Southcross Energy Partners LP
Annual Report 2015

Plain-text annual report

2015 ANNUAL REPORT Southern Cross Electrical Engineering Limited ABN: 92 009 307 046 Established 1978 Contents Chairman’s Message Managing Director’s Review Director’s Report Remuneration Report Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Lead Auditor’s Independence Declaration ASX Additional Information 04 06 14 20 28 29 30 31 33 72 73 75 76 2015 in Summary Underlying trading revenue $240.6m* Underlying trading NPAT $4.2m* Net cash of $44.6m Fully franked dividend of 2.7 cents per share Restructuring initiatives implemented and overheads reduced Order book of $111m at 30 June 2015 Committed to targeting growth organically and through acquisition * a reconciliation to statutory revenue of $238.3m and statutory loss after tax of $9.8m can be found on page 7 2015 Annual Report 1 SCEE was established as Southern Cross Electrical Engineering Limited in 1978. The company is a leading provider of large-scale specialised electrical, control and instrumentation services for projects. SCEE operates through three company divisions - SCEE Infrastructure, SCEE Construction and SCEE Services - to provide ‘full life cycle of project’ electrical services including: Design and construction of high voltage power line distribution, switchyards and substations Installation and commissioning of greenfield projects Operations support, maintenance, brownfield upgrade and sustaining capital services 2 2015 Annual ReportOur Values At SCEE, our values are integral to the organisation and act as internal drivers. They shape how we conduct our business on a daily basis and ultimately drive our success. Safety It’s in everything we do Loyalty We believe in harmonious relationships and building these through integrity and mutual respect Trust We entrust and empower our team to take ownership Reliability We are dependable and consistently deliver high quality services 3 2015 Annual ReportChairman’s Message Dear Shareholders 2015 has been a challenging year for SCEE, as it has been for the majority of companies servicing the resources sector. Market conditions throughout the year remained difficult for contractors as clients continued to focus on costs amid increased competition for a reducing pool of new work in most segments of the sector. With these conditions expected to endure in the near to medium term, the Board implemented a number of restructuring initiatives to ensure that the business is appropriately sized and structured to operate efficiently and cost effectively. Throughout the year we have continued to provide the highest level of client service and performed our work safely without a Lost Time Incident, SCEE’s eleventh consecutive LTI free year in Australia. Results The cost of the restructuring, together with an impairment of goodwill and write-downs to assets and claims, has resulted in the Company reporting a loss after tax of $9.8m. Adjusting for these one-off items, the Company made an underlying trading profit after tax of $4.2m. Notwithstanding, we entered the 2016 financial year with a strong balance sheet, including cash of $44.6m and no debt. Further discussion of the current year result is provided in the Managing Director’s Review on the following pages. I am pleased to advise that the Board has declared a fully franked dividend of 2.70 cents per share for the year, consistent in absolute terms with the prior year. The Board believes that this strikes an appropriate balance between delivering returns to shareholders and ensuring that sufficient capital is retained in the business to allow us to take advantage of growth opportunities. 4 2015 Annual ReportOutlook and Strategy We had an order book at 30 June 2015 of $111m, which excludes recurring revenues under framework agreements and forecast further work to be performed under already awarded cost reimbursable contracts. This, therefore, gives us a solid baseload of work for 2016. Whilst we expect conditions in the sector to remain highly competitive, the continued management of overheads and the implementation of our restructuring initiatives will help us counter this environment. The Board remains committed to a strategy of targeting growth, both organically and through acquisition. We are actively exploring expansion into other geographical areas and adjacent or complementary sectors and continue to view the growth of recurring revenues as a key objective. The Board of Directors There were number of changes to the composition of SCEE’s Board during the year. I would like to take this opportunity to acknowledge and thank John Cooper, Simon High, Peter Forbes and Jack Hamilton for their valuable contributions to SCEE during their respective tenures. Following the addition of Simon Buchhorn and Karl Paganin to the Board, alongside Chris Douglass as interim Managing Director, the Company now has a Perth based Board that is sized for the market in which we are currently operating and with a skill set well suited to these conditions and our growth aspirations. Whilst our search for a CEO was put on hold during the restructuring process, the Board is now actively focused on securing a business leader who is best equipped to execute both SCEE’s current operations and our future strategy. In this context, I must acknowledge and commend Chris Douglass on the role he continues to play as our interim CEO. On behalf of the Board I would like to thank all of our shareholders, clients and employees for their continuing support and in particular make special mention of our field workforce who have enhanced SCEE’s “can do” reputation which has, over the years, been a consistent hallmark of our performance. Derek