Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 ASX Code: SOL Annual R '162016 e p o r t Profile Calendar Corporate Directory Contents Washington H. Soul Pattinson and Company Limited (WHSP) was incorporated on 21 January 1903 having previously traded as two separate companies, Pattinson and Co. and Washington H. Soul and Co. Following a public offering of shares, WHSP was listed on the Sydney Stock Exchange (now the Australian Securities Exchange) on 21 January 1903. Over 100 years as a listed public company When Caleb Soul and his son Washington opened their first store at 177 Pitt Street, Sydney, in 1872 neither of them could have envisaged that 144 years later their single pharmacy would have evolved into a company as prominent and diversified as WHSP. WHSP is now a significant investment house with a portfolio encompassing many industries including its traditional field of pharmaceuticals, as well as coal mining, building materials, copper and gold exploration, equity investments, property investment, telecommunications and corporate consulting. Final Dividend Record date 21 November 2016 Payment date 12 December 2016 Annual General Meeting AGM date AGM venue 9 December 2016 The Wesley Theatre Wesley Conference Centre 220 Pitt Street, Sydney Group Company displays open 10.45am AGM commences 12.00 noon For more information visit our website www.whsp.com.au Directors Robert D Millner Todd J Barlow Michael J Hawker Thomas C D Millner Warwick M Negus Melinda R Roderick Robert G Westphal David E Wills Company Secretary Ian D Bloodworth Auditors Pitcher Partners Sydney DIVERSIFIED PORTFOLIO LONG TERM FOCUSED CONSERVATIVE AND VALUE FOCUSED OVER THE LAST 15 YEARS WHSP HAS CONTINUALLY INCREASED DIVIDENDS GROWING AT A COMPOUND ANNUAL GROWTH RATE OF 10.6% PA DELIVERED A TSR OF 12.6% PER ANNUM OUTPERFORMING THE ALL ORDS ACCUMULATION INDEX BY 4.5% PA Chairman – Non-Executive Director Key Highlights Chairman’s review Managing Director and Chief Executive Officer Review of group entities Non-Executive Director Non-Executive Director Non-Executive Director Finance Director and Chief Financial Officer Non-Executive Director Non-Executive Director TPG Telecom Limited Brickworks Limited New Hope Corporation Limited Australian Pharmaceutical Industries Limited BKI Investment Company Limited Ruralco Holdings Limited Apex Healthcare Berhad CopperChem Limited and Exco Resources Limited Other Investments and Property Directors’ report Auditor’s independence declaration Financial report 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 ASX additional information 160 Pitt Street, Sydney Circa 1950 2 3 9 10 12 14 16 17 18 19 20 21 22 47 48 50 51 52 53 54 55 128 129 131 1 Key Highlights Chairman’s Review NET PROFIT AFTER TAX $149.4m 79.3% 1 REGULAR PROFIT AFTER TAX $177.2m 9.1% 1 PRE-TAX VALUE OF PORTFOLIO LAST 12 MONTH TSR $6.03b 31.4% 9.6% 1 OUTPERFORMANCE 27.4% TOTAL DIVIDENDS (FULLY FRANKED) TOTAL SHAREHOLDERS 52cps 14,836 Dear Shareholders, I am pleased to present the 2016 Annual Report for Washington H. Soul Pattinson and Company Limited (WHSP, Parent Company) on behalf of the Board of Directors of the Parent Company. PROFIT AFTER TAX INCREASED BY OVER 79% Consolidated Financial Performance The profit after tax attributable to shareholders for the year ended 31 July 2016 was $149.4 million, an increase of 79.3% compared to the $83.3 million for last year. The regular profit after tax* was $177.2 million, an increase of 9.1% over the $162.4 million** for 2015. The result was driven by: 4 another strong contribution by TPG Telecom Limited (up 38.7%); 4 Brickworks Limited continued to capitalise on the strong building sector (up 33.5%); and 4 Australian Pharmaceutical Industries Limited (API) continued its upward trend (up 26.4%). The results of New Hope Corporation Limited (down 90.4%) continued to be impacted by lower coal and oil prices. WHSP’s diversified portfolio of investments continues to provide it with protection against the variability of results from different sectors of the economy. This year, improved results in telecommunications, building products and pharmacy have offset lower results from resources. The net loss from non-regular items was $27.8 million, compared with a loss of $79.1 million last year. Comparisons with the prior year are as follows: Regular profit after tax is a non-statutory profit measure and represents profit from continuing operations before non-regular items. A reconciliation to statutory profit is included in the Preliminary Final Report – Note 3, Segment information. The results for 2015 have been restated by transferring expenses of $6.0 million from the regular result to non-regular items following a reallocation by an Associated Entity. Refer to Note 3 of the Preliminary Final Report. 4.0% 1 25.7% 1 Interim Dividend (paid in May each year) Final Dividend (payable 12 December 2016) Regular profit after tax* attributable to shareholders Profit after tax attributable to shareholders 2016 $’000 177,222 149,421 21 cents 31 cents 2015 $’000 **162,405 83,330 20 cents 30 cents Total Dividends 52 cents 50 cents * Regular profit after tax is a non-statutory profit measure and represents profit from continuing operations before non-regular items. A reconciliation to statutory profit is included in the Consolidated Financial Statements – Note 3, Segment information. ** The results for 2015 have been restated by transferring expenses of $6.0 million from the regular result to non-regular items following a reallocation by an Associated Entity. Refer to Note 3 of the Consolidated Financial Statements. 2 Washington H. Soul Pattinson and Company Limited Annual Report 2016 % Change + 9.1% + 79.3% + 5.0% + 3.3% + 4.0% 3 Assets of the Parent Company Washington H. Soul Pattinson and Company Limited The assets of WHSP are summarised below. The net asset value at 31 July 2016 was $6.03 billion, an increase of $528 million or 9.6% compared to $5.50 billion as at 31 July 2015. As at 31 July 2016 Major Strategic Investments – listed (at market value) TPG Telecom Limited Brickworks Limited New Hope Corporation Limited Aust. Pharmaceutical Industries Limited BKI Investment Company Limited Ruralco Holdings Limited Apex Healthcare Berhad Other Listed Investments (at market value) Unlisted Investments1 Property1 (net of borrowings) Cash and net funds on deposit Loans and other net assets Net asset value (pre-tax)2 ASX All Ordinaries Index WHSP’s Holding % Value of WHSP’s Holding $m 12 month Movement % $m 25.2% 44.1% 59.6% 24.6% 10.3% 20.1% 30.3% 2,738 987 793 231 101 53 45 4,948 669 161 176 24 50 6,028 709 9 (154) 40 (8) (8) (10) 578 39 (93) 107 (130) 27 528 34.9% 0.9% (16.2%) 20.8% (7.1%) (13.1%) (18.3%) 13.2% 6.3% (36.5%) 156.1% (84.5%) 119.1% 9.6% (0.7%) 1 At Directors’ valuations 2 The tax payable if all of these assets had been disposed of on 31 July 2016 would have been approximately $1.27 billion. Chairman’s Review The value of the Major Strategic Investments above grew by 13.2% during the year significantly outperforming the ASX All Ordinaries Index which decreased by 0.7%. The net investment in other listed investments was $31.3 million for the year and previously unlisted investments were listed on the ASX during the period. Acquisitions included Australia and New Zealand Banking Group Limited (ANZ Bank), Bailador Technology Investments Limited and Woolworths Limited. The net gain on disposals for the year was $24.1 million and included BHP Billiton Limited and Whitehaven Coal Limited. Unlisted investments reduced in value by $93.0 million, primarily as a result of the impairment of copper assets and the movement of investments with a brought forward value of $46.0 million from unlisted to listed invest- ments during the period. During the year, property revaluations, the acquisition of two office buildings in Pennant Hills, NSW and the acquisition of land in Victoria added $107.5 million to the property portfolio. Washington H. Soul Pattinson and Company Limited WHSP is a long term investor with its focus on providing its shareholders with capital growth and increasing fully franked dividends. WHSP has consistently outperformed the ASX All Ordinaries Accumulation Index over the short and long term. Total shareholder return (TSR) measures share price movement over time and assumes dividends received are reinvested by purchasing additional shares. The table below shows the TSRs for WHSP shares for various periods and compares them to the ASX All Ordinaries Accumulation Index which also includes the reinvestment of dividends. Total Shareholder Returns to 31 July 2016 Annual Return WHSP 1 Year 3 Years 5 Years 10 Years 15 Years 31.4% 12.5% 9.6% 12.3% 12.6% All Ordinaries Accumulation Index 4.0% 8.5% 9.4% 5.7% 8.1% Out Performance by WHSP 27.4% 4.0% 0.2% 6.6% 4.5% FY2016 TOTAL SHAREHOLDER RETURN OVER 31% 4 Washington H. Soul Pattinson and Company Limited Annual Report 2016 Brickworks Limited 5 Chairman’s Review The following chart shows the total return over time of an initial investment made in WHSP shares in July 2001 compared to the ASX All Ordinaries Accumulation Index. An investment in WHSP over the last 15 years has more than doubled an investment in the index. 15 Year Total Shareholder Return The following chart shows that the wealth creation is even more pronounced over a longer period. If a shareholder had invested $1,000 in 1976 and reinvested all dividends, the shareholding would have appreciated to nearly $454,000 as at 31 July 2016. This equates to a compound annual growth rate of 16.6% year on year for 40 years. Wealth Creation over 40 years WHSP All Ordinaries Accumulation Index WHSP 1 0 0 2 2 0 0 2 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 All Ordinaries Accumulation Index Source: IRESS – Includes the re-investment of dividends. 500% 400% 300% 200% 100% 0% 4 $1,000 invested in 1976 worth $453,801 in 2016 4 Compound annual return of 16.6% for 40 years $500,000 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 6 7 9 1 1 8 9 1 6 8 9 1 1 9 9 1 6 9 9 1 1 0 0 2 6 0 0 2 1 1 0 2 6 1 0 2 6 Washington H. Soul Pattinson and Company Limited Annual Report 2016 New Hope Group 7 Chairman’s Review Dividends The chart below demonstrates WHSP’s exceptional history of paying dividends to shareholders. The Company has not missed paying a dividend since listing in 1903 (including during the Great Depression of the 1930s and the Global Financial Crisis of 2007–08). TOTAL DIVIDEND FOR THE YEAR 52¢ 20 Year Dividend History Cents per Share Total Ordinary Dividends Special Dividends 4 3.5 10 11 0 0 0 2 1 0 0 2 5 14 2 0 0 2 7 7 9 9 1 10 8 9 9 1 12 9 9 9 1 Final Dividend 25 12.5 15 15 5 5 20 17 27 28.5 30 25 32 34 50 52 48 46 44 40 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 The Directors have declared a fully franked final dividend of 31 cents per share in respect of the year ended 31 July 2016 (2015: 30 cents fully franked). This brings total dividends for the year to 52 cents per share fully franked (2015: 50 cents fully franked). The record date for the final dividend will be 21 November 2016 with payment due on 12 December 2016. WHSP is one of only two companies in the ASX All Ordinaries Index to have increased its dividend every year for the last 16 years. The Company receives dividends and distributions from its investments, interest from funds on deposit and gains on property assets. The Directors declare interim and final dividends based on the Company’s regular cash inflows less regular operating costs. This year it will pay out, as dividends, 90.6% of its net regular cash inflows from operations (2015: 87.9%). WHSP’s diversified portfolio continues to deliver reliable cash returns which enable it to provide increasing fully franked dividends to its shareholders. R D Millner Chairman Review of Group Entities as at 31 July 2016 TPG Telecom Limited ASX:TPM 10 Brickworks Limited ASX:BKW 12 New Hope Corporation Limited ASX:NHC 14 Australian Pharmaceutical Industries Limited ASX:API 16 BKI Investment Company Limited ASX:BKI 17 Ruralco Holdings Limited ASX:RHL 18 Apex Healthcare Berhad Bursa Malaysia: APEX MK 19 CopperChem Limited and Exco Resources Limited Other Investments and Property 20 21 8 Washington H. Soul Pattinson and Company Limited Annual Report 2016 9 Review of Group Entities TPG Telecom Limited Associated entity: 25.2% held Dividends paid to WHSP: $27.7 million Total Market Capitalisation: $10.89 billion Value of WHSP’s Holding: $2.74 billion ASX code: TPM TPG reported the following results for the year ended 31 July 2016: 4 Earnings before interest, tax, depreciation and amortisation (EBITDA) of $849.4 million, an increase of 75%. 4 Net profit after tax (NPAT) of $379.6 million, an increase of 69%. 4 Earnings per share 45.3 cents, an increase of 61%. 2016 marks TPG’s eighth consecutive year of strong growth. NET PROFIT AFTER TAX INCREASED 69% Excluding these irregular items, TPG’s underlying EBITDA for the year was $775.3 million, an increase of $290.0 million or 60% over last year. This growth includes the maiden contribution from iiNet of $248.9 million for the eleven and a quarter months post acquisition. Consumer Business The consumer division’s EBITDA for the year was $255.7 million, an increase of $16.0 million compared to last year. This 7% increase reflects organic growth driven by ongoing broadband subscriber growth (up by 64,000 in the year) and nine months of lower access costs arising from the ACCC’s fixed access determination. As at 31 July 2016 the consumer division had 885,000 broadband subscribers and 304,000 mobile subscribers. Corporate Business TPG’s corporate division achieved an EBITDA of $269.3 million, an increase of $27.0 million compared to $242.3 million last year. This 11% increase was achieved despite a negative $10.1 million accounting impact on the division’s EBITDA for the year arising from the consolidation of iiNet. Excluding this the EBITDA growth would have been $37.1 million or 15%. This growth reflects the strong sales for the year and the continued margin expansion. Operating Cash Flow (pre tax) NPAT iiNet $800m $600m $400m $200m 0 $400m $300m $200m $100m 0 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Operating Cash Flow (Pre-tax) The 2016 results include the following irregular items: 4 $73.1 million gain on TPG’s previously held interest in iiNet ($73.1 million post tax); 4 $17.6 million profit realised on a part-disposal of TPG’s interest in Vocus ($12.3 million post tax); 4 $10.3 million transaction fees relating to TPG’s acquisition of iiNet ($10.3 million post tax); and 4 $6.3 million restructuring costs arising from iiNet integration activities ($4.4 millon post tax). NPAT iiNet contributed EBITDA of $242.6 million (for the eleven and a quarter months post acquisition) inclusive of $6.3 million of restructuring costs arising from integration activities. Without those costs the EBITDA result would have been $248.9 million. By comparison, iiNet reported an underlying EBITDA of $201.7 million for its 2015 financial year. The principal drivers of this year’s EBITDA growth were: 4 realisation of post-acquisition integration benefits; 4 nine months of lower access costs arising from the ACCC’s fixed access determination; and 4 an increased contribution from Tech2. As at 31 July 2016 iiNet had 983,000 broadband subscribers. Cash Flow and Gearing TPG delivered another strong cash flow result in the 2016 financial year with $759.2 million of cash generated from operations (pre-tax). After tax, capital expenditure and Indefeasible right of use lease payments, TPG had free cash flow of $318.0 million. At the end of the year TPG had bank debt of $1,350 million and a net debt to underlying EBITDA leverage ratio of approximately 1.8 times. Dividend In light of TPG’s strong cash flow and earnings growth, its board of directors increased the final dividend to 7.5 cents per share fully franked. This brought total dividends for the year to 14.5 cents per share fully franked, an increase of 26% over last year. Contribution TPG contributed a net profit of $97.5 million to the Group (2015: $60.2 million 26.9% held). 10 Washington H. Soul Pattinson and Company Limited Annual Report 2016 11 Brickworks Limited Associated entity: 44.1% held Dividends paid to WHSP: $30.2 million Total Market Capitalisation: $2.24 billion Value of WHSP’s Holding: $987 million ASX code: BKW UNDERLYING NET PROFIT AFTER TAX INCREASED 22.3% Brickworks posted a record underlying net profit after tax (NPAT) for the year ended 31 July 2016 of $147.1 million, up 22.3% on last year. A feature of the result was the diversified earnings contribution, with Building Products, Land and Development and Investments all delivering an uplift in underlying earnings compared to the prior year. After including the impact of significant items, statutory NPAT was $78.2 million. The significant items, totalling $68.9 million after tax, primarily relate to the impairment of goodwill in Austral Bricks WA and significant restruc- turing activities in Austral Bricks and Auswest Timbers, resulting in the closure of plants and the non-cash write down of assets at those sites. On record sales revenue of $748.1 million, Building Products’ underlying earnings before interest and tax (EBIT) was $75.4 million, up 33.7% on the prior year. Underlying earnings before interest, tax, depreciation and amortisation (EBITDA) was up 26.0% to $102.8 million, on a combination of continued volume growth and increased margins. Land and Development underlying EBIT was $73.5 million for the 12 months to 31 July 2016, up 14.1% primarily due to a strong revaluation profit in the Joint Venture Industrial Property Trust. Underlying earnings per share were 98.9 cents, up 21.9% from 81.1 cents for 2015. The directors of Brickworks have declared a fully franked final dividend of 32 cents per share for the year ended 31 July 2016, up 6.7% from 30 cents last year. Together with the interim dividend of 16 cents per share, this brings the total dividends paid for the year to 48 cents per share, up 3 cents or 6.7% on 2015. Review of Group Entities Building Products Total dwelling commencements for Australia were up 3.1% to 225,367 for the twelve months to 30 June 2016. This level of residential building activity is the highest on record in Australia and was driven by unprecedented growth in non-detached housing commencements over the past four years. In the 12 months to June 2016 non-detached housing developments represented around 50% of total commencements. Austral Bricks delivered a 21.5% increase in earnings for the year. Sales revenue was up 6.9% to $405.8 million on sales volume of over 670 million bricks. Performance on the east coast was particularly strong, driven primarily by the major markets of New South Wales and Victoria. Austral Masonry delivered another increase in earnings on sales revenue of $90.9 million, up 4.4% on the prior year. Total sales volume increased to 479,000 tonnes for the year, driven by strong growth in south-east Queensland and New South Wales. Bristile Roofing’s earnings increased on the prior year, with revenue up 11.5% to $124.2 million, on sales volume of almost 3.7 million square metres of tiles. Austral Precast delivered a strong turn-around in performance with earnings significantly higher than 2015 and sales volume in excess of 20,000 panels for the year. Sales revenue was $74.0 million, up 11.4%. Auswest Timber’s revenue was down 5.7% at $52.5 million on sales volume of 62,000 cubic metres for the year. Significant progress has been made to enhance operational efficiency, with productivity improvements being widespread across all sites. Land and Development Land and Development produced an EBIT of $73.5 million for the year, up 14.1% from $64.4 million for the prior year. The improved result was due to the growth in the Joint Venture Industrial Property Trust (Property Trust) which is a 50/50 partnership between Brickworks and the Goodman Industrial Trust. The Property Trust generated an EBIT of $74.9 million, up 22.6% from $61.1 million in the prior year. Net property income distributed from the Property Trust was $15.3 million, in line with the prior year, despite the settlement of the Coles CDC facility in August 2015. The lost rent from this sale was offset by lower interest payments, rent increases on stabilised assets and the additional rental income of new developments at Oakdale Central and Rochedale. The total value of the Property Trust at 31 July 2016 was $1.01 billion with borrowings of $347.4 million, giving a total net value of $663.7 million. Brickworks’ share of the Property Trust’s net asset value was $331.9 million. Outlook – Building Products Current residential building activity in Australia is at the highest level on record, driven by strong population growth over the past five years, low interest rates and rising house prices. With approvals remaining elevated, commencements are likely to stay high for some time to come, particularly considering the significant weather related delays experienced in June, July and August 2016. Although the overall housing market remains very strong, conditions vary significantly across the country. On the east coast, strong demand in Victoria is being fuelled by the highest rate of net interstate migration in the country. Meanwhile in New South Wales, housing activity is expected to stay robust for an extended period of time, due to a large undersupply of housing that developed during the 2000s and remains significant even today. The short-term outlook for Building Products remains positive, with a full order book and a long pipeline of work at higher margins in Brickworks' major east coast markets set to support earnings in 2017. Brickworks’ business growth initiatives will provide diversification and underpin earnings in the event of a cyclical decline in market activity over the medium term. Contribution Brickworks contributed a net profit of $9.6 million (2015: $19.5 million 44.2% held) to the Group. Its contribution to regular profit was $38.8 million (2015: $29.1 million 44.2% held). These contributions exclude the WHSP profit taken up by Brickworks under the equity accounting method. 12 Washington H. Soul Pattinson and Company Limited Annual Report 2016 Brickworks Limited 13 New Hope Corporation Limited Controlled entity: 59.6% held Dividends paid to WHSP: $39.7 million Total Market Capitalisation: $1.33 billion Value of WHSP’s Holding: $793 million ASX code: NHC OPERATING CASH SURPLUS $61m New Hope reported a net profit after tax and before non-regular items of $5.0 million for the year ended 31 July 2016. This result comprised: a loss of $3.6 million from coal mining, marketing and logistics operations; a loss of $4.1 million from oil operations; and a profit of $12.7 million from treasury. The result was down 90.3% on the 2015 result of $51.7 million. After non-regular items, the result for the year was a net loss after tax of $53.7 million. This comprised: a loss of $34.9 million from coal mining, marketing and logistics operations; a loss of $26.5 million from oil operations; and a profit of $7.7 million from treasury. This result was down 146% on the 2015 loss of $21.8 million. During the year New Hope generated an operating cash surplus of $61.2 million (including receipts from customers and payments to suppliers) and received interest of $25.4 million from held to maturity investments (term deposits). Cash outflows from investing activities rose due to the acquisition of a 40% interest in the Bengalla project ($898 million including acquisition costs). Before non-regular items, basic earnings for 2016 were 0.6 cents per share, compared to 6.2 cents per share in 2015. After non-regular items basic earnings were (6.5) cents per share for 2016 against (2.6) cents in 2015. New Hope paid a fully franked final dividend of 2.0 cents per share (2015: 2.5 cents and 3.5 cents special dividend). Mining Operations Coal production for the year was 6.6 million tonnes compared to 5.7 million tonnes produced in 2015. Bengalla contributed 1.4 million tonnes during the five months of New Hope’s ownership and the Queensland mining operations produced 5.2 million tonnes compared to 5.7 million tonnes produced in 2015. Coal sales for 2016 totalled 6.9 million tonnes (including 1.5 million tonnes from Bengalla) which was well above the 5.7 million tonnes sold in 2015. New Acland Stage 3 Development (NAC03) The approvals process for the NAC03 mining leases progressed with the Queensland Land Court expected to deliver a recommendation by December 2016, approximately six months later than previously anticipated. Construction of NAC03 is planned to commence in the first quarter of 2017 pending grant of the mining leases and environmental authority. Federal Government approval is expected in 2016. Review of Group Entities Queensland Bulk Handling (QBH) QBH, New Hope’s 100% owned coal terminal at the Port of Brisbane, exported 7.0 million tonnes of coal on 90 vessels, a similar result to last year. QBH remains essentially a demurrage free port. Bengalla Joint Venture New Hope’s acquisition of a 40% interest in the Bengalla open cut coal mine in New South Wales’ Hunter Valley region from Coal and Allied settled on 1 March 2016. Since settlement New Hope has played an active role in the transition from Coal and Allied and the ongoing management of the Bengalla operation in conjunction with the other joint venture participants (Wesfarmers 40%, Mitsui 10% and Taipower 10%). The operational performance of the Bengalla mine has been consistent with New Hope’s pre-acquisition expectations. Total coal production for the period 1 March 2016 to 31 July 2016 was 3.5 million tonnes. New Hope Exploration Projects New Hope continued its active exploration program utilising its own drill rigs during the year. Exploration activities focused on resource definition in and around the New Acland project area for the revised New Acland stage 3 project. The drilling operations were supported by gravity and geochemical surveys. Oil and Gas Oil production for the year totalled 191,993 barrels (an average of 563 barrels per day) against the prior year result of 158,884 barrels, an increase in production of 20.8%. Sales revenue for the year was $10.5 million against $11.9 million last year, a decrease of 11.8%. The reduction in sales revenue was entirely a consequence of the continued drop in the oil price through the first half of the year which reached a low in January 2016 of US$27 per barrel. The price subsequently increased and stabilised at circa US$45 per barrel at year end. The decline in oil prices in US Dollar terms was partially offset by a declining AUD:USD exchange rate. The average price realised for the 2016 year was A$56.6 per barrel compared to A$74.3 per barrel in 2015. Despite difficult trading conditions Bridgeport was able to limit its EBITDA loss to $1.9 million before non-regular items. Non-regular items included: impairments of oil producing assets of $10.5 million (after tax); impairments of oil exploration assets of $8.4 million (after tax); and a loss of $3.4 million resulting from de-recognition of petroleum resource rent tax balances. Outlook During the past year the material capital investment decision was made to invest a significant proportion of available cash funds into a 40% interest in the Bengalla coal mine located in the Hunter Valley of New South Wales. During the next financial year Bengalla should increase New Hope’s equity production of thermal coal by approximately 3.5 million tonnes to a total of approximately 8.9 million tonnes. New Hope is working with its joint venture partners and the Bengalla management team to improve operational efficiency and effectiveness at the Bengalla operation. The New Hope management team is focused on achieving the grant of the New Acland stage 3 mining leases as expeditiously as possible in order to avoid the negative impacts of any delays in transition from mining stage 2 reserves to stage 3. Bridgeport continues to seek opportunities to grow its production base and is now the second largest conven- tional oil producer in Queensland. Following significant investment in seismic studies of its extensive exploration portfolio Bridgeport is identifying drilling targets for oil exploration to take advantage of any increase in oil prices in the future. Since 31 July 2016 prices for Australian thermal coal on the seaborne market have reached levels around US$70 per tonne. This represents an increase of approximately 40% from the lows of just under US$50 per tonne which prevailed during the 2016 financial year. Contribution New Hope contributed a net loss of $29.2 million (2015: $13.0 million loss 59.7% held) to the Group. Its contribution to regular profit was $3.1 million (2015: $31.8 million 59.7% held). 14 Washington H. Soul Pattinson and Company Limited Annual Report 2016 New Hope 15 Australian Pharmaceutical Industries Limited Associated entity: 24.6% held Dividends paid to WHSP: $6 million Total Market Capitalisation: $939 million Value of WHSP’s Holding: $231 million ASX code: API NET PROFIT CONTRIBUTED TO THE GROUP $11m API’s financial year ended on 31 August 2016. The results for the full year were released to the market on 20 October 2016. For the six months ended 29 February 2016, API reported the following results which are compared to those of the first half last year: 4 Total revenue of $1.8 billion, up 4.4%; 4 Earnings before interest and tax of $44.6 million, up 15.6%; 4 Underlying net profit after tax of $25.3 million, up 18.1%; and 4 Net profit after tax of $22.9 million, up 7.7%. API attributed this strong growth to its strategy which is centred on building the Priceline Pharmacy network while generating sustainable returns through its pharmaceutical distribution. In June API paid a fully franked interim dividend of 2.5 cents per share, an increase of 25% over last year. WHSP has equity accounted API’s result for the 12 months to 28 February 2016. API contributed a net profit of $11.0 million (2015: $11.3 million) to the Group. Its contribution to regular profit was $11.6 million (2015: $9.2 million). NET PROFIT CONTRIBUTED TO THE GROUP $4.5m # * Total Shareholder Return including Franking Credits Assumes a tax rate of 30% api Review of Group Entities BKI Investment Company Limited Associated entity: 10.3% held Dividends paid to WHSP: $4.5 million Total Market Capitalisation: $975 million Value of WHSP’s Holding: $101 million ASX code: BKI For the year ended 30 June 2016 BKI reported a net operating result before special investment revenue of $41.2 million, an increase of 0.7% over 2015. BKI’s net operating result was mainly driven by higher dividend distributions from Transurban, APA Group, Sydney Airports, Macquarie Group, TPG Telecom and Ramsay Healthcare. Lower dividends were received from BHP Billiton, Woolworths, Woodside Petroleum, ANZ Banking Group and Suncorp Group, while revenues from bank deposits and investments held for trading were also lower. BKI also received special dividend income for the year from New Hope Corporation, Milton Corporation, Suncorp Group and IAG Group. BKI’s net investment for the year was approximately $76 million, with major long term investments made in companies including: Commonwealth Bank, ANZ Banking Group, Westpac Banking Corporation, National Australia Bank, Macquarie Group, Qube Logistics, Telstra Corporation, Ramsay Healthcare, Caltex Australia, APA Group and Sydney Airports. The main disposals from BKI’s investment portfolio included Bendigo and Adelaide Bank, Clydesdale Bank, RioTinto Limited and the partial sell-down of the position in BHP Billiton. BKI’s total shareholder returns for 5 years, 10 years and 12 years were above the ASX 300 Index by 3.5% per annum, 2.0% per annum and 1.2% per annum respectively. BKI has paid total fully franked dividends for the year of 7.25 cents per share, an increase of 0.7%. As at 31 July 2016, BKI’s fully franked dividend yield was 4.4% (based on the immediate past 12 month rolling dividend and share price of $1.63), while the grossed up yield was 6.4% (based on a tax rate of 30%). WHSP has equity accounted BKI’s result for the 12 months to 30 June 2016. BKI contributed a net profit of $4.5 million to the Group (2015: $4.8 million 11.1% held). 12 Year Total Shareholder Return# 11.3% pa As at 30 June 2016 Management Expense Ratio 0.16%As at 30 June 2016 Market Cap $946mAs at 30 June 2016 Shareholders 14,358 Dividend Yield 6.6%*Grossed up, as at 30 June 2016 16 Washington H. Soul Pattinson and Company Limited Annual Report 2016 17 Review of Group Entities Ruralco Holdings Limited Apex Healthcare Berhad Associated entity: 20.1% held Dividends paid to WHSP: $2.4 million Total Market Capitalisation: $263 million Value of WHSP’s Holding: $53 million ASX code: RHL Associated entity: 30.3% held Dividends paid to WHSP: $1.3 million Total Market Capitalisation: $149 million Value of WHSP’s Holding: $45 million Listed on Bursa Malaysia, code: APEX MK NET PROFIT CONTRIBUTED TO THE GROUP $2.2m Ruralco’s financial year ends on 30 September 2016. Ruralco’s results for the full year are not scheduled to be released to the market until 15 November 2016. Ruralco released its result for the six months to 31 March 2016 on 17 May 2016. Revenue increased by 8.2% to $803.7 million compared to the previous corresponding period. The net profit after tax was $10.8 million, an increase of 3.2% compared to the first half last year. Ruralco’s record result reflects the maturing of new businesses in the network and highlighted the strength of its earnings platform and its geographical diversity in balancing the effect of the tough seasonal conditions experienced during the half year. An interim dividend of 8 cents per share fully franked was paid in June 2016. This represented a 55% dividend payout ratio which was in line with Ruralco’s new dividend policy which supports its strategic growth agenda via network expansion and vertical integration. WHSP has equity accounted Ruralco’s result for the 12 months to 31 March 2016. Ruralco contributed a net profit of $2.2 million to the Group (2015: $3.3 million). DIVIDEND PAID TO THE GROUP INCREASED 6.8% Apex develops, manufactures, markets and distributes pharmaceuticals, diagnostic products and equipment, consumer healthcare products and orthopaedic devices. It has operations in Malaysia, Singapore, Vietnam and Myanmar (Burma) and is publicly listed on the Main Board of Bursa Malaysia. For the six months ended 30 June 2016 Apex generated revenue of $98.1 million, an increase of 6.4% over the $92.2 million for the previous corresponding six month period. Net profit after tax was $6.5 million, an increase of 23.7% compared to first half of 2015. Apex paid an interim dividend of 1.8 cents per share for the six months ended 30 June 2016, an increase of 6.8% compared to the prior year’s interim dividend. WHSP has equity accounted Apex’s result for the 12 months to 30 June 2016. Apex contributed a net profit of $3.4 million to the Group (2015: $3.4 million). 18 Washington H. Soul Pattinson and Company Limited Annual Report 2016 Ruralco 19 CopperChem Limited and Exco Resources Limited Controlled entities: 100% held Unlisted entities CopperChem and Exco Resources are copper and gold exploration companies which have processing facilities capable of producing copper sulphate, copper concentrate, and gold bullion. Exploration activities are continuing on a number of prospective targets for the purpose of identifying additional copper resources for future mining activities within the operating radius of the Cloncurry processing facilities. Exploration activity ramped up with the drilling of a number of prospective targets in the Cloncurry region, with encouraging gold exploration results received for the Wallace Gold Project south-east of Cloncurry. Production activities recommenced at the White Dam mine in South Australia during the year with gold produc- tion expected to continue until late in the 2017 calendar year. Further gold deposits are being identified within the broader CopperChem/Exco portfolio for continued gold production. Revenue from copper sales for the year was $148,000 and revenue from gold sales for the year was $468,000. This will increase significantly as gold production ramps up in 2017 financial year. The continued reduction of the Australian dollar copper price resulted in further impairments being required against the carrying values of copper assets. The copper concentrator and operations at Cloncurry will remain on care and maintenance until there is an improvement in the copper price. CopperChem and Exco contributed a net loss of $42.2 million to the Group (2015: $67.2 million loss) of which non-regular expenses (including impairments) totalled $33.3 million (2015: $59.6 million loss). Review of Group Entities Other Investments Ampcontrol Pty Limited Belaroma Coffee Pty Limited Clover Corporation Limited Cromford Group Pty Limited Heritage Brands Limited Lindsay Australia Limited Pitt Capital Partners Limited Quickstep Holdings Limited Rum Jungle Resources Limited Specialist Oncology Property Pty Limited TPI Enterprises Limited Investment Properties 100% held % held 43.3% 40.0% 28.6% 100.0% 25.1% 19.2% 100.0% 15.9% 38.3% 24.1% 19.4% Pennant Hills Castle Hill WHSP continues to investigate opportunities in real estate, particularly property benefitting from urban renewal. Following the acquisition of two office buildings in Pennant Hills, NSW during the first half, Pitt Street Real Estate Partners (PSRE) has leased up the vacancy at rents higher than anticipated. In addition, PSRE has investigated the potential rezoning of the properties to mixed use and they now form part of the Pennant Hills Town Centre Master Plan which is due to be released in the first half of 2017. The Pennant Hills properties add to WHSP’s existing asset in Castle Hill, NSW. The Castle Hill property consists of a four hectare land parcel with 15,000 square metres of warehouse and 5,000 square metres of office space. In December, the NSW Department of Planning and Infrastructure released its Showground Station Precinct Proposal for exhibition. WHSP’s property is within this precinct. The plan aims to activate the precinct for a higher and better use following the introduction of the North West Rail Link. It is expected that the outcome of the plan will be known by the end of December 2016. In August 2015, PSRE was awarded a contract to develop and deliver two bus depots for Transdev Australasia, on behalf of Public Transport Victoria. Development of the bus depots continued through the year. Construction of the Sunshine West depot was completed in July 2016, with settlement in late September 2016. The Thomastown depot is under construction and due for completion in December 2016. 20 Washington H. Soul Pattinson and Company Limited Annual Report 2016 CopperChem 21 Directors’ Report The Directors of Washington H. Soul Pattinson and Company Limited (WHSP, Parent Company) present their report and the financial statements of the Consolidated Entity, being the Parent Company and its subsidiaries (the Group), for the financial year ended 31 July 2016. Directors The following persons were Directors of WHSP for the whole of the financial year and up to the date of this report: 4 Mr R D Millner 4 Mr M J Hawker 4 Mr T C D Millner 4 Mr W M Negus 4 Ms M R Roderick 4 Mr R G Westphal 4 Mr D E Wills The following person was appointed as a Director of WHSP on 14 October 2015 and remains a Director at the date of this report: 4 Mr T J Barlow Principal Activities The principal activities of the corporations in the Consolidated Entity during the course of the financial year were: ownership of shares; coal mining; gold and copper mining and refining; property investment; and consulting. There were no significant changes in the nature of the Consolidated Entity’s principal activities during the year. Dividends Dividends paid or declared by the Parent Company since the end of the previous financial year were: Cents Per Share cents Total Amount $’000 Franking % Date of Payment Declared and paid during the year Final ordinary dividend 2015 Interim ordinary dividend 2016 Dealt with in the financial report as dividends Declared after the end of the year Final ordinary dividend 2016 30 21 51 31 71,819 50,273 122,092 100% 100% 7 December 2015 12 May 2016 74,213 100% 12 December 2016 22 Review of Operations The profit after tax attributable to shareholders for the year ended 31 July 2016 was $149.4 million, 79.3% higher than the $83.3 million for the prior year. The Parent Company, TPG Telecom Limited and the private equity portfolio increased their contributions to Group profit while the contribution by Australian Pharmaceutical Industries Limited was in line with last year. Brickworks contributed an increased profit from operations but a reduced total contribution due to impairments and restructuring costs associated with operations in Western Australia. The results of New Hope Corporation Limited continued to be impacted by the lower coal and oil prices. Comparison with the prior year is as follows: Revenue from continuing operations Profit after tax attributable to shareholders Interim Dividend (paid in May each year) Final Dividend (payable 12 December 2016) Total Dividends 2016 $000 620,661 149,421 21 cents 31 cents 52 cents 2015 $000 641,604 83,330 20 cents 30 cents 50 cents Change % - 3.3% + 79.3% + 5.0% + 3.3% + 4.0% For further information regarding the operations of the Group refer to the Chairman’s Review and the Review of Group Entities on pages 3 to 21 of this annual report. State of affairs In the opinion of the Directors there were no significant changes in the state of affairs of the Consolidated Entity that occurred during the financial year under review not otherwise disclosed in this report or the Consolidated Entity’s financial statements. Financial Position, Financial Instruments and Going Concern The Directors believe the Group is in a strong and stable position to grow its current operations. Details of financial risk management objectives and policies are set out in note 20 of the consolidated financial statements. The Directors, having made appropriate enquiries, consider that the Group has adequate resources to continue in its operational businesses for the foreseeable future and have therefore continued to adopt the going-concern basis in preparing the financial statements. Litigation An entity acting on the directions of Perpetual Investment Management Limited has lodged a claim against WHSP and Brickworks Limited (Brickworks) in the Federal Court. The claim seeks orders including to have the cross shareholding between WHSP and Brickworks unwound. WHSP is vigorously defending the claim. Events Subsequent to the Reporting Date The Directors are not aware of any other event or circumstance since the end of the financial year not otherwise dealt with in this report or the consolidated financial statements that has or may significantly affect the operations of the Consolidated Entity, the results of those operations, or the state of affairs of the consolidated entity in subsequent years. Refer to note 7 of the consolidated financial statements. Likely Developments, Business Strategy and Prospects Other than as discussed in the Review of Group Entities, information about likely developments, business strategy and prospects and the expected results in subsequent financial years have not been disclosed because the Directors believe, on reasonable grounds, that to include such information would be likely to result in unreason- able prejudice to the Consolidated Entity. 23 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report Corporate Governance Statement The Parent Company’s Corporate Governance Statement may be viewed in the Corporate Governance section of the Company’s web site at www.whsp.com.au/whsp/wp-content/uploads/2016/10/WHSP-Corporate- Governance-Statement.pdf Workplace Gender Equality In accordance with the requirements of the Workplace Gender Equality Act 2012, WHSP lodged its annual public report for the year ended 31 March 2016 with the Workplace Gender Equality Agency on 26 May 2016. The report may be viewed in the Employment section of the Company’s web site at www.whsp.com.au. Environmental Compliance The Group was subject to the reporting requirements of the National Greenhouse and Energy Reporting Act 2007 during the year. This Act requires the Group to report its annual greenhouse gas emissions and energy use. The Group has implemented systems and processes for the collection and calculation of the data required and submitted its 2014/15 report to the Greenhouse and Energy Data Officer on 29 October 2015. New Hope Group (NHG) The NHG was not prosecuted for any breach of environmental laws during the year. Environmental performance The majority of the NHG’s operations, which include coal mining operations and exploration tenements, the Jondaryan rail loading facility, the Queensland Bulk Handling coal export port facility and oil and gas operations are in Queensland. The key piece of environmental legislation in Queensland is the Environmental Protection Act 1994 (EP Act). The EP Act protects our environment with a focus on ecologically sustainable development. The NHG’s operations have proactively undertaken initiatives to improve their environmental performance. Environmental systems During the prior year the NHG adopted a new environmental policy aligned with the requirements of the ISO 14001 standard and it has continued the embedding of the Environmental Management System (EMS) in 2016. The EMS assists the NHG to improve its environmental performance by increasing environmental awareness, optimising operational control, monitoring compliance and facilitating continuous improvement. Environmental reporting The NHG’s operational sites have submitted reports under the National Pollutant Inventory program. CopperChem Limited (CopperChem) and Exco Resources Limited (Exco) CopperChem’s mining operations (Great Australia Operations (GAO) and Mount Colin) and Exco’s Queensland exploration tenements are regulated by the Queensland Department of Environment and Heritage Protection (DEHP) under Queensland’s Environmental Protection Act (1994). Mining operations and exploration tenements each function under a site specific Environmental Authority (EA). CopperChem continues to consult with DEHP over their legacy concerns with groundwater quality at the GAO and no infringements have resulted from these concerns. The site transitioned to care and maintenance in mid 2015 and CopperChem continues to undertake the required environmental monitoring and compliance activities at GAO. Environmental monitoring, management and compliance activities are continuing at Mount Colin Mine which is also on care and maintenance. All major water infrastructure at GAO and Mt Colin is maintained in good working order to meet water management objectives and compliance with Environmental Authorities. Exco’s mining operations at White Dam Gold Mine (WDGM) and exploration tenements in South Australia are regulated by the Department of State Development (DSD) under South Australia’s Mining Act 1971 and the South Australian Environmental Protection Authority under the Environmental Protection Act 1993. A compliance report is prepared and submitted to DSD annually. A mine extension and cutback was granted by DSD for the start of 2016. WDGM is operated in compliance with its lease conditions and regularly undertakes environmental monitoring activities. It did not receive any environmental infringements during the year. Directors Information regarding the Directors of the Parent Company: Robert Dobson Millner FAICD Chairman Non-executive Director since 1984, appointed Chairman 1998. Chairman of the Investment Committee and member of the Nomination, Remuneration and Risk Committees Mr Millner has extensive experience in the investment industry. Other current listed company directorships: 4 Apex Healthcare Berhad – Appointed 2000 4 Australian Pharmaceutical Industries Limited – Appointed 2000 4 Brickworks Limited – Appointed 1997 Chairman since 1999 4 BKI Investment Company Limited – Appointed 2003 Chairman since 2003 4 Milton Corporation Limited – Appointed 1998 Chairman since 2002 4 New Hope Corporation Limited – Appointed 1995 Chairman since 1998 4 TPG Telecom Limited – Appointed 2000 Todd James Barlow B.Bus, LLB(Hons)(UTS) Managing Director since October 2015 Member of the Risk Committee Mr Barlow was appointed Chief Executive Officer of the Company in April 2014 having previously been the Managing Director of Pitt Capital Partners Limited for five years. Mr Barlow has extensive experience in mergers and acquisitions, equity capital markets and investing and has been responsible for a number of WHSP’s investments since joining the WHSP Group in 2004. His career has spanned positions in law and investment banking in Sydney and Hong Kong. Mr Barlow has a Bachelor of Business and Bachelor of Laws (Honours) from the University of Technology, Sydney. Other current listed company directorships: 4 TPI Enterprises Limited – Appointed 2015 4 New Hope Corporation Limited – Appointed 2015 4 PM Capital Asian Opportunities Fund Limited – Appointed 2015 Michael John Hawker AM B.Sc(Sydney), FAICD, SF Fin Non-executive Director since 2012 Chairman of the Nomination and Risk Committees, member of the Audit and Remuneration Committees Mr Hawker is a professional company director with over 30 years experience in financial markets and investment. He was Chief Executive Officer and Managing Director of Insurance Australia Group from 2001 to 2008. From 1995 to 2001, Mr Hawker held a range of positions at Westpac, including Group Executive of Business and Consumer Banking and General Manager of Financial Markets. Prior to this, he held a number of positions at Citibank, including Deputy Managing Director for Australia and subsequently Executive Director, Head of Derivatives, Europe. Mr Hawker has been: Chairman of the Insurance Council of Australia; Chairman of the Australian Financial Markets Association; a member of the Australian Governments Financial Sector Advisory Committee; and a member of the Business Council of Australia. Other current listed company directorships: 4 Aviva PLC – Appointed 2010 4 Macquarie Group Limited – Appointed 2010 24 25 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report Thomas Charles Dobson Millner B.Des(Industrial), GDipAppFin(Finsia), FFin, GAICD Non-executive Director since 2011 Member of the Investment, Nomination and Risk Committees Mr Millner’s experience includes management of investment portfolios, research and analysis of listed equities and business development. Mr Millner is the Chief Executive Officer of BKI Investment Company Limited (BKI). He joined BKI in 2008 from Souls Funds Management Limited where he was responsible for the investment portfolio of BKI. Mr Millner has a Bachelor of Industrial Design degree and a Graduate Diploma in Applied Finance. He is a Fellow of the Financial Services Institute of Australasia and a Graduate of the Australian Institute of Company Directors. Other current listed company directorships: 4 New Hope Corporation Limited – Appointed 2015 4 PM Capital Global Opportunities Fund Limited – Appointed 2013 Mr Warwick Martin Negus B.Bus(UTS), M.Com(UNSW), SFFin Non-executive Director since 2014 Member of the Audit, Investment, Nomination, Remuneration and Risk Committees Mr Negus has over 20 years experience in the banking and finance sectors including both senior management and director roles. He has extensive experience in managing equity and property portfolios. He has a Bachelor of Business Degree from the University of Technology Sydney and a Master of Commerce from the University of New South Wales. He is a Senior Fellow of the Financial Services Institute of Australasia (FINSIA). Mr Negus is also a director of FINSIA, Tantallon Capital Advisors Pte. Limited and Terrace Tower Group Pty Limited. He is a Member of the Council of UNSW and the Sydney Advisory Board of the Salvation Army. Other current listed company directorships: 4 Bank of Queensland Limited – Appointed September 2016 Melinda Rose Roderick B.Econ(Macq), CA, GAICD Finance Director since 2014 Member of the Risk Committee Ms Roderick has over 25 years accounting and operational experience having previously held senior financial roles within the financial services and insurance sectors including eight years as an external auditor within a chartered accounting practice. She joined WHSP in 2006 as the Chief Financial Officer and has a comprehensive understanding of the Company’s complex accounting matters. Ms Roderick is a member of the Institute of Chartered Accountants and holds a Bachelor of Economics Degree from Macquarie University. Robert Gordon Westphal B.Com(UNSW), FCA, FFin, MAICD Non-executive Director since 2006 Chairman of the Audit Committee and member of the Nomination, Remuneration and Risk Committees Mr Westphal is a Chartered Accountant and was a partner of Ernst & Young for 25 years. He has many years of experience in corporate transactions with particular emphasis on mergers and acquisitions, due diligence and valuation across a variety of industry sectors. Mr Westphal was formerly the Chairman of the Board of Governors of Queenwood School for Girls Limited for 10 years. Former listed company directorships in the past three years: 4 Xanadu Mines Ltd – Appointed 2010. Resigned November 2013 David Edward Wills B.Com(UNSW), FCA, MAICD Non-executive Director since 2006 Chairman of the Remuneration Committee and member of the Audit, Nomination and Risk Committees Mr Wills is a Chartered Accountant, having been a partner of Coopers & Lybrand and then PricewaterhouseCoopers for 25 years. He was Managing Partner of the Sydney office and Deputy Chairman of the Australian firm immedi- ately prior to his retirement from the firm in 2004. As a result of Mr Wills’ experience and qualifications, he brings financial expertise to the Board. Company Secretary Ian David Bloodworth Mr Bloodworth is a Chartered Accountant with more than 30 years accounting and company secretarial experience and was appointed Company Secretary of WHSP in 2007. He was also the Company Secretary of Clover Corporation Limited from 2007 to 2012. Prior to joining the Company, Mr Bloodworth was Company Secretary of the Garratts Limited Group of Companies for 2 years and Chief Financial Officer of the Group for 6 years. Directors’ Meetings The number of Board meetings and meetings of committees of Directors and the number of meetings attended by each of the Directors of the Company during the financial year were: e e t t i m m o C r e b m e M Board r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E Audit Committee Investment Committee Nomination Committee Remuneration Committee Risk Committee o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a o t e b g l i i l E r e b m u N d e d n e t t a d n e t t a Mr R D Millner Mr T J Barlow Mr M J Hawker Mr T C D Millner Mr W M Negus Ms M R Roderick Mr R G Westphal Mr D E Wills I, N, Re, Ri I, Ri A, N, Re, Ri I, N, Re, Ri A, I, N, Re, Ri Ri A, N, Re, Ri A, N, Re, Ri 13 9 13 13 13 13 13 13 13 9 13 13 12 13 13 13 – – 7 – 7 – 7 7 – – 7 – 6 – 7 7 10 7 – 10 10 – – – 10 7 – 10 10 – – – 2 – 2 2 2 – 2 2 2 – 2 2 2 – 2 2 7 – 7 7 7 – 7 7 7 – 7 7 7 – 7 7 5 4 5 5 5 5 5 5 5 4 5 5 5 5 5 5 A Member of the Audit Committee of Directors during the year. I Member of the Investment Committee of Directors during the year. N Member of the Nomination Committee of Directors during the year. Re Member of the Remuneration Committee of Directors during the year. Ri Member of the Risk Committee of Directors during the year. Directors' Interests The relevant interest of each Director in the share capital of the Company, as notified to the Australian Securities Exchange in accordance with section 205G of the Corporations Act 2001, at the date of this report is as follows: Mr R D Millner Mr T J Barlow Mr M J Hawker Mr T C D Millner Mr W M Negus Ms M R Roderick Mr R G Westphal Mr D E Wills Ordinary Shares 21,273,602 5,000 28,690 18,557,977 47,000 5,000 22,739 396,433 26 27 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report Remuneration Report Letter from the Chair of the Remuneration Committee Dear Shareholders, On behalf of the Remuneration Committee I am pleased to present to you WHSP’s Remuneration Report for the financial year ended 31 July 2016. WHSP’s remuneration policy is designed to attract and retain high calibre talent whilst providing incentives for senior management to deliver sustainable value for our shareholders. For the year, a new variable pay framework was introduced for the Parent Company that is aimed at better aligning executive performance with the short and long-term strategic objectives approved by the Board and ensuring that senior executive variable pay outcomes remain consistent with shareholder returns. The long-term incentive plan was voted on at the 2015 Annual General Meeting and approval was given for the issue of performance rights to Executive Directors. For the year, WHSP recorded improved results in telecommunications, building products and pharmacy, which has offset lower results in mining resources. It is on this basis that regular earnings per share increased 9.1% to 74 cents and group profit after tax increased by 79.3% to $149.4 million. Moreover, total shareholder return was 31.4% and pre-tax net asset value increased 9.6% to $6 billion for the year. During the year, a short-term incentive (STI) plan was introduced for the Parent Company which applies a cash inflow hurdle that is designed to enable increasing dividends and a net asset value performance hurdle that is designed to grow the value of the investment portfolio in support of shareholder wealth creation. For the year, cash inflow performance resulted in 80% of the target STI pool being awarded under this condition, whilst 150% of the target STI pool was awarded for outperformance related to net asset value per share. The new STI plan came into effect from 1 January 2016 and therefore awards have been pro-rated for the seven months to 31 July 2016. The Remuneration Committee is keen to ensure that shareholders continue to benefit from strong performance by the company. By incentivising our Executive Directors and senior management through the alignment of their performance with outcomes that benefit shareholders we are seeking to achieve a mutually beneficial outcome for all stakeholders. The following Remuneration Report considers the key management personnel of the Parent Company and the Consolidated Entity. New Hope Corporation Limited (New Hope) forms part of the Consolidated Entity and the remuneration of certain key management personnel of New Hope is included in this Report. New Hope is publicly listed and, accordingly, has its own Remuneration Committee and produces its own Remuneration Report in accordance with the Corporations Act 2001 to be voted on by its shareholders. We will continue to develop our remuneration policies in future years to ensure that WHSP’s practices and outcomes remain relevant by reflecting evolving strategic objectives and the expectations of Company shareholders. Yours sincerely, David Wills Non-Executive Director Chair of the Remuneration Committee Scope of Report This Remuneration Report considers the key management personnel of the Parent Company and the Consolidated Entity. New Hope Corporation Limited (New Hope) forms part of the Consolidated Entity and the remuneration of certain key management personnel of New Hope is included in this Report. New Hope is publicly listed and, accordingly, has its own Remuneration Committee and produces its own Remuneration Report in accordance with the Corporations Act 2001 to be voted on by its shareholders. Abbreviations used in this report ASX CAGR EPS KMP KPI LTI Australian Securities Exchange Compound annual growth rate Earnings per share Key management personnel Key performance indicator Long-term incentive New Hope New Hope Corporation Limited NHRC New Hope Remuneration Committee STI TSR Short-term incentive Total shareholder return VWAP Volume weighted average price Structure of Report This report is structured as follows: 1. KMP included in this report 2. Remuneration policy and framework 3. Elements of remuneration 4. Performance indicators 5. Remuneration expenses for KMP 6. Contractual arrangements for executive KMP 7. Share-based compensation 8. Other statutory information 28 29 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report 1. KMP included in this report Non-executive Directors Mr Robert D Millner Chairman Mr Michael J Hawker Mr Warwick M Negus Mr Thomas C D Millner Mr Robert G Westphal Mr David E Wills Executive Directors Mr Todd J Barlow Managing Director and Chief Executive Officer from 14 October 2015, formerly Chief Executive Officer Ms Melinda R Roderick Finance Director and Chief Financial Officer Other key management personnel of the Parent Company and Consolidated Entity Mr Ian D Bloodworth Company Secretary Key management personnel of the Consolidated Entity Mr Shane O Stephan Managing Director, New Hope Mr Bruce D Denney Chief Operating Officer, New Hope to 18 December 2015 Mr Andrew L Boyd Chief Operating Officer, New Hope from 21 December 2015 Mr Matthew J Busch Chief Financial Officer, New Hope 2. Remuneration policy and framework Remuneration Governance The Remuneration Committee of WHSP consists of Non-executive Directors. The Committee’s role is to make recommendations to the full Board on remuneration matters and other terms of employment for the Executive Directors, senior executives and Non-executive Directors. The Remuneration Committee ensures that remuneration levels for Directors and senior executives are competi- tively set to attract and retain qualified and experienced personnel. The Remuneration Committee is authorised by the Board to obtain independent professional advice on the appropriateness of remuneration packages if deemed necessary. Such advice was received during the year, refer to page 45 of this report for further information. New Hope has its own Remuneration Committee which reports to the Board of New Hope. Non-executive Directors Board policy is to remunerate Non-executive Directors at comparable market rates. Remuneration levels are reviewed annually by the Remuneration Committee and are not subject to performance based incentives. Executive Directors and Senior Executives Parent Company Remuneration levels are reviewed annually by the Remuneration Committee to reflect individual performance, the overall performance of the Parent Company and Consolidated Entity and prevailing employment market conditions. The Executive Directors and Company Secretary of the Parent Company are remunerated by way of fixed remuneration, STIs and LTIs. Annual STIs are set in order to drive performance without encouraging undue risk taking. LTIs are assessed over a three and/or four year period and are designed to promote long-term stability in shareholder returns. The total value of each remuneration package is approved by the Remuneration Committee based on data obtained from external sources. The Remuneration Committee is responsible for assessing performance against KPIs and determining the extent to which the STI and LTI is to be paid. The STI and LTI have been designed to be payable when value has been created for shareholders. To assist in this assessment, the Committee receives detailed reports on performance from management which are based on independently verifiable data. In the event of serious misconduct or a material misstatement in the Company’s financial statements, the Board may cancel LTI based remuneration and recover LTI remuneration paid in previous financial years. Target remuneration mix (based on entitlement to 100% of the target STIs and LTIs which are at risk and subject to performance hurdles) for the year ended 31 July 2016 was: Target Remuneration Mix Managing Director Finance Director 56% 61% 16% 28% 14% 25% Company Secretary 76% 9% 15% 0% 20% 40% 60% 80% 100% Fixed Remuneration STI* LTI *STI was for the 7 months ended 31 July 2016 only New Hope Corporation Limited New Hope aims to ensure that remuneration packages properly reflect the person's duties, experience and responsibilities and are aligned so that management is rewarded in creating value for shareholders. Remuneration of senior executives is reviewed annually after taking into consideration the executives’ performance, the New Hope Group’s performance, market rates and level of responsibility. Executive remuneration comprises a mix of fixed remuneration, STIs and LTIs. Target remuneration mix (based on the entitlement to 100% of the available STIs and LTIs which is at risk and subject to performance hurdles) for the year ended 31 July 2016 was: New Hope Target Remuneration Mix Managing Director Chief Operating Officer Chief Financial Officer 62% 62% 66% 19% 19% 19% 19% 17% 17% 0% 20% 40% 60% 80% 100% Fixed Remuneration STI LTI 30 31 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report 3. Elements of remuneration Non-executive Directors Non-executive Directors receive fixed remuneration based on their position on the Board and the Committees on which they sit or chair, at comparable market rates. Remuneration levels are reviewed annually by the Remuneration Committee and are not subject to performance based incentives. The Remuneration Committee reviews market data annually to assist in setting Non-executive Director remu- neration. Based on this data for 2015 the remuneration received by Non-executive Directors for the year ended 31 July 2016 was in line with the 50th percentile for ASX listed Companies with a market capitalisation between $3.5 billion and $7.5 billion. The aggregate amount of fees which may be paid to Non-executive Directors by the Parent Company is subject to the approval of Shareholders in general meeting and is currently set at $1,500,000 per annum. Approval for this aggregate amount was given at the 2009 Annual General Meeting. During the year ended 31 July 2016 remuneration of the Non-executive Directors by the Parent Company amounted to $1,211,981. With effect from 31 July 2004 the retiring allowance for Non-executive Directors was frozen at three times the average annual fees for the three years prior to that date. Non-executive Directors appointed after 31 July 2004 do not qualify for a retiring allowance. Mr David Fairfull was paid a retiring allowance of $162,500 upon his resignation from the Board of Directors on 5 December 2014. As set out in the 2012, 2013, 2014 and 2015 Remuneration Reports, Mr Peter Robinson was entitled to an employ- ment termination payment (ETP) on cessation of his employment as part consideration for transferring from a defined benefit superannuation plan to a target benefit superannuation plan. The ETP continued to increase by interest calculated at commercial rates until Mr Robinson’s retirement on 31 March 2015. The interest for the 2015 financial year was $19,555 and the final amount of the ETP paid was $888,302. Mr Robinson received total termination payments of $1,773,157 upon retirement on 31 March 2015. Shareholder approval was not required for these payments under Division 2 of Part 2D.2 of the Corporations Act 2001 as the non-exempt payments did not exceed Mr Robinson’s average annual base salary from the Group over the prior three years. The exempt components of the payment were unused annual leave and long service leave which totalled $825,529. Executive Directors and Senior Executives Parent Company Fixed Remuneration Fixed remuneration for senior executives is set annually (or on promotion if applicable) by the Remuneration Committee. It is benchmarked against market data for comparable roles in companies with similar characteristics and market capitalisation. Fixed remuneration comprises a cash salary, superannuation and other non-cash benefits where taken. Mr Barlow was appointed Chief Executive Officer in April 2015 and became Managing Director in October 2015. Mr Barlow’s remuneration continues to be at the lower end of the benchmark data used by the Remuneration Committee and may be progressively increased in future years based on performance and increasing experience. STIs Structure of STIs for the KMP of the Parent Company Feature STI pool Description Based on target performance 50% of Managing Director’s fixed remuneration 40% of Finance Director’s fixed remuneration 20% of Company Secretary’s fixed remuneration 10% of the fixed remuneration of other participants in the plan The size of the pool is determined by the performance metrics below, in the event that the targets are exceeded (performance metrics exceed 100%) the pool will be increased as set out below. Performance metrics The STI metrics align with WHSP’s strategic goals to maximise shareholders’ returns. Objective Weighting Threshold (80%) Target (100%) Outperformance Regular cash to the parent company net of regular expenses 50% > 0% and < 4% higher than last year 4% to < 5% higher than previous year 5% to < 6% = 110% 6% to < 7% = 120% 7% to < 8% = 130% 8% to < 9% = 140% 9% and higher = 150% As dividends are paid out of parent company cash, increasing net cash inflows enable the payment of increasing dividends. Adjusted net asset value (post tax) per share (adjusted by adding back dividends paid by the parent company) 50% > 0% and < 2% higher than ASX200 Accumulation Index 2% to < 3% higher than ASX200 Accumulation Index 3% to <4% = 110% 4% to < 5% = 120% 5% to < 6% = 130% 6% to < 7% = 140% 7% and higher = 150% Increases in net asset value per share drive increases in the WHSP share price. Entitlement to the STI pool Each participant’s entitlement to the STI pool is determined by the Remuneration Committee based on the performance of their duties and their contribution to meeting the objectives of the parent company including performance, efficiency, risk and marketing. The total of all STIs determined by the Remuneration Committee cannot exceed the STI pool. Delivery of STI 100% of the STI awarded is paid in cash following release of the year end results. The STI plan was introduced during the year ended 31 July 2016 and was designed to motivate and reward senior executives to generate increasing net cash flow (to facilitate increasing dividends) and to grow the value of the investment portfolio (measured by net asset value) for the benefit of shareholders. The STIs were effective from 1 January 2016 and have been pro-rated for the period 1 January 2016 to 31 July 2016. 