Parkin Chairman 5 2015 Annual ReportManaging Director’s Review Financial Review The 2015 financial year saw a continuation of the challenging market conditions being faced by contractors in the resources sector with highly competitive tendering, lower margins and commercially focussed clients and a reduction of work in segments of the market. In order to counter the impact of operating in these conditions the Board implemented a number of restructuring initiatives aimed at ensuring the business will be appropriately organised and efficient to operate in these market conditions. These measures included: • • • • a review of the organisation resulting in redundancies to effect a more streamlined structure; a reduction of the Company’s property leases; the sale of plant and equipment that is surplus to forecast activity requirements; a review of the carrying values of assets resulting in write-downs to plant and equipment, inventory and project claims recognised in work in progress; and • a write-down of the carrying value of goodwill from previous acquisitions. The costs of these initiatives has been recognised in the current financial year resulting in a net loss after tax of $9.8m compared to a net profit after tax of $7.7m in 2014. 6 2015 Annual ReportManaging Directors’ Review continued Excluding these costs, the Company made an underlying trading profit after tax of $4.2m as shown below: Contract revenue Contract expenses Gross profit Other (expense)/income Employee benefits expenses Occupancy expenses Administration expenses Other expenses Depreciation expense Amortisation Restructuring and impairment (Loss)/profit from operations Net finance expense (Loss)/profit before tax Income tax expense (Loss)/profit from continuing operations Statutory $m 238.3 (205.3) 33.0 (1.0) (15.9) (1.8) (4.7) (1.0) (6.8) (0.1) (11.0) (9.3) (0.1) (9.4) (0.4) (9.8) Organisation restructuring $m Asset write-downs and lease provisions $m Claim write-downs $m Impairment of goodwill $m Underlying trading (unaudited) $m 0.3 0.3 1.3 1.4 3.0 (0.6) 2.4 1.1 1.2 2.3 (0.7) 1.6 2.3 2.3 2.3 (0.7) 1.6 240.6 (205.0) 35.6 0.3 (14.8) (1.8) (4.7) (1.0) (6.8) (0.1) - 6.7 (0.1) 6.6 (2.4) 4.2 8.4 8.4 - 8.4 Underlying trading revenue for the year was $240.6m representing a 10% increase from 2014. SCEE entered the year operating at high activity levels as we completed our work on the Rio Tinto Cape Lambert Port B Phase B and BHP Billiton Iron Ore Yarnima Power Station projects. Activity early in the second half of the year was low as a result of the completion of these key projects and a slower than anticipated ramp up of new awards. Towards the end of the period we saw a marked increase in mobilisations across projects, including CITIC Pacific Sino Iron and Roy Hill, which has continued into the 2016 financial year. At 30 June we had an order book of $111m, excluding recurring revenues under framework agreements and forecast growth of work under existing cost reimbursable contracts. A more detailed discussion of SCEE’s 2015 projects is included in the Operations Review which follows. Underlying trading gross margins for the year were 14.8% compared to 20.1% in 2014. This is reflective of the lower margins being achieved by contractors in the current environment. The prior year gross margin benefited from strong performance in the early part of the year when several large lump sum projects, secured prior to the emergence of these tougher market conditions, were successfully closed out. Underlying trading overheads as a percentage of revenue were 9.3% compared to 11.9% in 2014. Management has remained focussed on cost control throughout the period and, following the recent restructuring exercise, we expect that overheads will reduce further in absolute terms in 2016. After reporting a first half profit after tax of $4.1m we recorded only a small underlying trading profit after tax in the second half. Importantly this consisted of a loss of $1.4m in the third quarter and a return to profit of $1.5m in the fourth quarter as activity increased. Our balance sheet remained strong throughout the year and at 30 June 2015 we had a cash balance of $44.6m. In addition, all asset finance debt was paid out prior to the year end leaving the Company debt free. 7 2015 Annual ReportManaging Directors’ Review continued We have made significant progress in settling outstanding project claims. This resulted in a write-down of WIP with an NPAT impact of $1.6m but the imminent receipt of the settlement amounts will further increase the underlying cash balance. In particular, all claims relating to projects that operationally completed in previous calendar years were settled before year end. The Board, as always, will continue to assess recoverability of claims and consequently adjust carrying values when appropriate, but following these write-downs has enhanced confidence regarding the collectability of the carrying values of current WIP and Debtors. Plant, equipment and systems with a book value of $3.3m were deemed to be surplus to requirements for expected activity levels and were written off or made available for sale. A loss on disposal totalling $2.2m before tax was recognised in the current year. We will see a significant decrease in our annual depreciation charge in 2016 as a result of this rationalisation. Capital expenditure is expected to remain low in the near term. The assessment of the carrying value of goodwill from prior acquisitions resulted in a write-down of $8.4m with the value in use of the respective cash generating units being impacted by the current market environment. The Board has declared a final fully franked dividend for the year of 2.7 cents per share