32 33 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report LTIs Executive KMP participate, at the Board’s discretion, in the LTI plan comprising annual grants of performance rights as follows. Structure of LTIs for the KMP of the Parent Company Feature Description Opportunity/ Allocation 50% of Managing Director’s fixed remuneration 40% of Finance Director’s fixed remuneration 20% of Company Secretary’s fixed remuneration The above amounts are divided by the VWAP of WHSP shares for the 30 trading days prior to 1 August each year to determine to number of rights issued. TSR rights 50% of rights issued are subject a TSR performance condition EPS rights 50% of rights issued are subject an EPS performance condition TSR performance hurdle TSR is initially assessed over a 3 year period and compared to the ASX All Ordinaries Accumulation Index (Index). Vesting will occur based on the company’s positioning relative to the Index. If less than 100% of the rights vest, performance is reassessed over a 4 year period. This incentive is designed to focus executives on delivering sustainable long-term shareholder returns. TSR performance per annum Rights to vest TSR% < Index TSR% = Index Nil 50% Index < TSR% < (Index + 3% per annum) Progressive pro-rata from 50% to 100% TSR% = (Index + 3% per annum) or higher 100% EPS performance hurdle EPS movement is initially assessed over a 3 year period and compared to the target set out below. Vesting will occur based on the company’s achievement of that target. If less than 100% of the rights vest, performance is reassessed over a 4 year period. This incentive is designed to align the interests of executives with shareholders. Regular EPS Regular EPS is the regular profit after tax of the consolidated WHSP Group, divided by the weighted average number of WHSP shares on issue across the measurement period. Regular profit after tax is a non-statutory profit measure and represents profit from continuing operations before non-regular items. A reconciliation to statutory profit is included in the Consolidated Financial Statements – Note 3, Segment information. Regular EPS CAGR over measurement period Rights to vest Regular EPS CAGR < 5% Regular EPS CAGR = 5% Nil 50% 5% < Regular EPS CAGR < 10% Progressive pro-rata from 50% to 100% Regular EPS CAGR = 10% or higher 100% Payable by participants Nil No amounts are payable by the participants upon the granting or the exercising of the rights. Delivery of LTI Rights vest over the 3 years following the 3 year performance period unless retesting applies. Refer to item 7 ‘Share-based Compensation’ below for further details. Service Condition Board Discretion The participant is to have been in the continuous employment of WHSP from 1 August 2015 to the relevant vesting date. In the event of serious misconduct or a material misstatement in the financial statements, the Board may cancel LTI based remuneration and recover LTI remuneration paid in previous financial years. The Board may waive vesting conditions in the event of a participant leaving employment. Expiry The performance rights issued during the year expire on 30 November 2020. The LTI plan was introduced during the year ended 31 July 2016 and was designed to reward senior executives for above market performance as reflected by the hurdles set above. The plan was effective from 1 August 2015 and the first test period will be for the three years ended 31 July 2018. Total Remuneration Package The total value of each remuneration package is approved by the Remuneration Committee based on market data. Based on this data for 2015 the remuneration received by Executive Directors and the Company Secretary for the year ended 31 July 2016 was under the 50th percentile for ASX listed Companies with a market capitalisation between $3.5 billion and $7.5 billion. New Hope Corporation Limited Fixed Remuneration Fixed remuneration for senior executives is set annually by the NHRC. It comprises a cash salary, superannuation and other non-cash benefits such as a company vehicle. Executives may elect to take a vehicle allowance in lieu of a company vehicle and may salary sacrifice a portion of their cash salary into superannuation or other benefits. STIs Structure of STIs for the KMP of the Consolidated Entity – New Hope executives Feature Description Maximum Opportunity/ Allocation 31% of New Hope Managing Director’s fixed remuneration 31% of New Hope Chief Operating Officer’s fixed remuneration 25% of New Hope Chief Financial Officer’s fixed remuneration Performance metrics STIs are designed to motivate and reward senior executives to achieve the short-term goals of New Hope. Objective New Hope Group Profit, Sales and Investment Performance New Hope Group Compliance: Safety, Environment and Risk Management New Hope Group Production Cost, Project Development and Merger and Acquisition Activities Weighting 60% 20% 20% Each of the STIs KPIs is made up of qualitative and quantitative measures with the quantitative measures set annually by the NHRC. 100% of the STI awarded is paid in cash following release of the year end results. Delivery of STI At the end of each period the NHRC awards executives a percentage of their maximum allowable STIs having regard to the performance of the executive and New Hope during the period. Given the historically low coal price and profit performance of New Hope, it was agreed that no STI be paid for the 2016 financial year. 34 35 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report LTIs Executive KMP participate, at the NHRC’s discretion, in the LTI plan comprising annual grants of performance rights as follows. Structure of LTIs for the KMP of the Consolidated Entity – New Hope executives 4. Performance indicators Parent Company Performance against key measures: Feature Description Maximum Opportunity/ Allocation 31% of New Hope Managing Director’s fixed remuneration 31% of New Hope Chief Operating Officer’s fixed remuneration 25% of New Hope Chief Financial Officer’s fixed remuneration Maximum allowable LTIs are provided for in senior executive employment contracts. At the end of each period the NHRC awards executives a percentage of their maximum allowable LTIs having regard to the performance of the executive and New Hope during the period. The value of the executive’s LTIs is converted into Performance Rights by reference to the five day volume weighted average share price of New Hope over the five days immediately preceding issue. KPIs Objective Shareholder Value Project Development and Merger and Acquisition Activities Strategic Plan (including Succession Planning and Stakeholder Management) Weighting 50% 25% 25% Performance and service conditions Performance Rights are issued subject to performance and service conditions. The service condition requires that the executive remain an employee of New Hope for the duration of the three year vesting period. The performance conditions attaching to the rights are measured over three years. The NHRC will determine the percentage of rights that will vest based on the performance of the executive and New Hope during the three year period. LTIs are designed to motivate and reward senior executives to achieve the strategic goals set by New Hope, align shareholder and executive objectives and to retain the services of senior executives. Shareholder value rights TSR of New Hope expressed as a percentage of the ASX 200 accumulation index (Index) over a three year period. TSR as a % of the Index Rights to vest < 100% 100% to < 105% 105% to < 110% 110% to <115% 115 to < 120% 120 to < 125% > 125% Nil 50% 60% 70% 80% 90% 100% Payable by participants Nil No amounts are payable by the participants upon the granting or the exercising of the rights. Discretion The NHRC has discretion to select alternative equity instruments for the award of LTIs in the event that Performance Rights do not align to the strategic goals set by the NHRC or New Hope. Subject to the employee satisfying the above service and performance conditions, a percentage of the Performance Rights will vest three years after their grant date in accordance with the above table. Metric Target Performance Impact on incentive award STI Regular cash to the parent company net of regular expenses 4% higher than previous year 1.3% higher than last year Threshold performance 80% of target STI pool awarded Adjusted net asset value (post tax) per share 2% higher than ASX200 Accumulation Index 10.6% higher than ASX200 Accumulation Index 150% of target STI pool awarded Out performance LTI The first test period will be for the three years ended 31 July 2018. In its review of remuneration policies of KMP of the Parent Company the Remuneration Committee has regard to the performance of the Consolidated Entity and Parent Company for the current and previous four financial years, taking into account the following measures: 2012 $’000 2013 $’000 2014 $’000 2015 $’000 2016 $’000 Consolidated Entity Revenue from continuing activities Profit after tax attributable to shareholders 912,359 142,989 791,315 105,421 658,116 131,729 641,604 83,330 620,661 149,421 Parent Company Net regular cash from operations Share price at year end Ordinary dividends paid/declared New Hope Corporation Limited 139,173 $13.15 44 cents 140,282 $13.50 46 cents 140,494 $15.13 48 cents 136,204 $13.70 50 cents 137,435 $17.43 52 cents Given the historically low coal price and profit performance of New Hope, it was agreed that no STI be paid for the 2016 financial year. 36 37 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report 5. Remuneration expenses for KMP (i) Remuneration of the KMP of the Consolidated Entity: Short-term Benefits Post- Employment Benefits Long-term Benefits Share-based Payments Short-term Benefits Post- Employment Benefits Long-term Benefits Share-based Payments Parent Entity $ Controlled Entities $ Salary & Fees $ STI $ Non- monetary1 $ Super- annuation $ Long Service Leave $ Termination Benefits $ LTI Rights2 $ Total $ Parent Entity $ Controlled Entities $ Salary & Fees $ STI $ Non- monetary $ Super- annuation $ Long Service Leave $ Termination Benefits $ LTI Rights $ Total $ Non-executive Directors – 2016 R D Millner M J Hawker T C D Millner W M Negus R G Westphal D E Wills 329,109 181,708 158,583 168,791 191,499 182,291 367,058 – 92,659 – – 27,375 1,211,981 487,092 624,883 165,943 192,404 154,147 174,885 191,476 Executive Directors – 2016 – – – – – – 27,892 – 39,895 – – – 43,392 15,765 18,943 14,644 16,614 18,190 – – – – – – 1,431,363 202,575 1,103,166 350,150 (1,450) 36,909 34,839 896,179 – 610,241 170,082 (1,053) 29,940 19,477 – – – – – – – – – – – – – – 696,167 181,708 251,242 168,791 191,499 209,666 110,324 1,633,938 67,492 896,179 416,224 – – – – – 1,416,052 410,715 465,134 635,825 301,939 1,247,833 312,686 389,709 546,028 44,799 – – – – 16,566 9,740 9,930 38,728 (990) 28,468 19,385 7,111 14,370 19,305 6,801 11,520 10,682 22,327 9,796 – – 136,316 – – 17,651 127,574 (66,010) – 61,686 416,224 1,416,052 410,715 465,134 635,825 Total 3,955,747 3,617,393 6,015,340 565,031 139,258 283,036 115,442 136,316 318,717 7,573,140 1. Non-monetary remuneration includes salary sacrificed fringe benefits and movements in annual leave provisions. 2. The LTI rights expense is determined by amortising the fair value of the rights over the vesting period of the rights. Refer to item 7. Share-based Compensation on page 41 of this report. 3. Mr B D Denney resigned as Chief Operating Officer of New Hope on 18 December 2015. The negative share based payment amount reflects rights forfeited. 4. Mr A L Boyd was appointed as the Chief Operating Officer of New Hope on 21 December 2015. T J Barlow – Managing Director M R Roderick – Finance Director Other KMP – 2016 I D Bloodworth S O Stephan B D Denney3 A L Boyd4 M J Busch Non-executive Directors – 2015 R D Millner D J Fairfull1 (resigned 5 December 2014) M J Hawker T C D Millner W M Negus (appointed 1 November 2014) R G Westphal D E Wills 307,587 366,533 604,773 209,167 148,167 142,333 107,333 172,332 152,332 51,262 – – – – 27,375 89,433 135,312 102,487 98,021 157,381 164,116 1,239,251 445,170 Executive Directors – 2015 2,400,012 135,050 669,950 628,843 – 352,073 P R Robinson2 (retired 31 March 2015) M R Roderick – Finance Director Other KMP – 2015 T J Barlow (appointed 1 April 2015) I D Bloodworth S O Stephan3 B D Denney3 M J Busch3 – – – – – – – – – 26,979 42,368 – – 30,308 – – – 8,496 12,855 9,538 9,312 14,951 15,591 – – – – – – – – 162,500 – – – – – 61,930 30,025 – 1,773,157 235,211 29,940 11,619 – – – – – – – – – 674,120 260,429 148,167 142,333 107,333 172,332 179,707 2,535,062 628,843 – – 43,056 75,539 48,492 373,602 329,024 1,307,272 832,487 626,544 – – – – – – 314,476 329,024 – – – 59,126 – 1,307,272 832,487 626,544 331,023 212,387 1,209,630 673,774 513,950 – – (24,967) (15,605) (9,363) – 89,596 42,778 72,920 44,970 11,436 21,276 18,915 18,915 18,779 31,143 5,765 17,860 6,944 9,716 Total 4,911,606 3,405,649 5,314,310 (49,935) 604,692 262,397 83,047 1,935,657 167,087 8,317,255 1. Retiring allowance of $162,500 paid to Mr D J Fairfull upon his resignation from the Board of Directors on 5 December 2014. Refer to the Non-executive Directors section of this report on page 32 for further details. 2. Termination benefits of $1,773,157 paid to Mr P R Robinson upon retirement on 31 March 2015. Refer to the Executive Director and Senior Executives section of this report on page 32 for further details. 3. STI 2015 represents the difference between the accrual for the 2014 STI and the actual payment made during the 2015 financial year. No STI was awarded or accrued in respect of the 2015 year. 38 39 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report 5. Remuneration expenses for KMP continued 6. Contractual arrangements for executive KMP (ii) Relative proportions of remuneration that are fixed and that are linked to performance Fixed Remuneration At Risk – STI At Risk – LTI 2016 2015 2016 2015 2016 2015 68% 73% 85% 91% 116% 100% 90% 100% 100% 100% 97% 91% – 92% 24% 19% 11% 0% 0% 0% 0% 0% 0% 0% 0% 0% – 0% 8% 8% 4% 9% (16%) 0% 10% 0% 0% 0% 3% 9% – 8% Parent Company T J Barlow M R Roderick I D Bloodworth New Hope Corporation Limited S O Stephan B D Denney A L Boyd M J Busch As the LTIs are provided exclusively by way of rights, the percentages disclosed reflect the value of remuneration consisting of rights, based on the value of rights expensed during the year. (iii) STIs granted and forfeited for the year 2016 Parent Company T J Barlow M R Roderick I D Bloodworth New Hope Corporation Limited S O Stephan B D Denney A L Boyd M J Busch Target STI $ Awarded % Forfeited % 291,667 157,500 40,833 400,000 95,890 121,112 150,000 120% 108% 110% 0% 0% 0% 0% 0% 0% 0% 100% 100% 100% 100% Parent Company T J Barlow M R Roderick I D Bloodworth New Hope Corporation Limited S O Stephan A L Boyd M J Busch Term of agreement and notice period1 Base remuneration including Superannuation2 No fixed term 6 months notice period No fixed term 3 months notice period No fixed term 3 months notice period No fixed term 6 months notice period No fixed term 3 months notice period No fixed term 3 months notice period $1,000,000 $675,000 $350,000 $1,300,000 $650,000 $600,000 Termination Payments3 6 months base remuneration 3 months base remuneration 3 months base remuneration 6 months base remuneration 3 months base remuneration 3 months base remuneration 1. This notice applies equally to either party. 2. Base remuneration including Superannuation as at 31 July 2016. 3. Base salary payable if the company terminates employees with notice, and without cause (e.g. for reasons other than unsatisfactory performance). 7. Share-based Compensation Parent Company Rights to deferred shares are granted under the WHSP Long Term Incentive Plan. Rights are granted for nil consideration. Rights are granted in accordance with the plan at the sole discretion of the WHSP Board. They vest and automatically convert to ordinary shares in WHSP following the satisfaction of the relevant performance and service conditions. Performance and service conditions applicable to each issue of Rights are determined by the Board at the time of grant. Rights granted under the plan carry no dividend or voting rights. The assessed fair value of the Rights at grant date is allocated equally over the period from grant date to vesting date and these amounts are included in the remuneration of the executive. The fair value of the rights was independently determined by valuation specialists Lonergan Edwards & Associates Limited based on the market price of WHSP’s shares at the grant date, with an adjustment made to take into account the vesting period, expected dividends during that period that will not be received by the participants and the probability that the market performance conditions will be met. 40 41 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report 7. Share-based Compensation continued Rights affecting the remuneration of KMP in the current or future periods. WHSP Grant Date EPS Rights December 2015 TSR Rights December 2015 Vesting Date If met over 3 years If re-tested over 4 years 50% September 2018 30% August 2019 20% August 2020 50% September 2019 30% September 2019 20% August 2020 50% September 2018 30% August 2019 20% August 2020 50% September 2019 30% September 2019 20% August 2020 Grant Date Value $ 13.86 13.86 13.86 12.25 11.08 10.87 Rights affecting the remuneration of KMP in the current or future periods. NEW HOPE Grant Date December 2011 December 2012 December 2012 December 2014 November 2015 November 2015 Vesting Date August 2015 August 2015 August 2016 August 2017 August 2017 August 2018 Grant Date Value $ 5.84 4.08 4.08 1.58 1.91 2.17 Rights to deferred shares granted, vested and forfeited during the year. NEW HOPE Rights to deferred shares Rights to deferred shares granted, vested and forfeited during the year. WHSP Rights to deferred shares Balance at start of year Granted during the year Vested Forfeited Grant Date Number Number Number T J Barlow M R Roderick I D Bloodworth Dec 2015 Dec 2015 Dec 2015 – – – 31,045 18,992 4,967 – – – % – – – Number – – – % – – – Balance at end of year Maximum value in future periods1 Number $ 31,045 18,992 4,967 220,648 134,983 35,302 1. The maximum value of the deferred rights in future periods has been determined as the fair value of the rights that is yet to be expensed. The minimum value of the rights yet to vest is nil, as the rights will be forfeited if the vesting conditions are not met. New Hope Corporation Limited Rights to deferred shares are granted under the New Hope Corporation Limited Employee Performance Rights Share Plan. Membership of the plan is open to those senior employees and those Directors of New Hope, its subsidiaries and associated bodies corporate whom the Directors of New Hope believe have a significant role to play in the continued development of the New Hope Group’s activities. Rights are granted for nil consideration at the sole discretion of the Directors of New Hope and in accordance with the New Hope Group’s reward and retention strategy. Rights vest and automatically convert to ordinary shares in New Hope following the satisfaction of the relevant performance and service conditions. Performance and service conditions applicable to each issue of Rights are determined by the New Hope Board at the time of grant. Rights granted under the plan carry no dividend or voting rights. The assessed fair value at grant date of rights granted to executives is allocated equally over the period from grant date to vesting date and these amounts are included in the remuneration of the executive. The fair value of the rights is determined based on the market price of New Hope’s shares at the grant date, with an adjustment made to take into account the vesting period, expected dividends during that period that will not be received by the participants and the probability that the market performance conditions will be met. Balance at start of year Granted during the year Vested Forfeited Number Number Number % Number S O Stephan B D Denney M J Busch Grant Date Vesting Date Dec 2011 Dec 2012 Dec 2012 Nov 2015 Nov 2015 Dec 2011 Dec 2012 Dec 2012 Dec 2014 Dec 2011 Dec 2012 Dec 2012 Dec 2014 Nov 2015 Aug 2015 Aug 2015 Aug 2016 Aug 2017 Aug 2018 Aug 2015 Aug 2015 Aug 2016 Aug 2017 Aug 2015 Aug 2015 Aug 2016 Aug 2017 Aug 2018 8,432 11,211 11,210 – – 8,010 11,211 11,210 83,893 4,005 8,408 8,408 50,336 – – – – 134,228 204,082 – – – – – – – – 76,531 8,432 11,211 – – – 8,010 11,211 – – 4,005 8,408 – – – 100% 100% – – – 100% 100% – – 100% 100% – – – Balance at end of year Maximum value in future periods1 Number $ – – 11,210 134,228 204,082 – – – – – – 8,408 50,336 76,531 – – – 73,297 160,750 – – – – – – – 50,336 76,531 % – – – – – – – – – – – – 11,210 83,893 100% 100% – – – – – – – – – – 1. The maximum value of the deferred rights in future periods has been determined as the fair value of the rights that is yet to be expensed. The minimum value of the rights yet to vest is nil, as the rights will be forfeited if the vesting conditions are not met. 42 43 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report – Remuneration Report 8. Other statutory information Shareholdings of KMP The following tables show the number of: 4 shares in WHSP; 4 shares in New Hope; and 4 preference shares in Pitt Capital Partners Limited that were held during the financial year by key management personnel of the Group, including their personally related parties. Shares in Washington H. Soul Pattinson and Company Limited Balance at start of year Purchased/ (sold) Received on the vesting of rights Other changes during the Year Balance at end of year Directors of Washington H. Soul Pattinson and Company Limited R D Millner T J Barlow M J Hawker T C D Millner W M Negus M R Roderick R G Westphal D E Wills Shares in New Hope Corporation Limited Directors of Washington H. Soul Pattinson and Company Limited R D Millner T C D Millner D E Wills Other key management personnel S O Stephan B D Denney A L Boyd M J Busch 20,878,602 5,000 19,000 18,162,977 35,000 5,000 22,739 376,433 220,000 – 9,690 220,000 12,000 – – 20,000 – – – – – – – – – – – – – – – – 21,098,602 5,000 28,690 18,382,977 47,000 5,000 22,739 396,433 Balance at start of year Purchased/ (sold) Received on the vesting of rights Other changes during the Year1 Balance at end of year 3,781,962 3,754,368 90,670 162,078 46,452 – 698,911 – 20,000 – 59,300 – – – – – – 19,643 19,221 – 12,413 – – – – (65,673) 15,438 – 3,781,962 3,774,368 90,670 241,021 – 15,438 711,324 1. Other changes during the year represent the balances held at the dates persons became or ceased to be KMP. Pitt Capital Partners Limited Class RP01 Preference Shares Balance at start of year Purchased/ (sold) Received on the vesting of rights Other changes during the Year Balance at end of year Directors of Washington H. Soul Pattinson and Company Limited T J Barlow 1 – – – 1 None of the shares above are held nominally by the Directors or any of the other KMP. Loans to KMP No loans have been made to the Directors of WHSP or other KMP of the Consolidated Entity. Other transactions with KMP The KMP and their related entities received dividends during the year in respect of their shareholdings in Group companies consistent with other shareholders. Unsecured deposits are accepted from some Directors of WHSP and their related entities and interest is paid at normal commercial rates. Interest paid during the current financial year amounted to $1,228,178 (2015: $1,590,264). The balance of deposits at 31 July 2016 was $48,200,787 (2015: $47,326,145). Deposits were received from Mr R D Millner, Mr T C D Millner and Mr R G Westphal and/or their related entities. Reliance on external remuneration consultants During the year the Remuneration Committee engaged PricewaterhouseCoopers (PwC) to provide advice on the executive long-term incentive plan design and prepare the necessary plan documentation. PwC was paid $39,386 for these services. PwC has confirmed that all remuneration advice has been made free from undue influence by members of the Group’s KMP. The following arrangements were made to ensure that the remuneration advice was free from undue influence: 4 PwC was engaged by, and reported directly to, the chair of the remuneration committee. The agreement for the provision of the services was executed by the chair of the remuneration committee under delegated authority on behalf of the board; and 4 the report containing the remuneration advice was provided by PwC directly to the chair of the remunera- tion committee. As a consequence, the Board is satisfied that the advice was made free from undue influence from any members of the KMP. Voting on the 2015 Remuneration Report The Parent Company’s Remuneration Report for the 2015 financial year was adopted at its 2015 Annual General Meeting on a show of hands with no votes against. This is the end of the Remuneration Report Directors’ Report Options The Parent Company did not issue any options over its unissued shares during the financial year or in the period to the date of this report. There are no such options on issue at the date of this report. Indemnification of Officers and Auditors Indemnification The Parent Company’s constitution provides for an indemnity of Directors, Secretaries and Executive Officers (as defined in the Corporations Act 2001) where liability is incurred in the performance of their duties in those roles, other than conduct involving a wilful breach of duty in relation to the Company. The Constitution further provides for an indemnity in respect of any costs and expenses incurred in defending proceedings in which judgement is given in their favour, they are acquitted, or the Court grants them relief under the Corporations Act 2001. Insurance In accordance with the provisions of the Corporations Act, the Parent Company has a Directors’ and Officers’ Liability policy covering Directors and officers of the Parent Company and some of its controlled entities. The insurance policy prohibits disclosure of the nature of the liability insured against and the amount of the premium. 44 45 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors' Report Auditors No indemnities have been given or insurance premiums paid during or since the end of the financial year in respect of any person who is or has been an auditor of the Parent Company or its controlled entities. Proceedings on behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the Parent Company or to intervene in any proceedings to which the Parent Company is a party for the purpose of taking responsibility on behalf of the Parent Company for all or any part of those proceedings. The Parent Company was not a party to any such proceedings during the year. Non Audit Services During the year, Pitcher Partners Sydney, the Parent Company’s auditor, performed certain other services in addition to their statutory duties. An entity associated with Pitcher Partners Sydney was paid $173,491 for providing tax compliance and other services in respect of the Group. Details of the amounts paid to the auditors are disclosed in note 36 of the financial statements. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: 4 All non-audit services were subject to the corporate governance procedures adopted by the Parent Company and have been reviewed by the Audit Committee to ensure they do not impact the integrity and objectivity of the auditor, and 4 the non-audit services provided do not undermine the general principles relating to auditor independence as set out in Professional Statement APES 110: Code of Ethics for Professional Accountants, as they did not involve: reviewing or auditing the auditor’s own work; acting in a management or decision making capacity for the Parent Company; acting as an advocate for the Parent Company; or jointly sharing risks and rewards. Auditor’s Independence Declaration The lead auditor’s independence declaration for the year ended 31 July 2016 has been received and is included on page 47. Rounding of Amounts The company is of a kind referred to in ASIC Corporations (Rounding in Financial/ Directors' Reports) Instrument 2016/191, and in accordance with that legislative instrument, amounts in the Directors' Report and financial report have been rounded off to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the Board of Directors: R D Millner Director – Chairman T J Barlow Managing Director Dated this 25th day of October 2016. Auditor’s Independence Declaration Auditor’s Independence Declaration to the Directors of Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 In relation to the independent audit for the year ended 31 July 2016, to the best of my knowledge and belief there have been: (i) no contraventions of the auditor independence requirements of the Corporations Act 2001; and (ii) no contraventions of any applicable code of professional conduct. This declaration is in respect of Washington H. Soul Pattinson and Company Limited and the entities it controlled during the year. J Gavljak Partner PITCHER PARTNERS Sydney 24 October 2016 46 47 An independent New South Wales Partnership. ABN 17 795 780 962 Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane | Newcastle An independent member of Baker Tilly International Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Financial Report for the year ended 31 July 2016 About this report This financial report is for the Consolidated entity consisting of Washington H. Soul Pattinson and Company Limited and its controlled entities for the year ending 31 July 2016. Throughout the report, the Consolidated entity is also referred to as the ‘Group’. We are continuously developing the Group’s financial reporting with the aim to enhance our shareholders understanding of the Group and to highlight the parent company information of Washington H. Soul Pattinson and Company Limited, illustrating the market value of our investments and the cash flows generated by them from which dividends to our shareholders are paid. The notes to the financial statements are ordered so as to focus on the drivers of the Group’s performance. Please refer to the contents page for how the notes are structured and ordered. In addition to the relevant financial information, the notes include a description of the accounting policies applied, and where applicable key judgements and estimates used by management in applying these policies. Consolidated entity perspective This consolidated financial report combines the operating results, financial positions and cash flows of Washington H. Soul Pattinson and Company Limited (the Parent company) and each entity that it controls (subsidiaries), into a single set of financial statements. A controlling stake in a subsidiary often occurs where the parent company owns less than 100% of the subsidiary. The term ‘non-controlling interest’ is used to describe that portion not owned by the parent company. The non-controlling interest’s share of the consolidated profit and net assets is disclosed separately in the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position and the consolidated statement of changes in equity. Investments in which the parent company or a subsidiary has significant influence but does not have control are termed ‘associate entities’. Unlike controlled entities, the individual financial reports of associates are not consolidated. Associates are equity accounted with the Group’s share of an associate’s result recorded in profit. The investment in associates is disclosed as a line item (equity accounted associates) in the consolidated statement of financial position and is adjusted for the Group’s share of the associate’s result and decreased by any dividends received. This method treats dividends from associates as if they are a return of capital rather than being recognised in income. Parent company perspective Financial information for Washington H. Soul Pattinson and Company Limited, the ‘Parent company’ has also been provided. In contrast to the consolidated financial report, the Parent company information reflects Washington H. Soul Pattinson and Company Limited’s activities as an ‘investor’ and provides details of its investments (subsidiaries, associate entities and other investments), together with the cash flows generated by them (dividend income). Washington H. Soul Pattinson and Company Limited is a for profit company limited by shares, incorporated and domiciled in Australia. The shares are publicly traded on the Australian Securities Exchange. Its registered office and principal place of business is as follows: Washington H. Soul Pattinson and Company Limited Level 1, 160 Pitt Street, SYDNEY NSW 2000 A description of the nature of the Consolidated entity's operations and its principal activities is included in the Directors' report, which is not part of this financial report. This financial report was authorised for issue in accordance with a resolution of the Directors on 24 October 2016. 48 Washington H. Soul Pattinson and Company Limited Annual Report 2016 Contents 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 Financial Statements Basis of preparation Basis of consolidation Parent company information 1 Parent company financial information: • statement of financial position; • income statement; • market value of listed investments; • related cash flows; and • source of shareholder dividends 2 Payment of dividends to shareholders Group structure and performance 3 4 5 6 7 Segment information – how the Group is organised and managed Accounting movements in value that are not reflected in profit: Reserves Share capital and capital management Business combinations Events after the reporting date Accounting for our Investments 8 9 Investments in controlled entities (subsidiaries) Investments in jointly controlled entities 10 Investments in Associates 11 Other equity investments 12 Investment properties 13 Term deposits 14 Cash and cash equivalents Revenue and expenses 15 Revenue 16 Other income Directors’ declaration Independent auditor’s report Financial Report 55 56 58 58 59 59 59 61 62 68 70 71 73 73 74 75 80 82 84 85 86 87 17 Expenses Taxation 18 Income tax expense 19 Deferred tax assets and deferred tax liabilities Risk management 20 Financial risk management 21 Fair value estimation 22 Derivative financial instruments 23 Interest bearing liabilities 24 Contingent liabilities Fixed assets 25 Property plant and equipment 26 Exploration and evaluation assets 27 Intangible assets Other operating assets and liabilities 28 Trade and other receivables 29 Inventories 30 Trade and other payables 31 Provisions Other notes 32 Share based payments 33 Related parties 34 Commitments for expenditure 35 Other accounting policies 36 Remuneration of auditors 37 Deed of cross guarantee 50 51 52 53 54 88 91 93 95 98 100 101 103 104 109 110 113 114 115 115 117 119 121 122 125 126 128 129 49 Consolidated Income Statement for the year ended 31 July 2016 Consolidated Statement of Comprehensive Income for the year ended 31 July 2016 Profit after tax for the year Other comprehensive income Items that may be reclassified subsequently to the income statement Net movement in the fair value of long term equity investments, net of tax Transfer to profit and loss on disposal of long term equity investments, net of tax Net movement in hedge reserve, net of tax Net movement in foreign currency translation reserve, net of tax Net movement in equity reserve, net of tax Total other comprehensive (expense)/income for the year, net of tax Total comprehensive income for the year Total comprehensive expense attributable to non-controlling interests Total comprehensive income attributable to members of Washington H. Soul Pattinson and Company Limited The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 2016 $’000 129,459 (40,304) (10,692) 17,141 (320) 2,813 (31,362) 98,097 12,761 2015 $’000 75,554 8,411 (3,950) (14,139) 627 (3,593) (12,644) 62,910 16,091 110,858 79,001 Notes 15 16 17 10 18a Revenue from continuing operations Other income Cost of sales Selling and distribution expenses Administration expenses Acquisition costs expensed Other expenses Impairment expense Finance costs Share of results from equity accounted associates Profit before income tax Income tax (expense)/benefit Profit after tax for the year Loss/(profit) after tax attributable to non-controlling interests Profit after tax attributable to members of Washington H. Soul Pattinson and Company Limited 2016 $’000 620,661 145,902 (392,308) (153,806) (34,600) (45,604) (13,313) (116,539) (2,535) 122,503 130,361 (902) 129,459 19,962 2015 $’000 641,604 4,504 (365,121) (142,627) (39,381) – (8,591) (123,801) (3,063) 95,079 58,603 16,951 75,554 7,776 149,421 83,330 2016 cents 2015 cents Earnings per share Basic and diluted earnings per share attributable to ordinary equity holders of Washington H. Soul Pattinson and Company Limited Earnings per share from all operations 62.42 34.81 Weighted average number of shares used in calculating basic and diluted earnings per share No. of shares No. of shares 239,395,320 239,395,320 The above consolidated income statement should be read in conjunction with the accompanying notes. 50 51 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Consolidated Statement of Financial Position as at 31 July 2016 Consolidated Statement of Changes in Equity for the year ended 31 July 2016 Current assets Cash and cash equivalents Term deposits Trade and other receivables Inventories Trading equities Derivative financial instruments Current tax asset Total current assets Non-current assets Trade and other receivables Equity accounted associates Long term equity investments Other financial assets Investment properties Property, plant and equipment Exploration and evaluation assets Deferred tax assets Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Interest bearing liabilities Derivative financial instruments Current tax liabilities Provisions Total current liabilities Non-current liabilities Interest bearing liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Parent entity interest Non-controlling interest Total equity Notes 31 July 2016 $’000 31 July 2015 $’000 14 13 28 29 11 22 28 10 11 11 12 25 26 19 27 30 23 22 31 23 19 31 5 4 126,709 47,660 116,775 79,039 31,605 2,313 1,486 59,424 1,217,011 75,348 72,870 21,300 – – 405,587 1,445,953 30,187 1,265,214 585,703 11,837 92,932 1,388,735 402,298 56,076 60,478 4,299 1,088,592 615,645 5,425 20,720 584,703 407,831 59,309 20,538 3,893,460 2,807,062 4,299,047 4,253,015 75,831 52,167 167 1,677 50,066 49,329 47,347 23,144 4,903 36,675 179,908 161,398 35,558 240,038 96,892 372,488 552,396 104 253,042 64,036 317,182 478,580 3,746,651 3,774,435 43,232 623,684 2,372,467 3,039,383 707,268 43,232 661,279 2,322,067 3,026,578 747,857 3,746,651 3,774,435 Year ended 31 July 2016 Total equity at the beginning of the year – 1 August 2015 Net profit for the year after tax Other comprehensive income for the year Net movement in asset revaluation reserve, net of tax Net movement in hedge reserve, net of tax Net movement in foreign currency translation reserve, net of tax Net movement in equity reserve, net of tax Total comprehensive income for the year Transactions with owners Dividends declared and paid Net movement in share-based payments reserve Non-controlling interests share of subsidiaries Equity transfer from members on issue of share capital in controlled entity Share capital $’000 Retained profits $’000 Reserves $’000 Total Parent entity interest $’000 Non- controlling interest $’000 Total equity $’000 43,232 2,322,067 661,279 3,026,578 747,857 3,774,435 – – – – – – – – – – 149,421 – 149,421 (19,962) 129,459 – – – – (51,139) 9,979 (51,139) 9,979 (216) 2,813 (216) 2,813 143 7,162 (104) – (50,996) 17,141 (320) 2,813 149,421 (38,563) 110,858 (12,761) 98,097 (99,064) 43 – – – 968 – – (99,064) 1,011 – (27,963) (95) (18) (127,027) 916 (18) – 248 248 Total equity at the end of the year – 31 July 2016 43,232 2,372,467 623,684 3,039,383 707,268 3,746,651 Year ended 31 July 2015 Total equity at the beginning of the year – 1 August 2014 Net profit for the year after tax Other comprehensive income for the year Net movement in asset revaluation reserve, net of tax Net movement in hedge reserve, net of tax Net movement in foreign currency translation reserve, net of tax Net movement in equity reserve, net of tax Total comprehensive income for the year Transactions with owners Dividends declared and paid Net movement in share-based payments reserve Non-controlling interests share of subsidiaries Equity transfer from members on issue of share capital in controlled entity 43,232 2,334,728 665,424 3,043,384 796,741 3,840,125 – – – – – – – – – – 83,330 – 83,330 (7,776) 75,554 – – – – 6,495 (7,858) 627 (3,593) 6,495 (7,858) 627 (3,593) (2,034) (6,281) – – 4,461 (14,139) 627 (3,593) 83,330 (4,329) 79,001 (16,091) 62,910 (95,126) (865) – – – 184 – – (95,126) (681) – (33,892) 800 (26) (129,018) 119 (26) – 325 325 Total equity at the end of the year – 31 July 2015 43,232 2,322,067 661,279 3,026,578 747,857 3,774,435 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 52 53 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Consolidated Statement of Cash Flows for the year ended 31 July 2016 Cash flows from operating activities Receipts from customers inclusive of GST Payments to suppliers and employees inclusive of GST Dividends received Interest received Acquisition costs expensed Finance costs Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payment for property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment Payments for exploration and evaluation activities Net proceeds from term deposits Payment for acquisition and development of investment properties Proceeds from sale of investment properties Payments for equity investments Proceeds from sale of long term equity investments Proceeds from sale of an equity accounted associate Payments to acquire equity accounted associates Loans advanced Loan repayments Payments for acquisition of businesses, net of cash Notes 6 14 6 2016 $’000 598,389 (559,921) 38,468 98,603 32,202 (45,604) (973) (2,869) 2015 $’000 592,947 (502,923) 90,024 94,648 46,393 – (1,438) (6,937) 119,827 222,690 (68,533) 829 (22,387) 1,161,399 (71,316) – (86,149) 49,130 4,108 (6,287) (41,285) 1,701 (849,530) (77,430) 336 (60,350) 52,933 (31,204) 153,069 (80,905) 29,222 – (5,014) (17,843) 3,554 – Net cash inflow/(outflow) from investing activities 71,680 (33,632) Cash flows from financing activities Dividends paid to our shareholders Dividends paid by subsidiaries to non-controlling interests Proceeds from interest bearing liabilities Payment on close out of interest rate swap Proceeds from external borrowings Repayment of external borrowings (122,092) (27,963) 1,356 – 23,358 (988) (117,304) (33,892) 1,238 (2,112) 11,572 (56,950) Net cash (outflow) from financing activities (126,329) (197,448) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year 14 65,178 59,424 2,107 126,709 (8,390) 64,933 2,881 59,424 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. Notes to the Financial Statements Basis of preparation This financial report is a general purpose financial report which: 4 has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB); 4 complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB); 4 has been prepared on a for profit basis; 4 is presented in Australian dollars with all values rounded to the nearest thousand dollars ($’000), or in certain cases, to the nearest dollar, unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191; 4 presents reclassified comparative information where required for consistency with the current year’s presentation; 4 adopts all new and amended Accounting Standards and Interpretations issued by the AASB that are relevant to the operations of the Group and effective for reporting periods beginning on or after 1 August 2015; 4 does not adopt any Accounting Standards and Interpretations that have been issued or amended but are not yet effective such as AASB 15 Revenue from Contracts with Customers; AASB 9 Financial Instruments (December 2010) as amended by 2013-9 and AASB 16 Leases. Refer to note 35 – Other accounting policies for more information; 4 has been prepared on a historical cost basis except for the following items, which are measured on an alternative basis. Item Measurement basis Long term equity investments Held for sale equities Trading equities Investment properties Inventories Fair value Fair value Fair value Fair value Net realisable value 4 where Parent company information is disclosed, relevant accounting policies are described when different to the Group accounting policies. 54 55 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Notes to the Financial Statements Basis of consolidation The consolidated financial statements of the Group incorporates the financial statements of Washington H. Soul Pattinson and Company Limited and its subsidiaries, and equity accounts its associates. A diagram is set out in note 3, listing the main subsidiaries and associates. i. Controlled entities (Subsidiaries) Subsidiaries are all entities over which the Group has control. The Group controls an entity 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. Subsidiaries are consolidated from the date on which control is obtained to the date on which control is disposed. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. Non-controlling interests in the results and equity of subsidiaries are shown separately in the income statement, statement of comprehensive income, statement of changes in equity and statement of financial position respectively. 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. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. For disposals to non- controlling interests, differences between any proceeds received and the relevant share of non-controlling interests are also recorded in equity. ii. Joint arrangements A joint arrangement is an arrangement where two or more parties share control. 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. Joint operations A joint operation is a joint arrangement in which the parties that share joint control, have rights to the assets, and obligations for the liabilities relating to the arrangement. 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 into the Group’s financial statements under the appro- priate headings. Joint ventures A joint venture is a joint arrangement in which the parties that share joint control have rights to the net assets of the arrangement. Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost. iii. Associates Associates are all entities over which the Group has significant influence and are neither subsidiaries nor jointly controlled. This is generally the case where the Group holds 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, after initially being recognised at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received/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 unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. 56 iv. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transac- tions are eliminated. Unrealised gains arising from transactions with an associate are eliminated to the extent of the Group’s interest in the associate. Unrealised losses are eliminated in the same way as unrealisd gains, but only to the extent that there is no evidence of impairment. Where practical, accounting policies of the associates have been changed to ensure consistency with the policies adopted by the Group. Other accounting policies Significant and other accounting policies relevant to gaining an understanding of the financial statements have been grouped with the relevant notes to the financial statements. Key judgements and 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. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed within the following notes: Note reference Key judgements and estimates Note 6 Note 9 Note 10 Note 11 Note 17 Note 18 Note 19 Note 25 Note 25 Note 26 Note 27 Note 28 Note 31 Business combination – acquisition fair value Classification of joint arrangements as a joint operation Recoverable value of investments in Associates Impairment of financial assets Recoverable value and impairment Petroleum resource rent tax (PRRT) Deferred tax assets Impairment of non-current assets 4 Estimation of reserves and resources – Coal 4 New Acland Coal Stage 3 approvals 4 Oil producing assets Determination of recoverable value - Copper assets Exploration and evaluation expenditure Impairment of goodwill Recoverability of receivables Mining restoration and site rehabilitation Page 72 74 78 81 90 92 94 107 108 109 112 114 116 57 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Notes to the Financial Statements Parent Company Information 1 NOTE 1 PARENT COMPANY FINANCIAL INFORMATION Source of shareholders dividends The Board declares dividends having regard to regular operating cash flows before non-regular items. The following information has been provided to demonstrate the underlying value of the Parent company’s investments and the regular profit and cash flows generated by them. Regular profit after tax is a measure of the Parent company's performance. This measurement excludes the effects of non-regular items of income and expense which by nature are outside the ordinary course of business or are part of ordinary operations but are unusual due to their size. The classification of income and expenses as regular or non-regular is consistent with the Consolidated entity’s measurement of segment results. ACCOUNTING POLICIES Parent company The statement of financial position, profit after tax and total comprehensive income for the Parent company, have been prepared on the same basis as the consolidated financial statements except for Investments in controlled entities (subsidiaries) and Investments in associates. In the Parent company, investments in subsidiaries and associates are carried at the lower of cost or impaired cost. Dividends from these entities are recognised as income within profit. This approach reflects Washington H. Soul Pattinson and Company Limited's activities as an investor. The consolidated financial statements recognises the individual assets, liabilities, income and expenses of the controlled entities. Associates are equity accounted, with the initial investment being increased/(decreased) by profits/ (losses) recognised in the income statement, movements in other comprehensive income and decreased by dividends received. Dividends from both controlled entities and associates are not recognised in the consolidated financial income statement. 58 Washington H. Soul Pattinson and Company Limited Annual Report 2016 Total assets 1,665,356 1,740,659 Total current liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Total equity Income Statement Profit after tax Less: Non-regular items after tax Special dividends received from New Hope Corporation Limited Net gain on disposal of investments Net impairment expense/(reversal) on investments Other expenses 52,134 72,866 48,676 89,112 125,000 137,788 1,540,356 1,602,871 43,232 571,178 925,946 43,232 610,339 949,300 1,540,356 1,602,871 98,737 165,200 (17,349) (11,713) 67,320 441 (17,349) (1,595) (14,837) 229 Regular profit after tax 137,436 131,648 Other comprehensive income Net movement in the fair value of the listed investment portfolio (39,363) (776) Statement of Financial Position As at 31 July 2016 Current assets Cash and term deposits Other current assets Total current assets Non-current assets Long term equity investments – measured at market value Other financial assets – Listed controlled and associated entities – measured at the lower of cost or impaired value – Unlisted entities – measured at the lower of cost or impaired value Other non-current assets 2016 $'000 2015 $'000 72,453 36,585 165,855 46,300 109,038 212,155 581,432 608,030 562,309 526,002 265,259 147,318 297,410 97,062 Market value of listed entities as at 31 July 2016 (based on ASX closing prices 31 July 2016) As at 31 July 2016 Long term equity investments Milton Corporation Limited Commonwealth Bank of Australia Perpetual Limited Lindsay Australia Limited ANZ Banking Group Limited National Australia Bank Limited Bailador Technology Investments Limited Brambles Limited Telstra Corporation Limited Wesfarmers Limited Other listed entities 2016 $'000 147,151 60,883 27,898 27,208 24,362 23,136 22,600 21,783 21,730 21,521 183,160 Total non-current assets 1,556,318 1,528,504 Market value of long term equity investments 581,432 Regular Profit after Tax and Regular Operating Cash Flows For the year ended 31 July 2016 Interest income Dividend and distribution income Milton Corporation Limited Commonwealth Bank of Australia Perpetual Limited Lindsay Australia Limited ANZ Banking Group Limited National Australia Bank Limited Bailador Technology Investments Limited Brambles Limited Telstra Corporation Limited Wesfarmers Limited Other listed entities TPG Telecom Limited Brickworks Limited New Hope Corporation Limited Australian Pharmaceutical Industries Ltd BKI Investment Company Limited Ruralco Holdings Limited Apex Healthcare Berhad Clover Corporation Limited Unlisted controlled and associates 2016 $'000 5,159 6,385 3,305 1,532 1,165 1,650 1,726 – 460 1,167 1,012 9,984 27,744 30,194 22,305 6,010 4,477 2,391 1,256 354 12,224 Total dividend and distribution income 135,341 Listed controlled and associated entities TPG Telecom Limited Brickworks Limited New Hope Corporation Limited Australian Pharmaceutical Industries Ltd BKI Investment Company Limited Ruralco Holdings Limited Apex Healthcare Berhad TPI Enterprises Limited Clover Limited Rum Jungle Resources Limited Market value of listed controlled and associated entities Holding 25.2% 44.1% 59.6% 24.6% 10.3% 20.1% 30.3% 19.4% 28.6% 38.3% 2,737,949 986,646 793,114 230,813 100,668 52,947 45,247 28,898 19,336 8,486 5,004,104 Total market value of WHSP's listed investments 5,585,536* Net pharmacy profit Other revenue Realised and fair value gains on equities Other expenses Finance costs Regular profit before tax Income tax (expense) Regular profit after tax Non-cash fair value losses on equities Net movements in working capital Regular operating cash flows Tax payable if WHSP's listed investments were disposed: WHSP is a long term equity investor. If WHSP had disposed of its listed investments on 31 July 2016, a capital gains tax liability of approximately $1.341 billion would have arisen based on market values as at 31 July 2016. Of this amount, only $60.9 million has been recognised in the Parent company accounts at 31 July 2016. * The market values of the listed investments are based on the last sale prices as quoted on the ASX on 31 July 2016 and are therefore subject to price fluctuations. Refer to note 7. The Board declares dividends having regard to the Parent company's regular operating cash flows. Dividends paid/payable – Interim of 20 cents per share paid 12 May 2016 – Final of 31 cents per share payable 12 December 2016 Total dividends paid/payable Payout ratio Dividends as a percentage of regular operating cash flows 1,575 1,649 5,140 (6,930) (1,334) 140,600 (3,164) 137,436 2,507 (2,508) 137,435 50,273 74,213 124,486 90.6% 59 Parent Company Information NOTE 1 PARENT COMPANY FINANCIAL INFORMATION (continued) a) Interest bearing liabilities 1 The Parent company accepts deposits from its Directors and Director-related parties under normal commercial terms and conditions. As at 31 July 2016, the balance of these deposits was $49.860 million (2015: $47.326 million) refer note 23. At 31 July 2016, the Parent company has no external borrowings from financial institutions and is not subject to any externally imposed capital requirements. b) Guarantees entered into by the Parent company The Parent company provides cash backed guarantees for environmental bonds that are required by CopperChem Limited. As at 31 July 2016 these guarantees totalled $5.013 million (2015: $5.013 million). c) Contingent liabilities of the Parent company Washington H. Soul Pattinson and Company Limited is in litigation with Perpetual Investment Management Limited which is proceeding with cross-claims in seeking to have the cross-shareholding between Washington H. Soul Pattinson and Company Limited and Brickworks Limited unwound. Washington H. Soul Pattinson and Company Limited continue to vigorously defend cross-claim. d) Contractual commitments for the acquisition of property, plant or equipment The Parent company did not have any contractual commitments as at 31 July 2016 or 31 July 2015. 60 2 NOTE 2 PAYMENT OF DIVIDENDS TO SHAREHOLDERS Accounting policy A liability is recognised for the amount of any dividend declared on or before the end of the financial year but not distributed at reporting date. As the final dividend was declared by Directors after year end, the final dividend has not been recognised as a liability. a) Dividends paid during the year Final dividend for the year ended 31 July 2015 of 30 cents (2014: 29 cents) per fully paid ordinary share paid on 7 December 2015 (2014: 8 December 2014) fully franked based on tax paid at 30% Interim dividend for the year ended 31 July 2016 of 21 cents (2015: 20 cents) per fully paid ordinary share paid on 12 May 2016 (2015: 14 May 2015) fully franked based on tax paid at 30% Total dividends paid b) Dividends not recognised at year end In addition to the above dividends, since year end the Directors have declared the payment of: A final dividend of 31 cents per fully paid ordinary share, (2015: 30 cents) fully franked based on tax paid at 30% This dividend is due to be paid on 12 December 2016 (2015: 7 December 2015) out of retained profits as at 31 July 2016, and has not been recognised as a liability at year end. c) Franking of dividends The final dividend for 31 July 2016 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 31 July 2016. Franking credits available for future dividend payments Franking credits available for subsequent financial years based on an Australian company tax rate of 30% (2015: 30%). The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for franking credits that will arise from the payment of provision for income tax, franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. Subsequent to year end, the franking account will be reduced by the final dividend to be paid on 12 December 2016 (2015: 7 December 2015). Balance of franking credits available after payment of the final dividend 2016 $’000 2015 $’000 71,819 69,425 50,273 122,092 47,879 117,304 74,213 71,819 540,553 529,996 (31,805) (30,779) 508,748 499,217 61 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Group Structure and Performance 3 NOTE 3 SEGMENT INFORMATION – HOW THE GROUP IS ORGANISED AND MANAGED How the Group is organised – Corporate structure The Parent company invests in a diversified range of companies. Larger holdings in a single entity are classified as follows: Controlled entities: (subsidiaries) The Parent company is able to control the activities of the organisation. Associates: The Parent company has significant influence but does not control the activities of the organisation. No controlled entities were acquired or disposed of during the year ended 31 July 2016. A subsidiary, New Hope Corporation Limited, acquired a 40% interest in the Bengalla coal mine, which is a jointly controlled operation. Refer to note 6 for details of this acquisition. For changes in ownership of Associates, refer note 10. How the Group is managed – Segment reporting The Parent company, its subsidiaries and associates operate within five segments. Segments are based on product and service type and are predominately based in Australia. The level of ownership determines the extent to which the Parent company is able to manage the underlying operations of its investment. The Group is managed by operating segment. Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board. As the Chief Operating Decision Maker is not regularly provided with the operating results from the listed associates (material contributors to reported profit) these associates are included within the Investing activities segment except for Syndicated Metals Limited, which is included within the Copper and Gold operations segment. Results for listed associates are sourced from publicly available information. Unlisted associates are considered not to be material contributors to the Group. These have been included within the segment as disclosed in the diagram on the following page: The Group’s operating segments are described as: Investing activities The Group invests in cash, term deposits, and equity investments. Energy The Group engages in coal, oil and gas activities which include exploration, development, production, processing, associated transport infrastructure and ancillary activities. Copper and Gold operations The Group engages in copper and gold mining activities which includes exploration, mining and processing of ore into copper concentrate, copper sulphide and gold. Corporate advisory The Group provides corporate advisory services. Property The Group engages in property investment activities including the identification and management of real estate to be held, sold or developed to earn rental income or capital appreciation, or both. CONTROLLED ENTITIES (SUBSIDIARIES) WHSP group percentage ownership of subsidiaries SEGMENTS How the businesses are managed ASSOCIATES (SIGNIFICANT INFLUENCE) WHSP group percentage ownership of associates WHSP CONSOLIDATED GROUP New Hope Corporation Limited Pitt Capital Partners Limited Property Trusts CopperChem Limited Exco Resources Limited WHSP: 59.65% WHSP: 100% WHSP: 100% WHSP: 100% WHSP: 100% INVESTING ACTIVITIES ENERGY OPERATIONS CORPORATE ADVISORY PROPERTY ACTIVITIES COPPER AND GOLD OPERATIONS ACTIVITIES ACTIVITIES WHSP Listed Equities Portfolio WHSP Cash and Term Deposits WHSP 100% WHSP 100% New Hope Cash and Term Deposits WHSP 59.65% Coal Production and Exploration Brisbane Port Coal Loading Oil and Gas Operations Australian Pharmaceutical Industries Limited BKI Investment Company Limited Brickworks Limited WHSP: 24.6% WHSP: 10.3% WHSP: 44.1% Syndicated Metals Limited WHSP: 32.8% Clover Corporation Limited Ruralco Holdings Limited TPG Telecom Limited WHSP: 28.6% WHSP: 20.1% WHSP: 25.2% Ampcontrol Pty Limited Apex Healthcare Berhad TPI Enterprises Limited Rum Jungle Limited WHSP: 43.3% WHSP: 30.3% WHSP: 19.4% WHSP: 38.3% Various unlisted associates 62 63 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Group Structure and Performance a) Reporting segments 3 NOTE 3 SEGMENT INFORMATION – HOW THE GROUP IS ORGANISED AND MANAGED (continued) Business performance – measurement of Segment results Segment performance is measured by regular profit and regular profit after tax attributable to members. These results are non-statutory profit measures and represent profit from continuing operations before non-regular items. The measurement basis in general, excludes the effects of non-regular items of income and expense which by nature are outside the ordinary course of business or part of ordinary activities but are unusual due to their size. Regular profit after tax attributable to members is the main measure of segment profit. A reconciliation between regular profit after tax attributable to members and profit after tax is set out below, and for each segment is set out in note 3a. The Directors have presented this information which is used by the Chief Operating Decision Maker, as they consider the disclosure enhances the understanding of the results to members and users of the financial statements. Non-regular items are disclosed in note 3b. The allocation of income and expense items between regular and non-regular profit is consistent with the prior year. Transactions between business segments are on an arm’s length basis in a manner similar to transactions with third parties. Segment revenue, expenses and results include transactions between business segments. These transfers are eliminated on consolidation. Reconciliation between regular profit after tax attributable to members and profit after tax: Regular profit after tax attributable to members 177,222 162,405* 2016 $’000 2015 $’000 Non-regular items – net of tax Gain on disposal of equity investments Gain on disposal of equity accounted associate Loss on initial recognition of equity accounted associate Gain on deemed disposal of equity accounted associates Impairment (expense)/reversal on equity accounted associates Impairment (expense) on equity investments Impairment (expense) on oil producing and exploration assets Impairment (expense) on goodwill Impairment (expense) – copper assets Impairment (expense) on non-current assets – coals to liquids facility Impairment (expense) on other assets Share of significant (expenses) from associate entities Deferred tax (expense) recognised on equity accounted associate entities Acquisition costs expensed Land access compensation Other items Total non-regular losses after tax attributable to members Profit after tax attributable to members 11,713 1,489 (1,682) 83,318 (7,554) (12,023) (13,277) – (22,374) – (6,675) (29,834) (20,900) (19,042) 2,982 6,058 (27,801) 149,421 2,410 – – 1,450 72,947 (16,170) (21,949) (2,480) (58,114) (10,638) (6,632) (23,391) (13,902) – – (2,606) (79,075)* 83,330 * The regular profit after tax for 2015 has been restated by transferring expenses of $5.956 million from regular profit to non-regular items following a reallocation by an Associated Entity. Year ended 31 July 2016 Revenue from external customers Intersegment revenue Total revenue Regular profit/(loss) before income tax Non-regular items before tax (note 3b) Profit/(loss) before income tax Less income tax benefit/(expense) Profit/(loss) after tax Less loss/(profit) attributable to non-controlling interests Profit/(loss) after tax attributable to members Profit/(loss) after tax attributable to members (as above) Non-regular loss/(profit) after tax attributable to members (note 3b) Regular profit/(loss) after tax attributable to members Profit/(loss) before income tax includes the following items: Interest revenue Interest (expense) Depreciation and amortisation (expense) Impairment (expense)/reversal Share of results from equity accounted associates g n i t s e v n I s e i t i v i t c a $’000 s n o i t a r e p o l d o G d n a r e p p o C y g r e n E $’000 $’000 e t a r o p r o C y r o s i v d a $’000 86,281 29,708 514,164 – 115,989 514,164 616 – 616 1,397 9,236 10,633 230,288 72,615 302,903 (62,586) (18,361) (68,750) (87,111) 25,795 (9,746) (55,515) (65,261) 39,092 240,317 (61,316) (26,169) 7,452 – 7,452 (2,273) 5,179 / t n e m g e s r e t n I d e t a c o l l a n u $’000 d e t a d i l o s n o C $’000 12,336 (39,858) 620,661 – (27,522) 620,661 (30,861) – (30,861) – 182,011 (51,650) 130,361 (902) y t r e p o r P $’000 5,867 914 6,781 3,239 – 3,239 (930) 2,309 (30,861) 129,459 (3,119) 24,742 – (1,610) (51) – 19,962 237,198 (36,574) (26,169) 3,569 2,258 (30,861) 149,421 237,198 (36,574) (26,169) 3,569 2,258 (30,861) 149,421 (18,654) 29,337 17,118 – – – 27,801 218,544 (7,237) (9,051) 3,569 2,258 (30,861) 177,222 22,484 (1,338) (2,209) (35,001) 567 (249) (74,905) (28,146) 273 (304) (2,339) (53,392) 124,693 – (2,183) 109 – (17) – – 15 (644) (143) – (7) – – – – – 23,448 (2,535) (79,613) (116,539) 122,503 64 65 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Group Structure and Performance b) Analysis of non-regular items excluded from segment results 3 NOTE 3 SEGMENT INFORMATION – HOW THE GROUP IS ORGANISED AND MANAGED (continued) a) Reporting segments (continued) g n i t s e v n I s e i t i v i t c a $’000 s n o i t a r e p o l d o G d n a r e p p o C y g r e n E $’000 $’000 108,679 37,758 465,420 – 146,437 465,420 209,290 23,957 233,247 (28,773) 31,546 (79,880) (48,334) 14,898 51,636 – 51,636 (9,967) (88,563) (98,530) 24,884 204,474 (33,436) (73,646) e t a r o p r o C y r o s i v d a $’000 1,949 6,152 8,101 4,866 – 4,866 (296) 4,570 / t n e m g e s r e t n I d e t a c o l l a n u $’000 d e t a d i l o s n o C $’000 11,630 (46,010) 641,604 – (34,380) 641,604 (41,897) – (41,897) 7,069 203,089 (144,486) 58,603 16,951 y t r e p o r P $’000 2,290 2,100 4,390 9,251 – 9,251 (831) 8,420 (34,828) 75,554 (4,687) 13,493 – – (1,030) – 7,776 199,787 (19,943) (73,646) 4,570 7,390 (34,828) 83,330 Year ended 31 July 2016 Gain on disposal of equity investments Loss on initial recognition of an associate Gain on deemed disposal of associates Gain on disposal of associate Impairment (expense) of assets Share of significant (expenses) from associate entities Deferred tax recognised on equity accounted associate entities Acquisition costs expensed Land access compensation Significant tax items Other Before tax $’000 16,501 (1,682) 118,850 2,127 (116,539) (29,834) – (45,604) 5,000 – (469) Tax $’000 (4,788) – (35,532) (638) 43,627 – (20,900) 13,681 – 6,413 114 Attributable to: After tax $’000 Non- controlling interest $’000 Members $’000 11,713 (1,682) 83,318 1,489 (72,912) (29,834) (20,900) (31,923) 5,000 6,413 (355) – – – – (11,009) – – (12,881) 2,018 – – 11,713 (1,682) 83,318 1,489 (61,903) (29,834) (20,900) (19,042) 2,982 6,413 (355) Total non-regular items (51,650) 1,977 (49,673) (21,872) (27,801) Year ended 31 July 2015 Gain on disposal of equity investments Gain on deemed disposal of associates Impairment reversal on equity accounted associate Impairment (expense) of assets Share of significant (expenses) from associate entities Deferred tax recognised on equity accounted associate entities Restructuring costs Consulting and legal costs Other 3,408 2,076 72,947 (196,748) (23,391) – (1,291) (325) (1,162) (534) (626) – 49,960 – (13,902) 74 98 – 2,874 1,450 72,947 (146,788) (23,391) (13,902) (1,217) (227) (1,162) 464 – – (30,805) – – – – – 2,410 1,450 72,947 (115,983) (23,391) (13,902) (1,217) (227) (1,162) 199,787 (19,943) (73,646) 4,570 7,390 (34,828) 83,330 Total non-regular items (144,486) 35,070 (109,416) (30,341) (79,075)* (19,648) 35,066 63,657 – – – 79,075* * The results for 2015 has been restated by transferring expenses of $5.956 million from regular profit to non-regular items following a reallocation by an Associated Entity. 180,139 15,123 (9,989) 4,570 7,390 (34,828) 162,405* 43,803 (1,595) (2,267) 42,189 90,122 230 (1) (61,181) (79,880) 11 (825) (16,675) (86,110) – (249) 163 – (16) – – 109 (642) (104) – – – – – 44,316 (3,063) (80,243) (123,801) 3,156 2,050 95,079 * The results for 2015 has been restated by transferring expenses of $5.956 million from regular profit to non-regular items following a reallocation by an Associated Entity. 66 67 Year ended 31 July 2015 Revenue from external customers Intersegment revenue Total revenue Regular profit/(loss) before income tax Non-regular items before tax (note 3b) Profit/(loss) before income tax Less income tax benefit/(expense) Profit/(loss) after tax Less loss/(profit) attributable to non-controlling interests Profit/(loss) after tax attributable to members Profit/(loss) after tax attributable to members (as above) Non-regular loss/(profit) after tax attributable to members (note 3b) Regular profit/(loss) after tax attributable to members Profit/(loss) before income tax includes the following items: Interest revenue Interest (expense) Depreciation and amortisation (expense) Impairment (expense)/reversal Share of results from equity accounted associates Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Group Structure and Performance 4 NOTE 4 ACCOUNTING MOVEMENTS IN VALUE THAT ARE NOT REFLECTED IN PROFIT: RESERVES Accounting policies – Reserves Reserves represent the portion of the consolidated entity’s reserves that are attributable to our shareholders. Certain changes in the value of assets and liabilities are not recognised in the income statement but are instead included in other comprehensive income. Also included in reserves is the Group’s share of the reserves of equity accounted associates. Asset Revaluation reserve Changes in the fair value of certain assets including long term equity investments are not recognised in the income statement but instead are recognised in other comprehensive income and accumulated in the asset revaluation reserve within equity. Amounts are reclassified to the profit or loss when investments are sold or impaired. Refer note 11. Hedge Reserve The hedge reserve records the effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges, as described in note 22. The gain or loss relating to the ineffective portion is recognised in the income statement. a) Reserves General reserve Asset revaluation reserve Capital profits reserve Hedging reserve Share-based payments reserve Foreign currency translation reserve Equity reserve Balance 31 July 2016 $’000 2015 $’000 404,548 220,103 11,368 244 1,677 (126) (14,130) 404,548 271,242 11,368 (9,735) 709 90 (16,943) 623,684 661,279 b) Major movements in reserves consist of: Asset revaluation reserve Balance 1 August Revaluation of long term equity investments, gross Revaluation of long term equity investments, deferred tax Transfer on sale of long term equity investments to profit, gross Transfer on sale of long term equity investments to profit, deferred tax Transfer on impairment of long term equity investments to profit, gross Transfer on impairment of long term equity investments to profit, deferred tax Share of associates (decrements)/increments Balance 31 July 271,242 (55,960) 18,373 (12,324) 1,844 12,934 (3,880) (12,126) 220,103 264,747 (5,933) (60) (4,691) 1,205 8,138 (2,444) 10,280 271,242 At balance date, the asset revaluation reserve predominately relates to the unrealised gains and losses of Washington H. Soul Pattinson and Company Limited’s long term equity investments. Hedge reserve Balance 1 August Revaluation, gross Revaluation, deferred tax Transfer to profit, gross Transfer to profit, deferred tax Share of associates (decrements) Balance 31 July 2016 $’000 (9,735) 1,925 (627) 13,032 (3,909) (442) 244 2015 $’000 (1,877) (27,115) 8,638 15,471 (4,599) (253) (9,735) Hedge Reserve Movements in the hedge reserve predominately relate to New Hope Corporation Limited’s derivative financial instruments which are used to hedge exposures to foreign currency exchange rates. Refer to note 22 for further details. c) Nature and purpose of other reserves General reserve The general reserve records funds set aside for future requirements of the Group and relate to Washington H. Soul Pattinson and Company Limited (the Parent company). Capital profits reserve This reserve represents amounts allocated from retained profits that were profits of a capital nature. Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options and rights issued to employees, but not yet exercised. Foreign currency translation reserve The foreign currency translation reserve records the foreign currency differences which arise from the translation of self-sustaining foreign operations, and foreign exchange movements. Equity reserve This reserve includes the tax effect of movements in the carrying value of equity accounted associates where this movement has been recognised directly in equity. 68 69 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 5 Group Structure and Performance NOTE 5 SHARE CAPITAL AND CAPITAL MANAGEMENT Accounting policy – Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction net of tax, from the proceeds. The amounts of any capital returns are applied against share capital. Group and Parent company Group and Parent company 2016 No of shares 239,395,320 2016 $’000 2015 No of shares 43,232 239,395,320 2015 $’000 43,232 Fully paid ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value. Capital Management The Group’s capital management approach is conservative with the objective to maintain a strong capital base in order to maintain investor, creditor and market confidence and to sustain the future development of the Consolidated entity. There were no changes to the Group’s approach to capital management during the year. The Group’s capital consists of shareholders’ equity net of debt. The movement in shareholders equity is shown in the statement of changes in equity. Refer to page 53. At 31 July 2016, the Parent company had no external borrowings from financial institutions and is not subject to any externally imposed capital requirements. The Parent company has accepted deposits from Directors and their related parties totalling $49.861 million (2015: $47.326 million). Refer to note 23. In the current year, non-recourse debt of $22.825 million was used to finance investment properties held within 100% controlled entities. Refer to note 23a. The Board declares dividends having regard to the Parent company’s regular operating cash flows, refer to note 1. 70 6 NOTE 6 BUSINESS COMBINATIONS Accounting policy – Business combinations The acquisition method of accounting is used to account for all business combinations. The consideration transferred is the sum of the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the investment. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in the income statement as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in the income statement. If the Group recognises previous acquired deferred tax assets after the initial acquisition accounting is completed there will be no adjustment to goodwill. As a consequence, the recognition of the deferred tax asset will increase the Group’s net profit after tax. a) Acquisitions during the year New Hope Corporation Limited acquisition of Bengalla Joint Venture On 1 March 2016, a subsidiary of Washington H. Soul Pattinson and Company Limited, New Hope Corporation Limited, acquired a 40% interest in the Bengalla Joint Venture, a coal mining and extraction operation producing thermal coal in the Hunter Valley, New South Wales. The Joint Venture is accounted for as a joint operation, whereby the Group recognises its direct right to the assets, liabilities, revenue and expenses of the joint operation 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. i) Purchase Consideration Cash Paid – Current Year Purchase price adjustment receivable Total Purchase Consideration 2016 $’000 850,796 (1,668) 849,128 71 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Group Structure and Performance 6 NOTE 6 BUSINESS COMBINATIONS (continued) i) Purchase Consideration continued The fair value of assets and liabilities recognised as a result of the acquisition are as follows: Cash Receivables Inventories Property, plant and equipment Intangibles Accounts payables and accruals Provisions Net assets acquired Revenue and profit contribution 2016 $’000 4,748 15,079 12,464 829,532 41,500 (18,386) (35,809) 849,128 The acquired business contributed revenue of $97.411 million and profit before tax since acquisition of $5.036 million (i.e before non-regulars) to New Hope Corporation Limited for the period 1 March 2016 to 31 July 2016. Due to the variability in key market factors and operational variations it is considered impractical to discuss an estimated revenue and profit/(loss) assuming the acquisition had occurred 1 August 2015. The anticipated increase in annual production and sales tonnes is 3.36 million tonnes. ii) Net cash outflow to acquire Bengalla Joint Venture Outflow of cash to acquire Bengalla Joint Venture, net of cash acquired Total cash consideration Less: Cash balance acquired Outflow of cash – investing activities Stamp duty expensed Other acquisition costs expensed Total net outflow of cash 2016 $’000 850,796 (4,748) 846,048 44,738 737 891,523 New Hope Corporation Limited acquisition of Oil producing assets During the year, a subsidiary of Washington H. Soul Pattinson and Company Limited, New Hope Corporation Limited acquired a business constituting the Moonie oil producing and exploration fields and also the unowned 40% joint operation interest in the Utopia oil production and exploration fields. These transactions constitute a business combination. The acquisitions resulted in cash outflows of $3.482 million for the acquisition of oil producing assets and assumption of rehabilitation related provisions. Significant judgements and estimates Acquisition fair value The determination of the fair values of net identifiable assets acquired, and of any goodwill, involves significant judgement. The allocation of fair value between intangible assets, and the tangible assets with which they are used, is also judgemental. The Group engages third-party valuers to advise on the purchase price allocation for significant acquisitions. 7 8 NOTE 7 EVENTS AFTER THE REPORTING DATE Since the end of the financial year, the following matters or circumstances not referred to elsewhere in this report have arisen that have or will significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years: The market value of Washington H. Soul Pattinson and Company Limited’s holding in TPG Telecom Limited as at 19 October 2016, was $1.628 billion which was $1.110 billion below the market value as at 31 July 2016. Whilst movements in market values have an impact on the net asset value of the Parent company, there is no impact on the statutory financial statements of the Group as TPG Telecom Limited is accounted for as an equity accounted associate. The carrying value of TPG Telecom Limited as at 31 July 2016 was $447.036 million. Accounting for Our Investments The Group invests in equities (subsidiaries, joint arrangements, associated entities, and other equity investments), investment properties, term deposits and cash. This section describes how each of these investments are recognised and measured in the consolidated financial statements. NOTE 8 INVESTMENTS IN CONTROLLED ENTITIES (SUBSIDIARIES) Accounting policy – Investments in controlled entities Investments in controlled entities such as New Hope Corporation Limited, the PSRE Urban Regeneration Trust, CopperChem Limited and Exco Resources Limited (refer to segment note for a detailed listing of subsidiaries) are not recognised as individual investments in the consolidated financial statements. The assets and liabilities of each controlled entity are instead recognised in the statement of financial position. Dividends from controlled entities are not recognised in the consolidated income statement, instead the results from each controlled entity are included in profit and loss. Washington H. Soul Pattinson and Company Limited, the Parent company has a 59.65% shareholding in its subsidiary, New Hope Corporation Limited. New Hope Corporation Limited is a diversified energy company, with operations covering coal mining and production, coal port operations and oil and gas production and exploration. Operations are mainly based in South East Queensland and most recently in the Hunter Valley region, NSW with the Bengalla Joint Venture. The remaining 40.35% shareholding in New Hope Corporation Limited (non-controlling interests) has a proportional share in the results and equity of New Hope Corporation Limited. The Group consolidates the net assets and results of subsidiaries in full, and discloses separately for each, the amounts not controlled by the Group (non-controlling interests). The following provides a summary of the financial information of New Hope Corporation Limited: 4 Total assets $2.019 billion (2015: 2.075 billion); Total liabilities $268.137 million (2015: $222.533 million); Net assets $1.750 billion (2015; $1.853 billion) and a net increase in cash and cash equivalents $64.266 million (2015: decrease $35.107 million), Non-controlling interest share of net assets $706.289 million (2015: $747.685 million), loss after income tax for the year $20.013 million (2015: $8.806 million). 72 73 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Accounting for Our Investments 9 NOTE 9 INVESTMENTS IN JOINTLY CONTROLLED ENTITIES (JOINT OPERATIONS AND JOINT VENTURES) Accounting policy – Investments in Joint arrangements A joint arrangement is an arrangement where two or more parties share control. 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. Joint operations A joint operation is a joint arrangement in which the parties that share joint control, have rights to the assets, and obligations for the liabilities relating to the arrangement. 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 into the Group’s financial statements under the appropriate headings. Joint ventures A joint venture is a joint arrangement in which the parties that share joint control have rights to the net assets of the arrangement. Interests in joint ventures are accounted for using the equity method, after initially being recognised at cost. Through New Hope Corporation Limited and its subsidiaries, the Group holds interests in the following Joint arrangements, each of which have been accounted for as a Joint operation as described in the accounting policy above. 10 NOTE 10 INVESTMENTS IN ASSOCIATES Accounting policy – Investments in associates Associates are equity accounted, with the initial investment being increased/(decreased) by the Group’s share of the associate’s profits/(losses) as recognised in the income statement, movements in their reserves (other comprehensive income) and decreased by dividends received. Dividends from associates are not recognised in the consolidated income statement. As the accounting policy for Investments in associates is considered key to understanding the Group’s results and financial position, the detailed accounting policy is set out in the basis of consolidation at the beginning of this financial report (refer to page 56). Non-Current Assets Equity accounted associates The equity accounted carrying amount of an associate does not reflect the fair value of the Group’s investment in the associate. Details of the fair value of investments in listed associates are provided in note 10b. 2016 $’000 2015 $’000 1,265,214 1,088,592 Accounted for as: Group’s interest Segment allocated to: a) Movements in equity accounted carrying values Name Bengalla Joint Venture Lenton Joint Venture Yamala Joint Venture Joint operation Joint operation Joint operation 40% 90% 70% 15% Energy operations Energy operations Energy operations Energy operations Cuisiner Joint Venture – Barta projects Joint operation Cuisiner Joint Venture – Wompi project Joint operation 17.5% Energy operations Key judgement Classification of joint arrangements as a joint operation The Group assesses whether it has the power to direct the relevant activities of the investee by considering the rights it holds with respect to the work programme and budget approval, investment decision approval, voting rights in joint operating committees and changes to the joint arrangement participant holdings. Where the Group has control, judgement is also required to assess whether the arrangement is a joint operation or a joint venture. Carrying amount at 1 August New investments during the period Reclassification of Long term equity investment to equity accounted associate Fair value loss on initial recognition as an equity accounted associate Gains on deemed disposal of equity accounted associates Share of profits after income tax, before write downs Impairment (expense)/reversal of equity accounted associates Dividends received/receivable Add back share of dividends received by associate Share of associates (decrement)/increment in reserves Disposal of equity accounted associate 1,088,592 6,287 2,803 (1,682) 118,850 122,503 (7,554) (72,722) 23,028 (12,910) (1,981) 944,726 13,059 – – 2,076 95,079 72,947 (69,339) 22,178 7,866 – Equity accounted carrying amount at 31 July 1,265,214 1,088,592 74 75 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Accounting for Our Investments 10 NOTE 10 INVESTMENTS IN ASSOCIATES b) Details of investments and results in associates Name of associated entity Associates – held by WHSP Apex Healthcare Berhad Pharmaceutical manufacturer and distributor Australian Pharmaceutical Industries Limited(ii) Pharmaceutical wholesaler BKI Investment Company Limited(ii) Listed investment company Brickworks Limited(ii) Manufacturer of clay products Clover Corporation Limited Refinement and processing of natural oil Rum Jungle Resources Limited(iii) Phosphate and Potash explorer Ruralco Holdings Limited(ii) Rural supplies and services TPG Telecom Limited(i) Telecommunications and internet provider TPI Enterprises Limited Manufacturer of narcotic concentrate from poppy straw Group’s percentage of holding at balance date* Jul 2016 Jul 2015 Balance date 31 Dec 31 Aug 30 June 31 July 31 July 30 June 30 Sept 31 July 31 Dec % 30.3 24.6 10.3 44.1 28.6 38.3 20.1 25.2 19.4 % 30.3 24.6 11.1 44.2 28.6 – 20.3 26.9 19.4 Contribution to Group net profit for the year** 2016 2015 Fair value of listed investments*** Regular Non-Regular# $’000 $’000 Total $’000 Regular Non-regular# $’000 $’000 Total $’000 Jul 2016 July 2015 $’000 $’000 3,417 11,611 4,524 – 3,417 (600) 11,011 – 38,841 (29,211) 632 – – – 4,524 9,630 632 – 3,381 9,186 4,777 – 3,381 45,247 55,364 2,118 11,304 230,813 191,142 – 4,777 100,668 108,371 29,089 (9,558) 19,531 986,646 978,113 3 – – – 3 – 19,336 8,486 8,017 – 3,787 (1,572) 2,215 3,735 (473) 3,262 52,947 60,921 91,825 5,699 97,524 66,201^ (5,956)^ 60,245 2,737,949 2,029,441 (3,128) (1,631) (4,759) (2,585) (1,779) (4,364) 28,898 Associates – held by controlled entities various various various 829 (2,520) (1,691) 4,683 (7,743) (3,060) n/a Share of results from equity accounted associates before gain on deemed disposal and impairment (expense)/reversal 152,338 (29,835) 122,503 118,470 (23,391) 95,079 Gain on deemed disposal of associates TPG Telecom Limited(i) Other equity accounted associates(ii) Impairment reversal of investment in associates – Australian Pharmaceutical Industries Limited – TPI Enterprises Limited Total gains on deemed disposal and impairment (expense)/reversal of equity accounted associates – – – – – Share of results, gains on deemed disposal and impairment (expense)/reversal of equity accounted associates 152,338 81,760 1,558 – (7,554) 75,764 45,929 81,760 1,558 – (7,554) 75,764 – – – – – 198,267 118,470 – 1,450 72,947 – 74,397 51,006 – 1,450 72,947 – 74,397 169,476 * The percentage holding represents the Group’s total holding in each Associate. ** Contribution to Group net profit represents the amount included in profit after tax before non-controlling interest. As the Group does not control associates, an associates’ balance date may not be the same as the Group’s balance date. An associate’s contribution to Group profit is based on the annual result reported for each associate, adjusted for any change in the Group’s holding of that associate. *** Fair value of listed investments represents the last sale price of listed associates at balance date. These are subject to capital gains tax and other transaction costs. Fair value of listed associates is classified as level 1 in the fair value hierarchy. # Non-regular items defined in note 3. ^ Results have been restated by transferring expenses of $5.956 million from regular profit to non-regular items All associates are incorporated in Australia except for Apex Healthcare Berhad (incorporated in Malaysia). 76 n/a n/a 77 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Accounting for Our Investments 10 NOTE 10 INVESTMENTS IN ASSOCIATES b) Details of investments and results in associates (continued) (i) During the year, TPG Telecom Limited issued shares to new and existing shareholders as follows: 4 Issued shares to iiNet shareholders; 4 Issued shares to new and existing institutional shareholders (Placement); and 4 Issued shares to retail shareholders through the (Share purchase plan). Washington H. Soul Pattinson and Company Limited only participated in the share purchase plan. As a result of the issue of shares to iiNet shareholders, the institutional placement and the share purchase plan: 4 the Group’s shareholding in TPG Telecom Limited decreased from 26.88% (July 2015) to 25.15%; and 4 the Group recognised a pre-tax gain on the deemed disposal of $116.624 million (after tax gain of $81.760 million). (ii) The following associates issued shares by way of a dividend reinvestment plan, employee share scheme or capital raising: 4 Australian Pharmaceutical Industries Limited; 4 BKI Investment Company Limited; 4 Brickworks Limited; and 4 Ruralco Holdings Limited. Washington H. Soul Pattinson and Company Limited did not participate in the above share issues. As a result there has been a change in the Group’s holding in each of these investments. (iii) During the year, Washington H. Soul Pattinson and Company Limited participated and underwrote Rum Jungle Resources Limited’s renounceable rights issue. This resulted in the Group’s holding increasing to 38.3% (up from 14.6%) and the investment is now classified as an equity accounted associate. Total consideration for the Group’s participation and underwriting of the renounceable rights issue was $6.257 million. During the year, an associate of Washington H. Soul Pattinson and Company Limited, Supercorp Pty Limited was disposed of for an after tax profit of $1.489 million. Key estimate and judgements Recoverable value of investments in associates The recoverable amount of investments in equity accounted associates is reviewed at each reporting date after taking into consideration any applicable impairment indicators. Significant judgement is used when assessing impairment and the reversal of previously recognised impairment for equity accounted associates. During the year ended 31 July 2016, TPI Enterprises was impaired by $7.554 million (2015: $nil). In the prior year $72.947 million of previously recognised impairment on Australian Pharmaceutical Industries Limited was reversed increasing the equity accounted carrying value to $152.316 million or $1.27 per share. At 31 July 2015, the last sale price of Australian Pharmaceutical Industries Limited was $1.59 per share. The previous impairment recognised on Australian Pharmaceutical Industries Limited has now been reversed in full. c) Group’s share of associates’ expenditure commitments Capital commitments Lease commitments 2016 $’000 100,596 137,211 2015 $’000 56,962 155,695 78 2016 $’000 2015 $’000 d) Group’s share of associates’ contingent liabilities Share of contingent liabilities incurred jointly with other investors of the associate 19,179 15,141 e) Summarised Group’s share of associates financial information Assets Liabilities Net assets Revenue Profit before income tax Income tax expense Profit after income tax 2,796,095 (1,168,989) 1,627,106 2,258,532 (830,422) 1,428,110 2,312,674 1,983,496 176,751 (54,248) 122,503 136,051 (40,972) 95,079 f ) Extract of financial information as reported by associates that are material to the Group The information disclosed reflects the total amounts reported in the financial statements of Brickworks Limited and TPG Telecom Limited amended to reflect adjustments made by the Group in applying the equity method. Brickworks Limited TPG Telecom Limited 2016 $’000 344,168 1,021,450 (145,498) (356,931) 863,189 44.14% 381,012 16,054 397,066 2015 $’000 316,851 1,055,363 (183,480) (333,864) 2016 $’000 358,600 3,412,400 (513,900) (1,477,900) 2015 $’000 253,900 1,399,900 (258,100) (392,500) 854,870 1,779,200 1,003,200 44.23% 25.15% 26.88% 378,109 15,085 447,469 (433) 269,660 1,140 393,194 447,036 270,800 Current assets Non-current assets Current liabilities Non-current liabilities Net assets Group’s percentage holding Group’s share of total net assets Goodwill/(discount) Equity accounted carrying value Revenue 750,985 723,611 2,387,800 1,270,600 Profit after tax attributable to members Other comprehensive income Total comprehensive income Dividends received by Washington H. Soul Pattinson and Company Limited from the associate 78,190 (12,851) 65,339 78,090 (1,732) 76,358 379,600 (34,700) 224,100 31,900 344,900 256,000 30,194 28,227 27,744 21,874 Refer to note 10 (b) for associates profit contributions to the Group. 79 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 11 Accounting for Our Investments NOTE 11 OTHER EQUITY INVESTMENTS Accounting policies – Other equity investments (excluding controlled entities, jointly controlled entities and associates) Recognition Purchases of equity investments are recognised on trade date being the date on which the Group commits to purchase the asset. Classification The Group classifies its equity investments into the following categories: long term equity investments, trading equities and held for sale equities. The classification depends on the purpose for which the investments are acquired. Management determines the classification of its investments at initial recognition. Trading equities Trading equities are initially recognised at fair value and any transaction costs are immediately expensed. The portfolio consists of equities that are principally held for the purpose of selling in the short to medium term. Trading equities are included in current assets. Long term equity investments Long term equity investments are initially recognised at fair value plus any transaction costs. These investments are intended to be held for the long term for capital growth and dividend income. These investments are included in non-current assets unless management intends to dispose of the investment within 12 months of the reporting date at which time they are transferred to and disclosed as held for sale equities. Subsequent measurement At each balance date, trading equities and long term equity investments are remeasured to fair value. Gains or losses arising from changes in the fair value of trading equities are recognised in the income statement within other income in the period in which they arise. Changes in the fair value of long term equity investments are recognised in equity through the asset revaluation reserve after allowing for deferred capital gains tax. All long term equities are subject to capital gains tax. Impairment The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as long term equity investments, a significant or prolonged decline in the value of a security below its cost is considered an indicator that the security may be impaired. Impairment losses are recognised in the income statement unless the asset has previously been revalued through the asset revaluation reserve, in which case the impairment loss is recognised as a reversal to the extent of that previous revaluation with any excess recognised in the income statement. An impairment recognised for a long term equity investment is prohibited from being reversed through profit and loss. Any future increments in the fair value of these investments will be recognised as a fair value increment in the asset revaluation reserve. Dividend income Dividend income is recognised as revenue when the right to receive the dividend is established, and is generally the ex-dividend date. Derecognition Equity investments are derecognised when the rights to receive cash flows from the equity investments have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as long term equity investments are sold, the accumulated fair value adjustments previously recognised in equity, are transferred to the income statement. Current Assets Trading equities – Listed Trading equities – Unlisted Total trading equities Non-Current Assets Long term equity investments – Listed Long term equity investments – Unlisted Total long term equity investments Other financial assets – unlisted equity investments 2016 $’000 15,459 16,146 31,605 585,700 3 585,703 11,837 2015 $’000 12,956 8,344 21,300 615,642 3 615,645 5,425 Information regarding the Group’s exposure to price risk is set out in note 20 and fair value classification is set out in note 21. The fair value of these investments is based on quoted market prices being the last sale price, at the reporting date. Listed equities are traded in an active market, with the majority of the Group’s investments being publicly traded on the Australian Securities Exchange. Unlisted securities do not trade in an active market. The fair value measurement of other financial assets is approximated by the cost price. Long term equity investments - Listed At 31 July 2016, Washington H. Soul Pattinson and Company Limited (the Parent company) held $581.432 million (2015: $608.030 million). Listed and unlisted trading equities Represents equities held by Washington H. Soul Pattinson and Company Limited (the Parent company). Key estimate and judgements Impairment of financial assets In the 2016 financial statements, the Group made significant judgements about the impairment of a number of its long term equity investments and its unlisted other financial assets. Where there was a decrease in the share price below the cost of a long term equity investments judgement was made as to whether the decrease was ‘significant and prolonged’, and if so the investment was considered to be impaired. 80 81 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 12 Accounting for Our Investments NOTE 12 INVESTMENT PROPERTIES Accounting policy – Investment properties Investment properties consist of properties held for long term rentals and/or capital appreciation and properties being constructed or developed for future use as investment properties. Investment properties are initially recognised at cost including transaction costs. Other costs capitalised into the carrying value of investment properties include development, construction, redevelopment, refurbishment (other than repairs and maintenance) and interest (until the property is ready for its intended use). Investment properties are subsequently stated at fair value. Changes in fair value are recognised as gains or losses in the Income Statement as part of ‘Other income’. Valuations are obtained periodically, and at least every three years from independent Registered Property Valuers who hold recognised and relevant qualifications and have recent valuation experience in the location and categories of each property held. At the end of each reporting period, the Directors update their assessment of the fair value of each property, taking account of the most recent independent valuations. Amounts provided to customers as lease incentives and assets relating to fixed rental income increases in operating lease contracts are included within investment property values. Lease incentives are amortised over the term of the lease on a straight line basis. The amortisation is applied to reduce gross rental income. Rental income is recognised on a straight line basis within revenue. On disposal of an investment property, a gain or loss is recognised in the income statement in the year of disposal. It is calculated as the difference between the carrying amount of the asset at the date of disposal and the net proceeds received. Non-Current Assets Investment properties Industrial property Commercial property Reconciliation Opening net book amount Acquisitions Capitalised costs Movement in tenant incentives, contracted rent uplift balances and leasing fee asset Disposal of investment properties Closing net book amount 2016 $’000 21,008 71,924 92,932 20,720 71,603 146 463 – 92,932 2015 $’000 20,720 – 20,720 139,421 – 26,844 1,649 (147,194) 20,720 In the current year, the Group acquired two commercial properties in Pennant Hills for a total of $71.603 million. In the prior year, the Australian Logistics Property Fund, a 100% controlled entity, sold two distribution warehouses. 82 a) Amounts recognised in the income statement for investment properties Rental income Direct operating expenses from property that generated rental income Direct operating expenses from property that did not generate income 2016 $’000 4,768 2,652 – 2015 $’000 1,676 1,344 55 Operating expenses for property that generated income includes finance costs of $644,000 (2015: $597,000). b) Measuring investment properties at fair value The basis of valuations for investment properties is fair value, being the amounts for which the assets could be exchanged between knowledgeable willing parties in an arm’s length transaction, based on current prices in an active market for similar properties in the same location and condition and subject to similar leases. Castle Hill industrial property For the year ended 31 July 2016, Industrial property represents land and buildings (including 15,000 square metres of warehouse and 5,000 square metres of office space) located in the Castle Hill industrial zone. This property was purchased in April 2014. In August 2014, this was announced as an Urban Activation Precinct (now known as Priority Precinct) by the New South Wales Department of Planning. The Group is continuing to investigate the potential rezoning of this property and have therefore determined that at balance date, there has been no material change in its fair value and hence continue to carry the property at cost. Pennant Hills commercial properties In October 2015 and December 2015, the Group acquired two commercial buildings in Pennant Hills for a total cost of $71.603 million. Since acquisition, there has been no material changes in the fair values of these properties. The fair value hierarchy, as discussed in note 21 to this report, provides an indication about the reliability of the inputs used in determining fair value. The fair value estimates for Investment properties are included in level 3 of the fair value hierarchy. c) Non-current assets pledged as security As at 31 July 2016, $45.520 million of the Group’s investment property was pledged as security. Refer to note 23 for information on non-current assets pledged as security by the Group. d) Leasing arrangements 2016 $’000 2015 $’000 The Group is entitled to receive rental income from non-cancellable operating leases on investment properties. The amounts have not been recognised in the financial statements and are receivable as follows: Within one year Later than one year but not later than five years Later than five years 5,125 8,805 524 14,454 – – – – 83 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 13 Accounting for Our Investments NOTE 13 TERM DEPOSITS Accounting policy – Term deposits Term deposit investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Term deposit financial assets are included in current assets, except those with maturities of more than 12 months from the reporting date, which are classified as non-current assets. Recognition and derecognition A term deposit is recognised on the date when the cash funds are deposited with the bank. The term deposit is derecognised on the term maturity date of the deposit. Subsequent measurement Term deposits are carried at amortised cost using the effective interest method. Current Assets Term deposits 2016 $’000 2015 $’000 47,660 1,217,011 Term deposits are held to their maturity of less than one year and carry a weighted average interest rate of 2.44% per annum (2015:2.77%). Term deposits in the statement of financial position at reporting date include term deposits held by the Parent company and its controlled entities. At 31 July 2016, Washington H. Soul Pattinson and Company Limited (the Parent company) held $46.000 million (2015: $138.079 million); and New Hope Corporation Limited, a controlled entity, held $116,000 (2015: $1.040 billion) of the consolidated balance. 14 NOTE 14 CASH AND CASH EQUIVALENTS Accounting policy – Cash and cash equivalents Cash and cash equivalents includes cash on hand, cash at bank, and deposits held with financial institutions for which there is a short-term identified use in the operating cash flows of the Group. Bank overdrafts, should they occur, are shown within borrowings in current liabilities in the statement of financial position. Current Assets Cash at bank and on deposit 2016 $’000 126,709 2015 $’000 59,424 Cash at bank and on deposit attracts interest at rates between 0% and 1.90% per annum (2015: 0% and 2.93%). Cash at bank in the statement of financial position at reporting date includes cash held by the Parent company and its controlled entities. At 31 July 2016, New Hope Corporation Limited, a controlled entity of Washington H. Soul Pattinson and Company Limited held $91.162 million (2015: $24.789 million) of the consolidated balance. Reconciliation of profit after income tax to net cash inflow from operating activities Profit after tax for the year Adjustments for non-cash items: Depreciation and amortisation Impairment charges Net (gain) on disposal of long term equity investments Fair value (gain)/loss on revaluation of trading equities Loss on disposal of unlisted investments Net (gain) on sale of held for sale assets Net (gain) on disposal of investment properties Share of (profits) of associates not received as dividends or distributions Net foreign exchange (gain) Fair value loss on initial recognition of an equity accounted associate Revaluation of interest rate swap (Gains) on deemed disposal of equity accounted associates (Gain) on sale of equity accounted associate Other non-cash items Changes in operating assets and liabilities, net of effects from purchase and sales of businesses: (Increase)/decrease in trade debtors, other debtors and prepayments (Increase)/decrease in inventory Increase/(decrease) in trade creditors and accruals (Decrease)/increase in employee entitlements, other liabilities and provisions Decrease in current tax asset (Decrease)/increase in current tax payable (Decrease) in deferred tax liability Decrease/(increase) in deferred tax asset 2016 $’000 2015 $’000 129,459 75,554 79,613 116,539 (16,501) (5,140) – – – (48,393) (2,107) 1,682 – (118,850) (2,127) (27) (61,906) (6,169) 66,503 (1,238) 1,486 (3,226) (13,004) 3,233 82,749 123,801 (5,543) 6,018 2,135 (1,151) (4,991) (27,815) (2,881) – 2,112 (2,076) – (331) 19,832 89 (21,350) 2,627 3,693 4,842 (12,798) (21,826) Net cash inflow from operating activities 119,827 222,690 84 85 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 NOTE 16 OTHER INCOME Accounting policies – Other income Other income represents gains or losses made on: • • • changes in fair value for certain assets including trading equities, unlisted investments, investment property and where a previously held equity investment becomes an equity accounted associate. the sale of an asset including the sale of equity investments, investment property and equity accounted associates. With the exception of the long term equity investments, the gain or (loss) is calculated as the difference between the proceeds received and the carrying value of the asset. For the sale of long term equity investments, whilst the gain is calculated in the same manner, it also includes any fair value changes that have previously been recognised in equity (through reserves). As these amounts have not previously been recognised in the profit and loss, they are included in the gain when the long term equity investment is sold. deemed disposals of equity accounted associates. This occurs when the Group’s percentage holding in an associate decreases but there has not been a loss of significant influence. The Group continues to equity account the associate. Gain on sale of investment properties Gains on deemed disposals of equity accounted associates Gain on disposal of equity accounted associate Loss on initial recognition of an equity accounted associate Gains/(losses) on trading equities fair valued through profit and loss Gains on sale of long term equity investments Land access compensation (Loss) on disposal of unlisted investment Other items Total other income 2016 $’000 – 118,850 2,127 (1,682) 5,140 16,501 5,000 – (34) 145,902 2015 $’000 4,991 2,076 – – (6,018) 5,543 – (2,135) 47 4,504 15 Revenue and Expenses NOTE 15 REVENUE Accounting policy – Revenue Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. 16 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 described below. • Coal sales revenue is recognised at the time the risks and benefits of ownership have been transferred to the customer in accordance with the sale terms. For export sales this is normally at the time of loading the shipment, and for domestic sales this is generally at the time the coal is delivered to the customer. Revenue from the sale of goods (net of returns, discounts and allowances) is recognised when title has transferred to the customer in accordance with the sales terms. Where a sale is settled through instalments, interest revenue is recognised over the contract term, using the effective interest rate method. Service fee income, including consulting and management fee income, is recognised as the services are performed. Interest income is recognised on a time proportion basis using the effective interest method. Dividend income is taken into revenue when the right to receive payment is established. As earnings from controlled entities and associates are included in consolidated profit, dividends from controlled entities and associates are not included in consolidated revenue. Rental income is recognised on a straight-line basis over the lease term. • • • • • From continuing operating activities Sales revenue Sale of goods Services Total Sales revenue Other revenue Dividends received – Other corporations Interest received – Other corporations Rental income Other Total other revenue Total revenue 2016 $’000 2015 $’000 526,355 34,071 560,426 28,398 23,448 5,973 2,416 60,235 537,583 25,192 562,775 25,491 44,316 2,695 6,327 78,829 620,661 641,604 Revenue composition A significant portion of the Group’s sales revenue is derived from New Hope Corporation Limited $486.220 million (2015: $441.009 million) through the sale of: • • Coal, both internationally and domestically; and Oil and gas, domestically. Sales revenue also includes the sale of: • • • • Pharmaceutical products sold through Washington H. Soul Pattinson and Company Limited’s Pitt Street chemist; Copper concentrate and copper sulphate sold domestically and internationally through CopperChem Limited; Gold, domestically through Exco Resources Limited; and Sales of Pipe and film, domestically through Cromford Pty Limited. 86 87 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Revenue and Expenses 17 NOTE 17 EXPENSES Accounting policies – Expenses Depreciation and amortisation Depreciation and amortisation expenses are non-cash expenses and represent the allocation of the cost of certain fixed assets such as buildings, plant and equipment and mining reserves and development, over the time that the asset is expected to generated revenue for the Group. Different depreciation rates apply to each asset and are included in the notes for each asset. Impairment Impairment charges are non-cash expenses and are recognised when the carrying value of an asset or group of assets is no longer recoverable either through the use or sale of the asset. Recoverable value assessment for each asset class is discussed within the notes for each asset. Impairment losses are expensed to the income statement unless the asset has been previously revalued. Where the asset has been previously revalued, the reduction in value is recognised as a reversal to the extent of the previous revaluation, and any residual is recognised as an impairment expense. An impairment expense recognised on goodwill or a long term equity investment is permanent and is prohibited from being reversed. For all other assets, an assessment is made at each reporting date as to whether an impairment loss recognised in a prior period no longer exists or has decreased. If it is determined that the impairment is no longer required, the carrying value of the asset is increased and the previously recognised impairment expense is reversed in the income statement. Employee benefits expense Employee benefits expense includes the payment of salary and wages (including the value of non-cash benefits such as share-based payments), sick leave and accruals for annual leave and long service leave. Finance costs Finance costs are expensed when incurred, except for interest incurred on borrowings that relate to the construction of Investment properties. This interest was included in the cost of the properties. Exploration costs expensed Exploration costs that do not satisfy the criteria to be capitalised are expensed. Refer note 26 for discussion on the criteria. Profit before income tax expense includes the following specific expenses: Depreciation Buildings Plant and equipment Total depreciation Amortisation Mining reserves and mine development Intangible assets Oil producing assets Lease incentive and leasing fee assets Total amortisation Impairment charges/(reversals) Equity accounted associates (i) Long term equity investments (ii) Oil producing assets (iii) Goodwill (iii) Non-current assets - coal to liquids facility (iv) Non-current assets – copper assets (v) Other assets Notes 2016 $’000 2015 $’000 1,374 53,996 55,370 18,795 1,722 3,593 133 24,243 7,554 17,912 28,146 – – 45,293 17,634 1,261 58,018 59,279 18,805 1,568 2,993 104 23,470 (72,947) 25,697 51,456 4,157 24,267 83,021 8,150 Total impairment charges/(reversals) 116,539 123,801 Impairment is allocated to asset classes: Equity accounted associates Long term equity investments Property, plant and equipment Exploration and evaluation assets Intangible assets – goodwill Intangible assets – other Other operating assets Total impairment charges/(reversals) Employee benefits expense (vi) Finance costs (vii) Operating lease costs expensed Exploration costs expensed (viii) 10 11 25 26 27 27 7,554 17,912 48,247 28,192 – – 14,634 116,539 120,185 2,535 5,159 14,150 (72,947) 25,697 127,801 34,800 4,157 1,018 3,275 123,801 107,823 3,063 4,811 15,976 88 89 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 17 Revenue and Expenses NOTE 17 EXPENSES (continued) Impairment (expense)/reversal on equity accounted associates i) The recoverable amount of investments in equity accounted associates has been assessed as at 31 July 2016. Where carrying values of an investment exceeded the recoverable amount, the investment has been impaired. During the year ended 31 July 2016, an impairment expense of $7.554 million was recognised on the investment in TPI Enterprises Limited. In the prior year, previously recognised impairment on the investment in Australian Pharmaceutical Industries Limited was reversed by $72.947 million. Impairment of long term equity investments ii) During the year ended 31 July 2016, there were significant and prolonged decreases in the share prices of listed equity investments held by the Group. Management has determined the recoverable value of these investments to be below their cost and have therefore recognised an impairment expense in respect of these investments. Impairments were recognised by the Parent company ($12.934 million) and New Hope Corporation Limited ($4.978 million). The impairment loss after tax impacted the result attributable to members by $12.023 million (2015: $16.170 million). iii) Impairment of goodwill and oil producing assets During the year ended 31 July 2016, New Hope Corporation Limited determined that the continued significant decline in global oil prices indicated the carrying value of certain oil producing and exploration assets were impaired. Refer to notes 25 and 26. Impairment expenses have been recognised on the following asset classes: Oil producing assets $15.029 million (2015: $51.456 million); Oil exploration assets $13.117 million (2015: nil); and goodwill nil (2015: $4.157 million). The impairment loss after tax impacted the result attributable to members by $13.277 million (2015: $24.429 million). iv) Impairment of non-current assets – coal to liquids facility In the prior year, New Hope Corporation Limited assessed the recoverable value of its coal to liquids proof of concept plant and impaired these assets by $24.267 million. The impairment loss after tax impacted the result attributable to members by $10.638 million. Impairment of non-current assets – copper assets v) As a result of continued and significant declines in the global copper price, the Group has determined that the carrying values of certain mining and exploration assets were no longer recoverable. An impairment loss on these assets of $45.293 million (2015: $83.021 million) was recognised during the year. An additional impairment expense of $8.099 million was recognised on other copper assets. These impairment losses after tax impacted the result attributable to members by $22.374 million (2015: $58.114 million). vi) Employee benefits expense Includes $100.782 million (2015: $86.513 million) relating to New Hope Corporation Limited. vii) Finance costs The Parent company incurred interest of $1.335 million (2015: $1.592 million) on interest bearing deposits from Directors and their related parties. A 100% controlled entity, the PSRE Urban Regeneration Trust incurred interest of $644,000 (2015: nil) relating to Investment properties (commercial properties). viii) Exploration costs expensed Includes exploration costs expensed, $14.150 million (2015: $15.976 million) relating to New Hope Corporation Limited Key Estimate Recoverable value and impairment The assessments of the recoverable value of non-current assets involves significant areas of estimation and judgement by management. Valuations have an element of uncertainty and therefore may not reflect the actual values of these assets in the future. 90 18 Taxation NOTE 18 INCOME TAX EXPENSE Accounting policy – Income tax expense The income tax expense or benefit for the period represents the tax payable on the current period’s taxable income based on the Australian corporate income tax rate (30%) adjusted by changes in deferred tax assets and liabilities attributable to the temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and unused tax losses. The current income tax charge is calculated on the basis of the 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 appro- priate on the basis of amounts expected to be paid to the tax authorities. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Tax consolidation legislation Some of the entities within the Consolidated entity have formed tax consolidated groups under the tax consolida- tion regime. The Australian Tax Office has been notified on these decisions. Controlled entities within the relevant tax consolidated groups, continue to be responsible under tax funding agreements, for funding their share of tax payments that are required to be made by the head entity in their tax consolidation group. These tax amounts are measured as if each entity within the tax consolidated group, continues to be a stand-alone tax payer in their own right. 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 differences between the amounts assumed and amounts receivable or payable under the tax funding agreements are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. a) Income tax expense/(benefit) comprises: Current income tax expense/(benefit) Current year Adjustments in respect of prior years Deferred income tax (benefit)/expense – Relating to the origination and reversal of temporary differences – Petroleum resource rent tax expense/(benefit) Income tax expense/(benefit) recognised in the income statement Deferred income tax expense/(benefit) included in income tax expense comprises: (Increase) in deferred tax assets Increase/(decrease) in deferred tax liabilities 2016 $’000 2,278 (4,185) (765) 3,574 902 (33,944) 36,753 2,809 2015 $’000 18,152 (3,422) (30,720) (961) (16,951) (19,188) (12,493) (31,681) 91 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Taxation NOTE 18 INCOME TAX EXPENSE (continued) 18 b) Reconciliation of prima facie tax expense to income tax expense/(benefit): Profit before income tax Tax at the Australian tax rate of 30% (2015: 30%) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Sale of long term equity investments Net Impairment (expense) Franking credits received (excluding controlled and associate entities) Tax effect of entities entering into the Washington H. Soul Pattinson and Company Limited tax consolidated group Deferred tax asset not recognised on current year net losses Net effect of New Hope Corporation Limited’s Petroleum resource rent tax expense/(benefit) Tax (benefit) on the carrying value of equity accounted associates Other Total income tax expense/(benefit) The effective tax rates are as follows: c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss but directly charged or credited to equity 2016 $’000 2015 $’000 130,361 39,108 (172) (11,235) (11,379) (7,379) 2,864 2,502 (15,469) 2,062 902 0.7% 58,603 17,581 (345) (13,662) (9,965) – 3,749 (673) (14,622) 986 (16,951) (29%) Decrease/(increase) to deferred tax assets (Decrease)/increase to deferred tax liabilities Net deferred tax – (credited) directly to equity 4,917 (17,497) (12,580) (3,638) 695 (2,943) d) Tax effect of impairments and tax losses Impairments and unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30% Key Estimates: 178,117 53,435 237,732 71,320 Petroleum resource rent tax (PRRT) As a result of the 100% acquisition of Bridgeport Energy Limited during 2013, the Group is subject to Petroleum resource rent tax (PRRT) effective 1 July 2012 being the date of the extension of the PRRT to onshore petroleum projects. The Group has accounted for the current and deferred tax impact of PRRT in accordance with the requirements outlined in the income tax expense policy. As such, the Group has recorded current and deferred tax assets and liabilities relating to PRRT at the prevailing PRRT rate at 31 July 2016 and 31 July 2015. A subsidiary of the Group, New Hope Corporation Limited (New Hope), as head company of the New Hope income tax consolidated group, has made a PRRT consolidation election and as such the New Hope tax consolidated group includes two PRRT consolidated groups at 31 July 2016 and 31 July 2015. New Hope has accounted for its PRRT tax balances in accordance with the stand alone taxpayer method in alignment with the tax funding arrangements. 92 19 NOTE 19 DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES Accounting policy – Deferred tax assets and deferred tax liabilities Deferred tax assets and liabilities are calculated on the differences (temporary differences) between the carrying amount of assets and liabilities as recognised in the consolidated financial statements and their tax cost base multiplied by the tax rate expected to apply when these assets are recovered or liabilities are settled. The current Australian corporate tax rate is 30%. Deferred tax asset or liabilities are provided in full, using the liability method. An exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to these temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. 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 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 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. Deferred tax assets temporary differences attributed to: Amounts recognised in the income statement Provisions Accrued expenses Impairment losses Capitalised exploration Property, plant and equipment Petroleum resource rent tax Tax value of losses carried-forward Other Amounts recognised directly in equity Cash flow hedges Long term equity investments Share issue costs Total deferred tax assets Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax assets Movements: Opening balance at 1 August Credited to the income statement – operating profit (note 18a) (Charged)/credited to equity (note 18c) Amounts recognised on acquisition of businesses Closing balance at 31 July 2016 $’000 44,549 973 14,909 7,334 5,509 – 88,028 10,625 2015 $’000 29,559 1,979 29,286 6,479 696 3,574 48,674 7,142 171,927 127,389 – 4,701 10 4,711 176,638 (120,562) 56,076 136,756 33,944 (4,917) 10,855 176,638 6,943 2,414 10 9,367 136,756 (77,447) 59,309 113,930 19,188 3,638 – 136,756 93 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Taxation 19 NOTE 19 DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES (continued) Key Estimate Deferred tax assets Deferred tax assets have been recognised relating to carried forward capital losses, income losses and temporary differences, based on current tax rates. Utilisation of capital tax losses and income losses requires the realisation of capital gains and taxable income respectfully, in subsequent years and the ability to satisfy certain tests at the time the losses are recouped. The actual tax results in future periods may differ from the estimate made at the time the deferred taxes are recognised. Deferred tax liabilities temporary differences attributed to: Amounts recognised in the income statement Property, plant and equipment Mine reserves Capitalised exploration Inventories Investments Receivables Other Amounts recognised directly in equity Long term equity investments Property, plant and equipment Cash flow hedges Other investments Total deferred tax liabilities Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax liabilities Movements: Opening balance 1 August Charged/(credited) to the income statement – operating profit (note 18a) (Credited)/charged to equity (note 18c) Amounts recognised on acquisition of businesses Closing balance at 31 July 2016 $’000 2015 $’000 1,897 – 92,681 6,619 163,067 44 3,929 14,591 345 90,013 6,933 105,687 440 5,192 268,237 223,201 76,640 9,662 694 5,367 92,363 360,600 (120,562) 240,038 330,489 36,753 (17,497) 10,855 360,600 90,684 7,160 – 9,444 107,288 330,489 (77,447) 253,042 342,287 (12,493) 695 – 330,489 It is important to note, that the deferred tax liability recognised above does not represent the total tax that would be incurred if all assets of the Group were to be disposed. This is predominately due to subsidiaries and the associate entities not being carried at their market value in the consolidated financial statements. The market values of the listed investments together with the estimate of capital gains tax payable thereon is set out in note 1, Parent company financial information. 20 Risk Management NOTE 20 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of financial risks; market risk (including currency risk, price risk and interest risk), credit risk, and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Entities within the Group use derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. Derivatives are used exclusively for hedging purposes, i.e. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analyses in the case of interest rate, foreign exchange and other price risks and ageing analyses for credit risk. Risk management policies cover specific areas, such as mitigating foreign exchange, interest rate and credit risks, use of forward exchange contracts and investment of excess liquidity. The Group holds the following financial instruments: Financial assets Cash and cash equivalents Term deposits Loans and receivables Trading equities Derivative financial instruments Long term equity investments Equity accounted associates Other financial assets Total financial assets Financial liabilities Trade and other payables Deposits accepted Derivative financial instruments Borrowings Lease liabilities Total financial liabilities a) Market Risk i. Foreign exchange risk 2016 $’000 2015 $’000 126,709 47,660 146,962 31,605 2,313 585,703 1,265,214 11,837 59,424 1,217,011 79,647 21,300 – 615,645 1,088,592 5,425 2,218,003 3,087,044 75,831 49,861 167 22,825 15,039 49,329 47,326 23,144 – 125 163,723 119,924 Foreign exchange risk arises when in local currency terms the value of a financial commitment or a recognised asset or liability, will fluctuate due to changes in foreign currency exchange rates. The Group is exposed to foreign exchange risk arising from currency exposures to the US Dollar. Forward contracts are used to manage foreign exchange risk. Senior management is responsible for managing exposures in each foreign currency by using external forward currency contracts. Contracts are designated as cash flow hedges. External foreign exchange contracts are designated at Group level as hedges of foreign exchange risk on specific future transactions. The Group’s export coal sales risk management policy is to hedge up to 65% of anticipated transactions in US Dollars for the subsequent year, up to 57% of anticipated revenue beyond a year but less than two years and up to 50% for revenue beyond two years but less than three years. All hedges of projected export coal sales qualify as “highly probable” forecast transactions for hedge accounting purposes. 94 95 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Risk Management 20 a) Market Risk NOTE 20 FINANCIAL RISK MANAGEMENT i. Foreign exchange risk (continued) The Group’s exposure to foreign currency risk at the reporting date was as follows: US Dollar exposure Cash and cash equivalents Trade receivables Forward exchange contracts – sell foreign currency (cash flow hedge) Trade payables Sensitivity analysis 2016 USD $’000 2015 USD $’000 9,135 13,501 20,000 389 3,867 11,383 137,000 11 Based on the trade receivables, cash held and trade payables at 31 July 2016, had the Australian dollar weakened/ strengthened by 10% against the US dollar with all other variables held constant, the Group’s post-tax profit for the year would have increased/(decreased) by $2.300 million/($1.882 million) (2015: $1.638 million/($1.380 million)), mainly as a result of foreign exchange gains/(losses) on translation of US dollar receivables and cash balances as detailed in the above table. The Group’s equity as at reporting date would have increased/(decreased) by the same amounts. Based on the forward exchange contracts held at 31 July 2016, had the Australian dollar weakened/strengthened by 10% against the US dollar with all other variables held constant, the Group’s equity would have increased/ (decreased) by $2.961 million/($2.419 million) (2015: $21.075 million/($17.208 million)). There is no effect on post-tax profits. ii. Price Risk The Group is an investment company and is exposed to equity securities price risk. The majority of the Group’s investments are publicly traded on the Australian Securities Exchange. Investments held for the long-term are classified in the statement of financial position as ‘long term equity investments’. As the market value of individual companies fluctuate, the fair value of the portfolio changes with the movement being recognised directly to equity. Where an investment’s value falls below its cost, management may consider the investment to be impaired. An impairment expense is recognised in the income statement. Investments held for the short to medium term are classified in the statement of financial position as trading equities. As the market value of individual companies fluctuate, the fair value of this portfolio changes with the movement being recognised through the income statement. Investments in associates are not carried at fair value in the statement of financial position but are instead equity accounted. The initial investment is increased/(decreased) by the Group’s share of the associate’s profits/(losses) as recognised in the income statement, movements in their reserves (other comprehensive income) and decreased by dividends received. For listed associates the market value is taken into consideration when assessing the recoverable value of an equity accounted associate. Sensitivity analysis The following table summarises the financial impacts of a hypothetical 5% decrease in the market value of those investments (trading equities and long term equity investments) that are carried at fair value as at reporting date. Where this decrease results in an individual security being valued below its cost, the reduction below cost may be recognised in the income statement where Directors consider the investment to be impaired. For long term equity investments, a 5% increase in market values would have no impact on the income statement as all increases are recognised directly in equity. 96 Impact to post-tax profit Impact on reserves 2016 $’000 (773) – (773) 2015 $’000 (648) – (648) 2016 $’000 – (20,503) 2015 $’000 – (21,578) (20,503) (21,578) Trading equities Long term equity investments Total iii. Fair value interest rate risk Refer to 20e below. b) Credit Risk Exposure to credit risk relating to financial assets arises from the potential non-performance by counterparties of contract obligations that could lead to a financial loss to the Group. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure to export and domestic customers, including outstanding receivables and committed transactions. The Group has no significant concentrations of credit risk. The Group’s derivative counterparties and term deposits are limited to financial institutions with a rating of at least BBB. The Group has policies that limit the maximum amount of credit exposure to any one financial institution. Credit risk further arises in relation to financial guarantees given to certain parties (refer note 23c). Such guaranr- tees are only provided in exceptional circumstances and are subject to specific Board approval. The credit quality of financial assets that are neither past due nor impaired, can be assessed by reference to historical information about counterparty defaults. To mitigate credit risk, management within each of the Group entities apply policies to assess and monitor the credit worthiness of customers and set appropriate credit limits for each customer, taking into account their financial positions, past experience and other factors pertaining to each industry segment. The maximum exposure to credit risk at the reporting date is the carrying amount of assets as stated in the statement of financial position. The following table summarises these assets: Cash and cash equivalents Term deposits Loans and receivables Derivative financial instruments 2016 $’000 126,709 47,660 146,962 2,313 2015 $’000 59,424 1,217,011 79,647 – 323,644 1,356,082 The loans and receivables balances as stated above reflect the recoverable value and are net of any impairments or provisions. Refer note 28 for further description on the impairment of receivables. c) Liquidity risk Liquidity risk is the risk that an entity is unable to meet its financial obligations as they fall due. Prudent liquidity risk management is adopted by the Group through maintaining sufficient cash and marketable securities, the ability to borrow funds from credit providers and to close-out market positions. The Group entities manage liquidity risk by continually monitoring forecast and actual cashflows and matching maturity profiles of financial assets and liabilities. Surplus funds are only invested in conservative financial instruments such as term deposits with major banks. Financing arrangements Details of financial facilities available are set out in note 23. d) Maturity of financial liabilities The Group’s trade and other payables are all payable within one year. The Group’s maturity analysis for derivative financial instrument’s is set out in note 22. 97 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Risk Management 20 NOTE 20 FINANCIAL RISK MANAGEMENT e) Cash flow and fair value interest rate risk 21 The Group currently holds interest-bearing assets which are placed with reputable investment counterparties for up to 12 months. The Group has treasury investment policies approved by each of the relevant entity’s Board which stipulates the maximum exposure to each financial institution. Significant changes in market interest rates may have an effect on the Group’s income and operating cash flows. Cash flow interest rate risk is managed by placing excess funds in term deposits and other fixed interest bearing assets. Refer to notes 13 and 14 for details. Based on the deposits held at reporting date, the sensitivity to a hypothetical 1% per annum increase or decrease in interest rates would increase/(decrease) after tax profit by $1.221 million (2015: $8.935 million). This scenario assumes all cash and term deposits at balance date continue to remain invested for the whole year. Investment properties are partly funded by borrowings. The long term borrowings are issued at variable rates and the Group partially hedges its exposure to interest rate risk by using a derivative financial instrument, an interest rate swap, to effectively convert the variable interest rate facility into a fixed interest rate facility. Refer to note 23a for further details. NOTE 21 FAIR VALUE ESTIMATION Accounting policy – Fair value estimation The fair value of financial assets, financial liabilities and investment properties must be estimated for recognition and measurement or for disclosure purposes. The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. The quoted market price used for financial assets held by the Consolidated entity is the last sale price; the appropriate quoted market price for financial liabilities is the last sale price. 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 and makes assump- tions that are based on market conditions existing at each balance date. The fair value of forward exchange contracts is determined using forward exchange market rates at the reporting date. The carrying value less estimated credit adjustments and impairment provision of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. Fair value hierarchy Judgements and estimates are made in determining the fair values of assets and liabilities. To provide an indica- tion of the reliability of the inputs used in determining fair value, the Group categorises each asset and liability into one of the following three levels as prescribed by accounting standards: Level 1: Fair value is determined by reference to quoted prices (unadjusted) in active markets for identical assets or liabilities as at the end of the reporting period. Level 2: Fair value is determined by using valuation techniques incorporating observable market data inputs. Level 3: Fair value is determined by using valuation techniques that rely on inputs that are not based on observ- able market data. 98 Fair value measurements The following table presents the Group’s assets measured and recognised at fair value as at 31 July 2016 and 31 July 2015. As at 31 July 2016 Financial assets Trading equities Long term equity investments Other financial assets – equity investments Derivatives – Foreign exchange hedge Non-financial assets Investment properties Total assets Financial liabilities Derivatives - Interest rate swaps Total liabilities As at 31 July 2015 Financial assets Trading equities Long term equity investments Other financial assets – equity investments Non-financial assets Investment properties Total assets Financial liabilities Derivatives – Foreign exchange hedge Total liabilities Note 11 11 11 22 12 11 11 11 12 22 Level 1 $’000 15,459 585,700 – – – 601,159 – – 12,956 615,642 – – 628,598 Level 2 $’000 – – – 2,313 – 2,313 167 167 – – – – – – – 23,144 23,144 Level 3 $’000 16,146 3 11,837 – 92,932 120,918 – – 8,344 3 5,425 20,720 34,492 – – Total $’000 31,605 585,703 11,837 2,313 92,932 724,390 167 167 21,300 615,645 5,425 20,720 663,090 23,144 23,144 99 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 22 Risk Management NOTE 22 DERIVATIVE FINANCIAL INSTRUMENTS Accounting policy – Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subse- quently remeasured to their fair value at each reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of highly probable forecast transactions (cash flow hedges). The Group documents at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. At reporting date the outstanding contractual receivables/payables at fair value are (AUD Equivalents): Current Assets – Forward exchange contracts Current Liabilites – Forward exchange contracts – Interest rate swaps Fair value measurement 2016 $’000 2,313 – 167 167 2015 $’000 – 23,144 – 23,144 23 Credit risk exposures of derivative financial instruments – forward exchange contracts Credit risk arises from the potential failure of counterparties to meet their obligations under the respective contracts at maturity. A material exposure arises from forward exchange contracts and the Group is exposed to losses in the event that counterparties fail to deliver the contracted amount. Refer to note 20 for additional information. At balance date the details of outstanding forward exchange contracts are: Maturity 0 to 6 months 6 to 12 months Sell US dollars Buy Australian dollars Average exchange rate 2016 $’000 7,297 21,831 29,128 2015 $’000 82,116 84,188 166,304 2016 $’000 0.68520 0.68709 2015 $’000 0.84027 0.80771 NOTE 23 INTEREST BEARING LIABILITIES Accounting policy – Interest bearing liabilities Interest bearing liabilities are initially recognised at fair value, net of any transactions costs incurred. These balances are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the liability using the effective interest method. Interest bearing liabilities 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. Lease liabilities Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease’s inception at the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other short-term and long-term payables. The property, plant and equipment acquired under finance leases is depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the group will obtain ownership at the end of the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight line basis over the period of the lease. The fair value measurement of forward exchange contracts is determined using forward exchange market rates at the reporting date. The fair value of interest rate swaps is determined using forward interest rates at the reporting date. New Hope Corporation Limited and certain of its controlled entities are parties to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in foreign currency exchange rates. These instruments are used in accordance with the Group’s financial risk management policies. Current Liabilities Deposits accepted – Directors and Director related parties (refer below) Lease liabilities (refer to note 23b) Non-Current Liabilities Long term borrowings (refer to note 23a) Lease liabilities (refer to note 23b) 100 2016 $’000 49,861 2,306 52,167 22,825 12,733 35,558 2015 $’000 47,326 21 47,347 – 104 104 101 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 23 Risk Management NOTE 23 INTEREST BEARING LIABILITIES (continued) Fair value disclosures The carrying value of financial liabilities as disclosed approximates their fair values. Director deposits The Parent company accepts deposits from Directors and Director related parties under normal commercial terms and consistent with deposits received from other parties. Deposits are repayable at call and carry a market interest rate of 2.43% per annum (2015: 2.56%) at the reporting date. The effective interest rate applicable to these Directors and Director related deposits is consistent with the interest rate that deposits of the Parent company receives and ensures a margin of at least 25 basis points is earned by the Parent company. Refer to note 17vii for interest incurred on Director related deposits. a) Borrowings Financing facilities secured by assets pledged as security The total secured financing facilities are as follows: Bank loan facilities (i) Lease liabilities 2016 $’000 22,825 15,039 37,864 2015 $’000 – 125 125 (i) On 23 October 2015, the Group entered into a bank loan facility agreement for $22.825 million for the purpose of acquiring a commercial property at Pennant Hills. This property is classified as an Investment property in these financials statements. The loan was fully drawn from the first day of the loan. The loan is for a period of three years and is a variable rate facility. A three year interest rate swap agreement has also been established to manage the fluctuations in interest rates over the term of the facility. The interest rate for 50% of the loan facility is effectively fixed at 3.42% per annum. The variable rate at balance date was 3.07% per annum. The bank loan facility is secured by a first mortgage over this commercial property (refer note 12). b) Secured – finance lease liabilities Commitments in relation to finance leases are payable as follows: Within one year Later than one year but not later than five years Minimum finance lease Future finance charges The present value of finance lease liabilities is as follows: Current Non-current Recognised as a liability Secured liability 2016 $’000 2,802 13,813 16,615 (1,576) 15,039 2,306 12,733 15,039 2015 $’000 21 121 142 (17) 125 21 104 125 Lease liabilities are effectively secured as the rights to the leased assets recognised in the financial statements revert to the lessor in the event of default. No other assets are pledged as security for borrowings. 102 c) Other financing arrangements The Consolidated entity has access to bank overdraft and bank guarantee facilities as follows: Bank overdraft Total facility Used at balance date Unused at balance date Bank guarantees Total facilities Used at balance date Unused at balance date 2016 $’000 1,000 – 1,000 141,377 (124,356) 17,021 2015 $’000 1,000 – 1,000 106,377 (82,276) 24,101 Bank guarantees include: Unsecured facilities, for no fixed term and bear variable rates: i. Mining restoration and rehabilitation 91,667 50,836 The liability has been recognised by New Hope Corporation Limited in relation to its rehabilitation obligations. ii. Statutory Body suppliers No liability was recognised by New Hope Corporation Limited in relation to these guarantees as no losses are foreseen on these contingent liabilities. Secured, for no fixed term and bear variable rates: iii. Environmental bond The net present value of this liability has been recognised by CopperChem Limited in relation this guarantee. The guarantee has been provided by Washington H. Soul Pattinson and Company Limited (the Parent company). 24 NOTE 24 CONTINGENT LIABILITIES Details and estimates of maximum amounts of contingent liabilities for which no provision is included in the accounts, are as follows: i. Undertakings and guarantees issued by a Controlled entity’s bankers to the Department of Natural Resources and Mines, Statutory Power Authorities and various other entities ii. Undertakings and guarantees issued by a Controlled entity’s bankers for stage 1 and stage 2 of the Wiggins Island Coal Export Terminal expansion project and expansion of rail facitlities 26,744 25,063 5,013 5,013 123,424 80,912 2016 $’000 19,262 2015 $’000 20,981 12,494 9,095 31,756 30,076 The contingent liabilities as described above are not secured by any charges on the Consolidated entity’s assets. For contingent liabilities of the parent company, refer to note 1c, page 60. For contingent liabilities relating to associates refer to note 10d, page 79. 103 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 25 Fixed Assets NOTE 25 PROPERTY, PLANT AND EQUIPMENT Accounting policy – Property, plant and equipment Freehold land is carried at the lower of cost and recoverable amount. Property, plant and equipment, (excluding investment properties, refer to note 12), are stated at historical cost less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity relating to any gains/ losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. The cost of self-constructed assets includes the cost of materials, direct labour, the initial estimate where relevant, of the cost of dismantling and removing the items and restoring the site under which they are located and an appropriate portion of production overhead. 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 other repairs and maintenance are charged to the income statement during the reporting period in which they are incurred. The depreciable amount of all fixed assets including buildings and capitalised lease assets, but excluding freehold land, is depreciated commencing from the time the asset is held ready for use. Depreciation is calculated so as to write off the cost of each item of property, plant and equipment during its expected economic life to the Consolidated entity. Each item’s useful life has due regard both to its own physical life limitations and to present assessments of economically recoverable resources (when related to mining activities). Estimates of residual values and remaining useful lives are made on an annual basis. The straight line method is predominately used (Copper float and solvent extraction plants are depreciated on the units of production method). The expected useful life of plant and equipment is 4 to 20 years, buildings is 25 to 40 years and motor vehicles is 4 to 8 years. Land is not depreciated. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. Accounting policy – Mine development costs, mining reserves and leases and oil producing assets Development expenditure incurred by the Group is accumulated separately for each area of interest in which economically recoverable mineral and oil resources have been identified to the satisfaction of the Directors. Direct development expenditure, pre-operating mine start-up costs, and an appropriate portion of related overhead expenditure are capitalised as mine development costs up until the relevant mine is in commercial production. Mining reserves, leases and mine development costs are amortised over the estimated productive life of each applicable mine on either a unit of production basis or years of operation basis, as appropriate. Amortisation commences when a mine commences commercial production. The cost of acquiring mineral reserves and mineral resources are capitalised in the statement of financial position as incurred. Oil producing assets are amortised on a unit of production basis. The method uses the actual costs of the asset to date plus all its projected future costs. Amortisation commences when an area of interest is ready for use. Impairment of non-current assets Assets are tested 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 cost to sell and its value in use. For the purposes of assessing impairment under value in use testing, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Annual assessments of impairments reversals are undertaken. All property, plant and equipment allocated to cash generating units (CGU’s) containing goodwill must be tested for impairment at the CGU level on an annual basis. Other property, plant and equipment assets must also be tested for impairment when impairment indicators are identified. Non-current assets 2016 At 1 August 2015 Cost Accumulated depreciation/ amortisation and impairment Land $’000 Buildings $’000 Plant, fixtures, motor vehicles $’000 Oil producing assets $’000 Mining reserves and leases $’000 Mine develop- ment $’000 Total $’000 164,665 37,053 731,851 104,832 30,502 118,263 1,187,166 – (16,587) (426,778) (57,488) (16,847) (84,763) (602,463) Net book amount 164,665 20,466 305,073 47,344 13,655 33,500 584,703 Year ended 31 July 2016 Opening net book amount Acquisition of businesses – (refer note 6) Additions Transfers in/(out) Disposal of assets Impairment of assets Depreciation/amortisation charge 164,665 20,466 305,073 47,344 13,655 33,500 584,703 3,290 – – – – 11,694 664 130 (762) (2,398) 163,644 79,013 (1,799) (97) (8,245) 11,483 4,277 190 – (15,029) 633,267 602 (530) – (11,965) 17,932 5,685 1,354 – (10,610) 841,310 90,241 (655) (859) (48,247) – (1,374) (53,996) (3,593) (10,717) (8,078) (77,758) Closing net book amount 167,955 28,420 483,593 44,672 624,312 39,783 1,388,735 At 31 July 2016 Cost Accumulated depreciation/ amortisation and impairment 167,955 48,779 972,612 120,782 663,841 143,234 2,117,203 – (20,359) (489,019) (76,110) (39,529) (103,451) (728,468) Net book amount 167,955 28,420 483,593 44,672 624,312 39,783 1,388,735 Pledged assets Plant, fixtures and motor vehicles includes assets with a net book value of $15.039 million which the Group is a lessee under a finance lease. Refer note 23 for details. Impairments of Property plant and equipment During the year impairment charges of Property, plant and equipment include write downs on copper assets of $30.218 million (2015: $47.203 million), Oil producing assets of $15.029 million (2015: $51.456 million) and Coal to liquid assets of $nil (2015: $24.267 million). 104 105 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 25 Non-current assets 2015 At 1 August 2014 Cost Accumulated depreciation/ amortisation and impairment Fixed Assets NOTE 25 PROPERTY, PLANT AND EQUIPMENT (continued) Land $’000 Buildings $’000 Plant, fixtures, motor vehicles $’000 Oil producing assets $’000 Mining reserves and leases $’000 Mine develop- ment $’000 Total $’000 153,343 33,525 692,352 94,113 29,972 91,806 1,095,111 – (10,146) (334,855) (3,039) (8,181) (37,364) (393,585) Net book amount 153,343 23,379 357,497 91,074 21,791 54,442 701,526 Year ended 31 July 2015 Opening net book amount Additions Transfers in/(out) Disposal of assets Impairment of assets Depreciation/amortisation charge 153,343 11,322 – – – 23,379 306 3,222 – (5,180) 357,497 44,006 (4,155) (352) (33,905) 91,074 11,208 (489) – (51,456) 21,791 530 – – (5,677) 54,442 19,061 7,396 – (31,583) 701,526 86,433 5,974 (352) (127,801) – (1,261) (58,018) (2,993) (2,989) (15,816) (81,077) Closing net book amount 164,665 20,466 305,073 47,344 13,655 33,500 584,703 At 31 July 2015 Cost Accumulated depreciation/ amortisation and impairment 164,665 37,053 731,851 104,832 30,502 118,263 1,187,166 Net book amount 164,665 20,466 305,073 – (16,587) (426,778) (57,488) 47,344 (16,847) 13,655 (84,763) (602,463) 33,500 584,703 Pledged assets For the year ending 31 July 2015, none of the Group’s property, plant and equipment was pledged as security. Key estimates – impairment of non-current assets Judgement is involved in assessing whether there are indicators of impairment of property, plant and equipment including in relation to the impact of events or changes in circumstances. For mining and oil production assets, key judgements include external factors such as forecast commodity prices and foreign exchange rates. Judgement is also required in relation to the estimation of reserves and resources. Further information is provided below. Where the recoverable amounts of the Group’s CGU’s are tested for impairment using analyses of discounted cash flows, the resulting valuations are also sensitive to changes in estimates of long-term commodity prices, production timing and recovery rates, exchange rates, operating costs, reserve and resource estimates, closure costs and discount rates. Estimates in respect of the timing of project expansions and the cost to complete asset construction are also critical to determining the recoverable amounts for cash-generating units. Estimates of reserves and resources – Coal The Group estimates its coal reserves and coal resources based on information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2012 (the JORC code, which is produced by the Australasian Joint Ore Reserves Committee). The estimation of reserves and resources requires judgment to interpret available geological data and then to select an appropriate mining method and establish an extraction schedule. It also requires assumptions about future commodity prices, exchange rates, production costs, recovery rates and discount rates and, in some instances, the renewal of mining licences. There are many uncertainties in the estimation process and assump- tions that are valid at the time of estimation may change significantly when new information becomes available. Reserves and resources determined in this way are used in the calculation of depreciation, amortisation and impairment charges, the assessment of mine lives and for forecasting the timing of the payment of decommis- sioning and restoration costs. Changes in coal resources could have an impact on the recoverability of Exploration and evaluation costs capitalised (refer note 26). New Acland Coal Stage 3 approvals A subsidiary of Washington H. Soul Pattinson and Company Limited, New Hope Corporation Limited (New Hope) has coal operations where there remains a number of uncertainties associated with the approvals timeline and ultimate conditionality of the New Acland Stage 3 project. The lengthy duration of the approval process may result in a delay to the commencement of stage 3 operations. The financial statements have been prepared on the basis of a reasonable expectation the Group will be successful in securing approval for the New Acland Stage 3 expansion during the next financial year. If this was not to occur, it could impact the assessment of recoverable amount for property, plant and equipment as well as the calculation of depreciation, amortisation and rehabilita- tion provisions. Oil producing assets The Group has determined that due to the continued significant decline in global oil prices there is an indicator that certain oil producing assets may be impaired. The Group has classified its Cooper Basin assets as separate Cash Generating Units (CGU) on a per field basis and has measured the recoverable amount of each CGU using the Fair value less cost of disposal method with all fair value measurements categorised as Level 3 in the fair value hierarchy. These CGU’s are included in the Energy segment. The Group has estimated the future cash flows of each CGU making assumptions in respect of key variables including: economically recoverable reserves, future production profiles, commodity prices, foreign exchange rates, operating costs and future development costs necessary to produce the reserves. The commodity price and foreign exchange assumptions have been based on consensus market data in the range of oil prices of USD $41–USD $85 (2015: USD $62–USD $91) (before escalation) and AUD/USD exchange rates of 0.72–0.75 (2015: 0.75–0.93). The future cash flows have been discounted using an after tax discount rate of 10% (2015: 10%). The recoverable amount and impairment loss calculated under the Fair value less cost of disposal method of the CGUs determined to be impaired are: 106 107 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Fixed Assets NOTE 25 PROPERTY, PLANT AND EQUIPMENT (continued) 25 2016 2015 Cooper Basin PL98 Cooper Basin PL214 Cooper Basin PL24-26, 35, 36, 62, 76-79, 82, 87, 105, 107, 109, 133, 149, 175, 181, 182, 189 and 302 Cooper Basin PL15 Recoverable amount/ (liability) $’000 6,901 1,383 (1,097) – 7,187 Impairment loss on oil producing assets $’000 8,342 5,673 Recoverable amount/ (liability) $’000 12,869 6,719 Impairment loss on goodwill and oil producing assets $’000 51,410 1,545 1,613 1,045 1,014 – 15,029 (277) – 19,311 55,613* * Includes $4.157 million impairment of associated goodwill. Refer to note 27. Determination of recoverable value – copper processing plant, equipment and capitalised mine development costs The assessment of recoverable value includes key estimates in relation to quantities of economically recoverable reserves and resources, resource grades and mine plans. These are based upon interpretations of geological models and other matters. It also requires key assumptions to be made regarding a number of factors including short and long-term exchange rates, short and long-term copper prices, future capital expenditure and working capital. Estimates are also required to be made in relation to the economic life of the plant and its residual value. Changes in these estimates and applying different assumptions may impact significantly the assessment of the recoverable value of the plant, equipment and capitalised mine development costs, as well as the amount of depreciation and amortisation charged to the income statement. The directors are satisfied that the estimates and assumptions made are based on observable and other supportable inputs and therefore that the impaired carrying value of the copper processing plant, equipment and capitalised mine development costs at 31 July 2016 is appropriate. 26 NOTE 26 EXPLORATION AND EVALUATION ASSETS Accounting policy – Exploration and evaluation assets Exploration, evaluation and relevant acquisition costs are accumulated separately for each area of interest for which a mining tenement is current. They are initially recognised at cost and include acquisition of rights to explore, studies, exploratory drilling, trenching, sampling and an appropriate portion of related overhead expenditure. Costs are carried forward only if they relate to an area of interest for which rights of tenure are current and such costs are expected to be recouped through successful development and exploitation or from sale of the area. Exploration and evaluation expenditure which does not satisfy these criteria is written off. Where a decision is made to proceed to the development of a mine, the relevant exploration and evaluation costs for that area of interest are transferred to mine development (disclosed within note 25 – Property, plant and equipment). Non-Current Assets Exploration and evaluation at cost Reconciliation Opening net book amount Additions Impairment (a) Transfers in/(out) Closing net book amount 2016 $’000 2015 $’000 402,298 407,831 407,831 22,129 (28,192) 530 402,298 388,210 60,565 (34,800) (6,144) 407,831 (a) In the current year, an impairment expense of $15.075 million relates to Copper exploration assets (2015: $34.800 million) which are allocated to the copper cash generating unit for the purpose of assessing recoverable value, and $13.117 million relates to oil exploration assets (2015: $3.465 million). Refer to note 25 for details of impairment testing. Exploration and evaluation assets include New Hope Corporation Limited of $382.048 million (2015: $377.120 million) and Exco Resources Limited of $15.385 million (2015: $19.436 million) Key Estimate Exploration and evaluation expenditure During the year, the controlled entities New Hope Corporation Limited, CopperChem Limited and Exco Resources Limited, capitalised various items of expenditure to exploration and evaluation assets. The relevant items of expenditure were deemed to be part of the capital cost of developing future mining operations, which would then be amortised over the useful life of the mine. The key judgement applied in considering whether the costs should be capitalised, is that costs are expected to be recovered through either successful development (through mining operations) or sale of the relevant mining interest. Factors that could impact the exploration and evaluation costs being transferred to future mine operations include the level of reserves and resources, changes in commodity prices and foreign exchange rates, future legal changes and any future technology changes. 108 109 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Fixed Assets 27 NOTE 27 INTANGIBLE ASSETS Accounting policy – Intangible assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in the carrying amount of investments in associates. Goodwill is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it maybe be impaired, and is carried at cost less accumulated impairment losses. Goodwill acquired is allocated to cash generating units for the purpose of impairment testing. The allocation is made to those cash generating units or group of cash generating units that are expected to benefit from the business combination in which in which the goodwill arose. Cash generating units are discussed in the impairment section below. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Water rights and mining information The Group benefits from water rights associated with its mining operations through the efficient and cost effec- tive operations of the mine. The value of exploration, pre-feasibility and feasibility costs necessary for regulatory, reporting and internal control purposes have been recognised as a mining information intangible asset. Software Software is stated at historical cost less applicable amortisation. Historical cost includes expenditure that is directly attributable to the acquisition of software. Amortisation is calculated so as to write off the cost of each item of software during its expected economic life to the Group. Other intangible assets Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses. Subsequent expenditure Subsequent expenditure on capitalised intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is expensed as incurred. Amortisation of intangible assets Amortisation is charged to the income statement on a straight line basis, unless otherwise stated, over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life are systematically tested for impairment at each balance date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives of intangibles are as follows: Class of intangible Goodwill Water rights and mining information Software Useful life Indefinite life Estimated life of mine 3 – 5 years Impairment 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 changes or circumstances indicate that they may be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Refer to note 25 for details on impairment testing. 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 value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Intangible assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Goodwill impairments are not reversible. Impairment losses for intangible assets are recognised in the income statement. 110 Non-Current Assets At 31 July 2014 Cost Accumulated amortisation and impairment Net book amount Year ended 31 July 2015 Opening net book amount Additions Amortisation (charged) to the income statement (refer note 17) Impairments (charged) to the income statement (refer note 17) Transfers in Closing net book amount At 31 July 2015 Cost Accumulated amortisation and impairment Net book amount Year ended 31 July 2016 Opening net book amount Additions Asset acquired by purchase of businesses Amortisation (charged) to the income statement (refer note 17) Transfers in Closing net book amount At 31 July 2016 Cost Accumulated amortisation and impairment Net book amount a) Recoverable amount of goodwill Goodwill $’000 Water rights $’000 Mining informa- tion $’000 22,830 – 22,830 22,830 – – (4,157) – 18,673 22,830 (4,157) 18,673 18,673 – – – – 18,673 22,830 (4,157) 18,673 – – – – – – – – – – – – – – – – – – – – – – – – – – 6,560 (110) – 6,450 6,560 (110) 6,450 – – 34,900 (585) – 34,315 34,900 (585) 34,315 Other $’000 14,687 (10,670) 4,017 4,017 264 (1,568) (1,018) 170 1,865 15,121 (13,256) 1,865 1,865 37 40 (1,027) 125 1,040 15,323 (14,283) 1,040 Total $’000 37,517 (10,670) 26,847 26,847 264 (1,568) (5,175) 170 20,538 37,951 (17,413) 20,538 20,538 37 41,500 (1,722) 125 60,478 79,613 (19,135) 60,478 Intangible assets, which have indefinite lives are allocated to the Group’s cash generating units (CGU’s) identified according to business segment and country of operation. A segment-level summary of the goodwill allocation is presented below: Energy Carrying amount of Goodwill at beginning of year Impairment Consulting Carrying amount of Goodwill at beginning of year Closing net book value Country of operation Australia Australia 2016 $’000 18,098 – 18,098 575 18,673 2015 $’000 22,255 (4,157) 18,098 575 18,673 111 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 27 Fixed Assets NOTE 27 INTANGIBLE ASSETS (continued) The recoverable amount of the cash generating units for which goodwill has been allocated is determined based on the fair value less cost of disposal method. Assumptions and methodology applied to each cash-generating unit are as follows: (i) Energy The brought forward balance of goodwill relates to acquisitions by New Hope Corporation Limited, including Queensland Bulk Handling Pty Limited (goodwill of $5.596 million), Northern Energy Corporation Limited (goodwill of $12.271 million). The recoverable amount of the cash-generating unit to which the Northern Energy Corporation Limited goodwill is attributable has been based on the Fair value less cost of disposal method. This assessment is determined under Level 2 of the fair value hierarchy based on observable external market data for reserve and resources transaction multiples, rather than quoted prices (refer note 21 for an explanation on Fair value hierarchy). The transaction multiples observed are based on transactions in the last 3 years for Australian coal exploration projects with the same coal exploration projects with the same coal type as the cash-generating unit assets. Estimation of the resources used to determine the recoverable amount requires judgement and assumptions as detailed in note 25. The recoverable amount of Queensland Bulk Handling Pty Limited cash generating units has been based on value in use calculations using discounted cash flow model. The future cash flows have been discounted using a post-tax rate of 10% (2015: 10%). Goodwill impairment – Energy There was impairment of goodwill in the year ended 31 July 2015 of $4.157 million. This relates to goodwill on oil producing assets within Bridgeport (acquired 2012). Details of impairment assessment are included in note 25. (ii) Consulting Brought forward goodwill relates to obtaining control of Pitt Street Real Estate Partners Pty Limited. Key Estimates Impairment of goodwill At each reporting date the Group considers the recoverable value of goodwill. Goodwill is allocated to cash-gen- erating units for which the recoverable value is determined. The recoverable value may be determined based on fair value less costs to sell and is estimated based on recent market transaction information. These calculations require the use of assumptions. 112 28 Other Operating Assets and Liabilities NOTE 28 TRADE AND OTHER RECEIVABLES Accounting policy – Trade and other receivables Trade receivables are recognised initially at fair value and subsequently at amortised cost, using the effective interest rate method, less provision for impairment. Trade receivables are due for settlement between 30 and 45 days from the date of recognition. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 to 45 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance 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. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of any impairment loss is recognised in the income statement. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to the income statement. Measurement Loans and receivables are carried at amortised cost using the effective interest method. Current Assets Trade receivables Less impairment of receivables Loans to other parties – secured Other receivables Prepayments Total current receivables Non-current Assets Loans to related entities Loans to others – secured Other receivables and prepayments Total non-current receivables 2016 $’000 66,203 (6,382) 59,821 25,185 25,410 6,359 2015 $’000 35,827 (1,733) 34,094 22,246 14,311 4,697 116,775 75,348 – 26,877 3,310 30,187 112 – 4,187 4,299 113 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Other Operating Assets and Liabilities 28 NOTE 28 TRADE AND OTHER RECEIVABLES (continued) a) Credit, foreign exchange, fair value and interest rate risk Information about the Group’s exposure to these risks in relation to trade and other receivables is provided in note 20. The carrying value less impairment provisions of trade receivables are assumed to approximate their fair value. Key Estimate Recoverability of receivables As at reporting date, trade receivables past due but not impaired were $14.251 million (2015: $6.498 million). This receivable relates solely to invoices issued by Queensland Bulk Handling Limited (QBH) (a wholly owned subsidiary of New Hope Corporation) to Peabody (Wilkie Creek) Pty Limited for coal port services. The balances outstanding with Peabody were the subject of an action in the Supreme Court of Queensland brought by QBH. At the date of this report, all amounts invoiced were considered to be recoverable. Subsequent to reporting date, an agreed settlement (in principle conditional upon the execution of a Settlement Deed which is currently being negotiated) for an amount of $12.950 million plus GST has been achieved. A doubtful debt expense of $6.377 million has been recognised against the total amount initially invoiced and recognised as a receivable in order to bring the amount outstanding at 31 July 2016 in line with the in principle settlement amount. While the amount is past due, it is considered recoverable at year end. 29 NOTE 29 INVENTORIES Accounting policy – Inventory Inventories are measured at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate portion of variable and fixed overheads, the latter being allocated on the basis of normal operating capacity. 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. Current Assets Raw materials and stores – at cost Work in progress – at cost Finished goods – at cost Inventory expense 2016 $’000 35,050 14,011 29,978 79,039 2015 $’000 28,348 7,714 36,808 72,870 Inventories recognised as an expense during the year ended 31 July 2016 amounted to $283.704 million (2015: $227.428 million). In the current year, write-down of inventory to net realisable value recognised as an expense during the year amounted $1.086 million (2015:$666,000). 30 NOTE 30 TRADE AND OTHER PAYABLES Current Liabilities Trade and other payables 2016 $’000 75,831 2015 $’000 49,329 Trade and other payables The balance at 31 July 2016 includes $64.513 million (2015: $42.512 million) relating to New Hope Corporation Limited. 31 NOTE 31 PROVISIONS Accounting policy – Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. i. Restoration, rehabilitation and environmental expenditure Provisions are raised for restoration, rehabilitation and environmental expenditure as soon as an obligation exists, with the cost being charged progressively to the income statement in respect of ongoing rehabilitation. Where the obligation relates to decommissioning of assets and restoring the sites on which they are located, the costs are carried forward in the value of the asset and amortised over its useful life. The obligations include profiling, stabilisation and revegetation of the completed area, with cost estimates based on current statutory requirements and current technology. ii. Employee entitlements Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, annual leave and vesting sick leave, expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability of annual leave and accumulating sick leave is recognised in the provision for employee benefits. All other short-term benefit obligations are presented as payables. Other long-term employee benefit obligations The liabilities for long service leave and annual leave which are not expected to be settled within 12 months after the end of the period in which the employees render the related service, are recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period based on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. 114 115 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 32 Other Notes NOTE 32 SHARE-BASED PAYMENTS Accounting policies – Share-based payments Share-based compensation benefits are provided to employees of Washington H. Soul Pattinson and Company Limited (the Parent company) and New Hope Corporation Limited via various employee incentive schemes. A summary of each scheme is provided below. The fair value of options and rights granted under each of these schemes is recognised as an employee benefits expense with a corresponding increase in the share-based payment reserve within equity. The fair value is measured at grant date and the total amount to be expensed is recognised over the period during which the employee becomes unconditionally entitled to the options rights. The fair value of options and rights granted is adjusted to reflect any market performance conditions and the impact of any non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of options and rights that are expected to become exercisable. At each reporting date, the entity revises its estimate of the number of options and rights that are expected to become exercisable. The employee benefits expense each period takes into account the most recent estimate. The impact of the revision to the original estimate, is recognised in profit or loss with a corresponding adjustment to equity. Washington H. Soul Pattinson and Company Limited – Long term incentive plan During the year, Washington H. Soul Pattinson and Company Limited, (Parent company) introduced a Long Term Incentive Plan (LTI plan) for its executive team and management team whereby rights to shares are granted for nil consideration. Rights are granted in accordance with the plan at the sole discretion of the Washington H. Soul Pattinson and Company Limited Board. Rights vest and automatically convert to ordinary shares in Washington H. Soul Pattinson and Company Limited following the satisfaction of the relevant performance and service conditions. Performance and service conditions applicable to each issue of rights are determined by the Board at the time of the grant. Rights granted under the plan carry no dividend or voting rights until they have vested and have been converted into shares in the Parent company. Detailed vesting conditions are set out in the Remuneration report. Refer to pages 28 to 45. The fair value of services received in return for performance rights granted is based on the fair value of the performance rights granted. The fair value of rights was independently determined by valuation specialists Lonergan Edwards & Associates Limited and was based on the market price of Washington H. Soul Pattinson and Company Limited’s shares at the grant date, with an adjustment made to take into account the vesting period, expected dividends during that period that will not be received by the participants and the probability that the market performance conditions will be met. Other Operating Assets and Liabilities 31 NOTE 31 PROVISIONS (continued) Current Liabilities Mining restoration and site rehabilitation (ii) Employee benefits (i) Native title claims Non-Current Liabilities Mining restoration and site rehabilitation (ii) Employment benefits (i) Native title claims Other 2016 $’000 13,613 36,453 – 50,066 89,877 6,950 – 65 96,892 2015 $’000 6,156 30,382 137 36,675 59,280 4,746 10 – 64,036 (i) Employee benefits Current liabilities not expected to be settled within the next 12 months The current provision for employee benefits includes accrued annual leave, vested sick leave and long service leave for all unconditional settlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payment in certain circumstances. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However, on past experi- ence, the Group does not expect all employees to take the full amount of accrued long service leave or require payment within the next 12 months. (ii) Mining restoration and site rehabilitation Movements in provision 2016 Carrying amount at beginning of year Provision arising on acquisition of businesses Provisions (written down)/capitalised recognised Provisions charged/(credited) to income statement Charged to income statement – unwinding of discount Carrying amount at end of year Disclosed as: Current liabilities Non-current liabilities Total provision for mining restoration and site rehabilitation 2016 $’000 65,436 37,982 (3,118) 53 3,137 103,490 13,613 89,877 103,490 2015 $’000 56,399 – 8,687 (2,348) 2,698 65,436 6,156 59,280 65,436 Key Estimate Mining restoration and site rehabilitation The Group makes estimates about the future cost of rehabilitating tenements which are currently disturbed, based on legislative requirements and current costs. Cost estimates take into account past experience and expectations of future events that are expected to alter past experiences. Any changes to legislative requirements could have a significant impact on the expenditure required to restore these areas. 116 117 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Other Notes 32 NOTE 32 SHARE-BASED PAYMENTS (continued) Set out below are the summaries of rights granted under the Parent company LTI plan: Performance hurdle TSR Hurdle or Non TSR Hurdle Movement in number of performance rights granted Fair value at grant date Balance at start of year Granted during the year Vested Forfeited Balance at end of year Grant Date Vest Date Dec 2015 Dec 2015 Dec 2015 Dec 2015 Sep 2018 (Sep 2019)* Sep 2018 (Sep 2019)* Aug 2019 (Sep 2019)* Aug 2019 (Sep 2019)* Dec 2015 Aug 2020 Non-TSR Dec 2015 Aug 2020 TSR Non-TSR $13.86 TSR $12.25 Non-TSR $13.86 TSR $11.08 $13.86 $10.87 – – – – – – – 14,198 14,197 8,518 8,518 5,679 5,679 56,789 – – – – – – – – – – – – – 14,198 14,197 8,518 8,518 5,679 5,679 56,789 * Certain tranches of performance rights are subject to ‘re-testing dates’. Details of vesting conditions and performance hurdles are set out in the Remuneration report. Refer to pages 28 to 45. For the current year an expense of $201,810 was recognised in the income statement for the rights issued under the Parent company LTI plan. The total fair value of the performance rights outstanding at year end was $723,577. New Hope Corporation Limited- Employee Share option and Performance rights share plans New Hope Corporation Limited provides share based compensation benefits to its employees via the New Hope Corporation Limited Employee Share Option Plan and the New Hope Corporation Limited Employee Performance Rights Share Plan (Rights plan). Membership of the Rights plan is open to those senior employees and those Directors of New Hope Corporation Limited, its subsidiaries and associated bodies corporate whom, the Directors believe have a significant role to play in the continued development of the Group’s activities. Detailed vesting conditions are set out in the Remuneration report. Refer to pages 28 to 45. Rights are granted for nil consideration. Rights will vest and automatically convert to ordinary shares in New Hope Corporation Limited following the satisfaction of the relevant service conditions. Service conditions applicable to each issue of rights are determined by the New Hope Corporation Limited’s Board at the time of the grant. Total expense arising from rights issued under the New Hope Corporation Limited employee performance share rights plan during the financial year was $123,000 (2015:$ 167,000). The total fair value of the performance rights outstanding at year end was $1.024 million (2015: $583,000). Further details are provided in the published financial report of New Hope Corporation Limited for year ended 31 July 2016 (ASX code: NHC). 33 NOTE 33 RELATED PARTIES a) Parent company The ultimate Parent company is Washington H. Soul Pattinson and Company Limited. b) Subsidiaries and Associates Interests in Subsidiaries and Associates are set out in note 3. c) Key management personnel (KMP) compensation Short-term employee benefits Post-employment benefits Long-term employee benefits Termination benefits Share-based payments Paid to KMP of the Consolidated entity Paid to KMP of the Parent company 2016 $’000 6,720 283 115 136 319 7,573 2015 $’000 5,869 262 83 1,936 167 8,317 2016 $’000 4,166 223 61 – 195 4,645 2015 $’000 3,361 206 48 1,936 – 5,551 Key management personnel remuneration has been included in the Remuneration Report section of the Directors’ Report on pages 28 to 45. d) Related parties transactions and balances Details of loans to and transactions with key management personnel are included in the Remuneration Report section of the Directors’ Report on page 45. The Parent company accepts deposits from Director and Director related parties on normal commercial terms. Refer to note 23 for further details. i. Subsidiaries Transactions between the Parent company and its subsidiaries and between subsidiaries are at normal commercial terms and conditions. Transactions consist of the transfer of funds for day to day financing, provision of consulting, management and advisory services, loans advanced and repaid, interest, dividend and rental payments. Transactions between members of the Group which are eliminated on consolidation are not disclosed in this note. ii. Associates Transactions with associates are at normal commercial terms and conditions. Transactions consist of the supply of pharmaceutical products to the Parent company, advisory, consulting, underwriting, management fees, and rent received from/paid to associates, loans advanced and repaid, interest and dividend payments. 118 119 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Other Notes NOTE 33 RELATED PARTIES (continued) 33 Summary of transactions Advisory, consulting, underwriting and management fees: – received by subsidiaries from associates – received by associates from subsidiaries – rent income received by Parent company from associate Purchases of pharmaceutical products from associate Interest income from associate 2016 $’000 999 – 12 5,868 984 2015 $’000 262 10,349 12 5,671 248 The controlled entity, Pitt Capital Partners (PCP) owns 45% of Xact Property Solutions Pty Limited (XPS). As a result of this ownership, XPS is an associate of PCP and the Group has equity accounted its share of the results of XPS. XPS provided project management and related services for the development of the distribution warehouses that were held within the 100% controlled entity, Australian Property Logistics Fund (ALPF). These properties were sold in November 2014. Costs charged by XPS were capitalised in the carrying value of the investment properties and recognised as income in the accounts of XPS. During the prior year, total fees charged by XPS to ALPF totalled $10.349 million. Loans to associates During the year, the Parent company provided a stand-by loan facility of $20 million to TPI Enterprises Limited. The amount owed at 31 July 2016 was $18.925 million. Interest is charged at market rates. The facility matures on 30 September 2017. During the prior year, the Parent company converted a loan balance of $7.0 million owed from TPI Enterprises Limited to equity. All accrued interest was repaid prior to the debt conversion. Interest was charged at market rates. 34 NOTE 34 COMMITMENTS FOR EXPENDITURE a) Capital commitments Capital expenditure contracted for at the reporting date payable within one year: Property, plant and equipment Amounts contracted for construction projects classified as inventories b) Lease commitments: Group as lessee Operating leases Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years The Group leases port facilities under non-cancellable operating leases expiring within five to fifteen years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. The Group leases office space and small items of office equipment under operating leases. Operating leases – Joint Ventures The Bengalla Joint Venture leases property, plant and equipment. The Group’s share of commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years For commitments relating to associates refer to note 10c. 2016 $’000 8,705 5,261 2015 $’000 7,002 – 5,027 20,674 36,456 62,157 4,589 20,047 41,389 66,025 5,765 7,732 732 14,229 – – – – 120 121 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 35 Other Notes NOTE 35 OTHER ACCOUNTING POLICIES a) New accounting standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for 31 July 2016 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below: i. AASB 15 Revenue from Contracts with Customers This standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. It supersedes current revenue recognition guidance including AASB 118 Revenues, AASB 111 Construction Contracts and related interpretations. The core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard also allows costs associated with obtaining a contract to be capitalized and amortised over the life of the new contract. The Group has not yet assessed how its own revenue recognition would be affected by the new rule. The Group does not intend on adopting the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 July 2019. ii. AASB 9 Financial Instruments This standard will be applicable retrospectively and includes revised classification, measurement and derecogni- tion of financial assets and financial liabilities and simplified requirements for hedge accounting. The Group does not intend on adopting the new standard before its operative date, which means that it would be first applied in the annual reporting period ending 31 July 2019. The Group has considered the adoption of AASB 9 and the major impact to the Consolidated entity will be to the Group’s long term equity investments. Currently, changes in market value of these investments are recognised in the revaluation reserve. When an investment is disposed of, the gain or loss measured from the original cost is then recognised in the income statement. Under the new standard, no gain or loss on the disposal of an investment would be recognised in the income statement and investments would no longer be subject to impairment reviews as all movements in market value are only recognised in the revaluation reserve. There will be no impact on the Group’s accounting for 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 new hedging rules align hedge accounting more closely with the Group’s risk management practices. As a general rule, it will be easier to apply hedging going forward. The new standard also introduces expanded disclosure requirements and changes in presentation. The Group has not yet assessed how its own hedging arrangements would be affected by the new rules. iii. AASB 16 Leases This standard replaces AASB 117 Leases and some lease related Interpretations and requires that all leases to be accounted for ‘on-balance sheet’ by lessees, other than short-term and low value asset leases. The standard provides new guidance on the application of the definition of leases and on sale and lease back accounting. It largely retains the existing lessor accounting requirements in AASB 117. It requires new and different disclosures about leases. The Group is currently undertake a detailed assessment of the impact of AASB 16. There are no other standards that are not yet effective and that are expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. b) Foreign currency translation i. 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 Washington H. Soul Pattinson and Company Limited’s functional and presentation currency. ii. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such trans- actions 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 and qualifying net investment hedges. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, differences on non-monetary assets and liabilities such as investments fair valued through profit and loss are recognised in the income statement, as part of the fair value gain or loss and translation differences on non-monetary assets, such as long term equity investments are included in the asset revaluation reserve in equity. iii. Group companies The results and financial position of all of the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: 4 assets and liabilities are translated at the closing rates at the reporting date; 4 income and expenses 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 4 all resulting exchange differences are recognised as a separate component of equity. 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, a proportionate share of such exchange differences is reclassified to the income statement, as part of the gain or loss where applicable. c) Deferred stripping costs The Group does not recognise any deferred stripping costs. Based on the nature of the Group’s mining operations and the stripping ratio for the components of its operations, the recognition criteria of a deferred stripping asset are not satisfied. Further, it is anticipated that the operations will maintain a consistent stripping ratio at the component level and as such no overburden in advance should be recognised. In the event that a stripping campaign is undertaken in the future a deferred stripping asset will be recognised at that time and amortised in accordance with the requirements of Australian Interpretation 20. An asset will be recognised for stripping activity where the following criteria are met: 4 It is probable that the future economic benefit (improved access to the ore body) associated with the stripping activity will flow to the entity; 4 The entity can identify the component of the ore body for which access has been improved; and 4 The costs relating to the stripping activity associated with that component can be measured reliably. 122 123 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Other Notes NOTE 35 OTHER ACCOUNTING POLICIES (continued) 35 d) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and benefits incidental to the ownership of the asset are classified as finance leases. Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight line basis over their estimated useful lives where it is likely that the Group will obtain ownership of the asset or over the term of lease. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group, as lessee, are classified as operating leases. Payment made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. e) Trade and other payables Trade and other payables are stated at their amortised cost. These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. The amounts are unsecured and usually paid within 30 to 45 days of recognition. f ) 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. g) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing: 4 the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares; and 4 by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: 4 the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and 4 the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. h) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST receivable or payable. The net amount of GST recoverable from, or payable to the ATO is included with other receivables or payables in the statement of financial position. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. i) Financial statement presentation The Group has attempted to improve the transparency of its reporting by adopting ‘plain English’ where possible. Key ‘plain English’ phrases and their equivalent AASB terminology are as follows: ‘Plain English’ terminology Share capital Trading equities Long term equity investments Equity accounted associates Term deposits AASB terminology Contributed equity Other financial assets at fair value through profit or loss Available for sale financial assets Investments accounted for using the equity method Held to maturity investments The accounting standards also require the presentation of a statement of comprehensive income which presents all items of recognised income and expenditure either in one statement or in two linked statements. The Consolidated entity has elected to present two statements. 36 NOTE 36 REMUNERATION OF AUDITORS During the year the following fees were paid or payable for services provided by the auditor. a) Audit Services Pitcher Partners Sydney* for audit and review of financial reports and other audit work under the Corporations Act 2001 Other audit firms for the audit or review of financial reports of any entity in the Group b) Other services Pitcher Partners Sydney* Tax compliance services Other auditors of Group entities Other services Total remuneration for other services * On 1 November 2015, Moore Stephens Sydney merged with Pitcher Partners Sydney. 2016 $’000 2015 $’000 422 454 876 116 57 173 466 300 766 100 23 123 124 125 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 37 Other Notes NOTE 37 DEED OF CROSS GUARANTEE During 2012, Washington H. Soul Pattinson and Company Limited and Souls Private Equity Limited entered into a deed of cross guarantee under which each company guarantees the debts of the other. During 2013, Exco Resources Limited and its wholly-owned subsidiaries became party to the deed of cross guarantee. By entering into the deed, Souls Private Equity Limited and Exco Resources Limited are relieved from the requirements to prepare a financial report and directors’ report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 issued by the Australian Securities and Investments Commission. i) Consolidated income statement, statement of comprehensive income and summary of movements in consolidated retained profits and consolidated statement of financial position The above companies represent a ‘closed group’ for the purposes of the instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Washington H. Soul Pattinson and Company Limited, they also represent the ‘extended closed group’. Set out below is a consolidated income statement, a consolidated statement of comprehensive income, a summary of movements in consolidated retained earnings for the year ended 31 July 2016 of the closed group and a consolidated statement of financial position as at 31 July 2016 for the closed group. Consolidated income statement – closed group Profit before income tax Income tax benefit/(expense) Profit after tax attributable to closed group Other comprehensive income Net movement in fair value of long term equity investments, net of tax Share of other comprehensive income movements, net of tax Total other comprehensive income for the year, net of tax 2016 $’000 254,449 (44,018) 210,431 (51,879) 3,351 (48,528) 2015 $’000 123,263 17,718 140,981 9,504 (3,220) 6,284 Total comprehensive income attributable to the closed group 161,903 147,265 Summary of movements in consolidated retained earnings Retained profits attributable to the closed group Retained profits at the beginning of the year Profit for the year Dividends declared and paid Retained profits at the end of the year 1,289,883 210,431 (99,064) 1,244,028 140,981 (95,126) 1,401,250 1,289,883 126 Consolidated statement of financial position – closed group Current assets Cash and cash equivalents Term deposits Trade and other receivables Inventories Trading equities Total current assets Non-current assets Trade and other receivables Equity accounted associates Long term equity investments Other financial assets Property, plant and equipment Exploration and evaluation costs Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Interest bearing liabilities Provisions Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained profits Total equity 2016 $’000 26,530 47,044 28,345 7,571 31,605 2015 $’000 27,492 154,831 19,296 2,205 21,300 141,095 225,124 66,946 1,272,092 581,061 124,647 10,642 19,309 65,044 43,313 1,093,408 608,030 108,533 10,634 23,360 68,683 2,139,741 1,955,961 2,280,836 2,181,085 20,563 49,942 3,090 73,595 174,938 960 175,898 249,493 8,078 47,407 2,038 57,523 154,181 877 155,058 212,581 2,031,343 1,968,504 43,232 586,861 1,401,250 43,232 635,389 1,289,883 2,031,343 1,968,504 127 Notes to the Financial StatementsWashington H. Soul Pattinson and Company LimitedAnnual Report 2016 Directors’ Declaration In the opinion of the Directors of the Company: 1. the financial statements and notes, as set out on pages 48 to 127 are in accordance with the Corporations Act 2001, including: a) complying with Accounting Standards and the Corporations Regulations 2001; b) giving a true and fair view of the financial position as at 31 July 2016 and the performance for the year ended on that date of the consolidated entity; 2. 3. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and at the date of this declaration, there are reasonable grounds to believe that the Company and the wholly owned subsidiaries identified in Note 37 to the financial statements as being parties to a Deed of Cross Guarantee will be able to meet any obligations or liabilities to which they are, or may become subject to, by virtue of the Deed. The Basis of Preparation on page 55 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. This declaration is made in accordance with a resolution of the Board of Directors. R D Millner Director T J Barlow Managing Director Dated this 25th day of October 2016. Independent Auditor’s Report Independent Auditor’s Report to the Members of Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 Report on the Financial Report We have audited the accompanying financial report of Washington H. Soul Pattinson and Company Limited, which comprises the consolidated statement of financial position as at 31 July 2016, the consolidated income statement, the consolidated statement of comprehensive income, the consol- idated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the consolidated entity comprising Washington H. Soul Pattinson and Company Limited and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ Responsibility for the Financial Report The directors of Washington H. Soul Pattinson and Company Limited are responsible for the prepa- ration and fair presentation 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 controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In the Basis of Preparation on page 55, the directors also state that, in accordance with Australian 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 about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclo- sures 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 controls relevant to the An independent New South Wales Partnership. ABN 17 795 780 962 Level 22 MLC Centre, 19 Martin Place, Sydney NSW 2000 Liability limited by a scheme approved under Professional Standards Legislation Pitcher Partners is an association of independent firms Melbourne | Sydney | Perth | Adelaide | Brisbane | Newcastle An independent member of Baker Tilly International 128 129 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Independent Auditor’s Report 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 controls. 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. We confirm that the independence declaration required by the Corporations Act 2001, provided to the directors of Washington H. Soul Pattinson and Company Limited on 24 October 2016, would be on the same terms if provided to the directors as at the date of signing this audit report. Opinion In our opinion: a. the financial report of Washington H. Soul Pattinson and Company Limited and its controlled entities is in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the consolidated entity’s financial position as at 31 July 2016 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in the Basis of Preparation on page 55. Report on the Remuneration Report We have audited the Remuneration Report included in pages 28 to 45 of the directors’ report for the year ended 31 July 2016. The directors of Washington H. Soul Pattinson and Company Limited are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion, the Remuneration Report of Washington H. Soul Pattinson and Company Limited for the year ended 31 July 2016, complies with section 300A of the Corporations Act 2001. . J Gavljak Partner 25 October 2016 PITCHER PARTNERS Sydney 130 ASX Additional Information Distribution of Equity Securities as at 1 October 2016 Size of Holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over TOTAL Holding less than a marketable parcel Top 20 Shareholders as at 1 October 2016 1 2 3 4 5 6 7 8 9 10 11 Brickworks Limited Milton Corporation Limited J S Millner Holdings Pty Limited Dixson Trust Pty Limited National Nominees Limited Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited (PI Pooled A/C) J P Morgan Nominees Australia Limited T G Millner Holdings Pty Limited HSBC Custody Nominees (Australia) Limited Hexham Holdings Pty Limited 12 Mr Robert Dobson Millner & Mr Michael John Millner (Est James S Millner A/C) Argo Investments Limited Australian Foundation Investment Company Limited BNP Paribas Noms Pty Ltd (DRP) UBS Nominees Pty Ltd Farjoy Pty Ltd Citicorp Nominees Pty Limited (Colonial First State Inv A/C) Dixson Trust Pty Limited (A/C NO 1) 13 14 15 16 17 18 19 20 Mary Millner Holdings Pty Limited Number of Holders Ordinary Shares Performance Rights 8,538 5,124 1,039 828 88 15,617 264 – 2 – 2 – 4 Ordinary Shares Held % of Issued shares 102,257,830 42.72 9,174,640 8,757,859 8,611,540 6,790,986 6,417,936 3,875,701 3,752,743 3,421,051 3,122,925 2,933,127 2,522,092 2,182,606 1,708,571 1,474,197 1,456,757 1,344,463 1,283,405 1,175,290 1,156,860 3.83 3.66 3.60 2.84 2.68 1.62 1.57 1.43 1.30 1.23 1.05 0.91 0.71 0.62 0.61 0.56 0.54 0.49 0.48 131 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 ASX Additional Information Substantial Shareholders as at 1 October 2016 As disclosed in notices received by the Company. Brickworks Limited and its subsidiaries Mr Robert Dobson Millner Mr Thomas Charles Dobson Millner Ordinary Shares Held % of Issued Shares Notice Received 102,257,830 19,921,975 17,211,350 42.72 8.32 7.19 18 Nov 2013 3 Mar 2014 3 Mar 2014 17,195,965 of the above ordinary shares in which Mr R Millner and Mr T Millner have an interest relate to holdings by the same entities. For further details refer to the notices lodged on 3 March 2014 on the ASX announcements list for WHSP (ASX code: SOL). Unquoted Equity Securities As at 1 October 2016 the Company had the following unquoted equity securities on issue. Performance Rights – issued under the Long-term Incentive Plan 56,789 4 Number of Rights Number of Holders Voting Rights Ordinary shares: (a) on a show of hands, each member has one vote; (b) subject to section 250L(4) of the Corporations Act 2001, on a poll each member has: (i) (ii) for each fully paid share held by the member, one vote; and for each partly-paid share held by the member, a fraction of a vote equivalent to the proportion which the amount paid (not credited nor paid in advance of a call) is of the total amounts paid and payable (excluding amounts credited) for the share. Performance Rights: No voting rights. Australian Securities Exchange Listing Washington H. Soul Pattinson and Company Limited ordinary shares are listed on the Australian Securities Exchange under the ASX Code: SOL. 132 Designed and Produced by APM Graphics Management > 1800 806 930 133 Washington H. Soul Pattinson and Company LimitedAnnual Report 2016 Registered Office Level 1, 160 Pitt Street Mall, Sydney NSW 2000 Telephone: (02) 9232 7166 Facsimile: (02) 9233 1025 www.whsp.com.au Share Register Advanced Share Registry Limited 110 Stirling Highway, Nedlands WA 6009 Telephone: (08) 9389 8033 or +61 8 9389 8033 (outside Australia) (02) 8096 3502 (NSW) (03) 9018 7102 (Vic) (07) 3103 3838 (Qld) Facsimile: (08) 9262 3723 or +61 8 9262 3723 (outside Australia) www.advancedshare.com.au Auditors Pitcher Partners Sydney Level 22, 19 Martin Place, Sydney NSW 2000 GPO Box 1615, Sydney NSW 2001 Telephone: (02) 8236 7700 Facsimile: (02) 9233 4636 Washington H. Soul Pattinson and Company Limited ABN 49 000 002 728 ASX Code: SOL