which maintains the dividend at the same absolute level as 2013 and 2014. The franking account balance on hand at 30 June 2015 was $12.0m. Operations Review During the year SCEE continued to provide life of project electrical and instrumentation (E&I) services to the resources sector, primarily within Australia. The business is divided into the three divisions of SCEE Infrastructure, SCEE Construction and SCEE Services. An overview of the operations during the year is provided below. SCEE Infrastructure earned revenues of $45.7m in 2015 (2014: $50.9m). Key projects during the year were: BHP Billiton Iron Ore Yarnima Power Station In the year SCEE completed its work at BHP Billiton Iron Ore’s Yarnima Power Station near Newman in Western Australia with the work growing from its original awarded scope of $25m. BHP Billiton Iron Ore Sustaining Capital During the year we performed various projects under the framework agreement in which SCEE is one of a panel of contractors providing electrical and instrumentation services to BHP Billiton Iron Ore’s Australia-wide Sustaining Capital program. Queensland Coal Seam Gas Works On the East Coast we have been performing powerline installation work for the Roma Stage 2a and Fairview Eastern Flank coal seam gas projects. 8 2015 Annual ReportManaging Directors’ Review continued SCEE Construction earned revenues of $123.9m in 2015 (2014: $133.8m). Key projects during the year were: Rio Tinto Cape Lambert Port B Phase B During the year SCEE successfully completed work on Phase B of Rio Tinto’s Cape Lambert Port B expansion. SCEE’s scope included the E&I works on the car dumpers and screenhouse and had a peak manning of 480. The project commenced in 2014 at an award value in excess of $80m. Civmec Nammuldi SCEE was subcontracted to perform the Electrical and Instrumentation component of Civmec’s stockyard and train load out works at Rio Tinto’s Nammuldi Below Water Table project 60km north of Tom Price in Western Australia. The work, with an award value in excess of $10m, was successfully completed during the year. CITIC Pacific Sino Iron During the year CITIC Pacific awarded SCEE over $70m of E&I works at the Sino Iron project in Cape Preston, Western Australia. The scope covers the installation and commissioning of all E&I works across process lines 3 to 6 and follows SCEE’s successful completion of work on lines 1 and 2 and the central processing plant in prior years. Activity has ramped up significantly in recent months and SCEE currently has a workforce of over 400 on site. SCEE Services earned revenues of $68.7m in 2015 (2014: $33.5m). Key projects during the year were: Rio Tinto Electrical Infrastructure Replacement Program SCEE continued to perform work throughout the year at Rio Tinto’s Cape Lambert and East Intercourse Island sites as part of the Electrical Infrastructure Replacement Program. BHP Billiton Iron Ore Sustaining Capital SCEE Services also performed work under the Sustaining Capital framework agreement discussed in the SCEE Infrastructure section above. SCEE’s LNG focussed joint venture, KSJV, continued to work throughout the year for Bechtel at Curtis Island on the Australia Pacific LNG project. The work is ongoing and being performed on a cost reimbursable basis. During the year KSJV was also awarded work by Bechtel on the GLNG Plant project on Curtis Island. SCEE’s 50% share of revenues from KSJV of $37.6m are included in the Construction division revenues noted above. 9 2015 Annual ReportManaging Directors’ Review continued International We continue to perform ongoing maintenance work in Peru and are actively monitoring selected opportunities overseas. Health and Safety Performing our work safely remains our highest priority and I am delighted to report that we completed our 2015 operations without suffering a Lost Time Injury (LTI). This is the eleventh consecutive year LTI free in Australia. NECA WA Awards At the 2015 NECA WA Excellence and Apprentice Awards, SCEE received a Certificate of Commendation in the ‘Industrial – Large Project’ category for our work on the Rio Tinto Cape Lambert Phase B Project and Daniel Cocker won the ‘Industrial’ category 4th year apprentice award, the third consecutive year that he has won his category. On behalf of the Board, I would like to congratulate Daniel on this outstanding achievement and wish him the best of luck representing SCEE and WA in the national NECA awards. 2015 Projects Rio Tinto CLB Port B CITIC Pacific Sino Iron Rio Tinto Electrical Infrastructure Replacement Curragh ROM Upgrade Rio Tinto Services Roy Hill Rockhampton Services Queensland Coal Seam Gas Bechtel Australia Pacific LNG Bechtel GLNG BP services Civmec Nammuldi Rio Tinto West Angelas BHP Billiton Iron Ore Yarnima Power Station BHP Billiton Iron Ore Sustaining Capital Karara Mining Power Line Contract Value >$75m $25m-$75m <$25m Recurring framework agreements 10 2015 Annual ReportManaging Directors’ Review continued Outlook Current Activity and Order Book As we enter 2016 the volume of activity at CITIC Pacific Sino Iron is now significantly increased and we continue to work at Curtis Island for Bechtel on the Australia Pacific LNG project through KSJV. We have also recently commenced work at Roy Hill both for Decmil and directly to Samsung. The group workforce currently totals around 1000 employees and recruitment is continuing. All current projects are progressing well and are profitable. Our order book at 30 June 2015 was $111m which is a similar level to the start of the year. In addition to this we estimate that we will perform approximately $30m of work under existing cost reimbursable contracts which has not been included in the year end order book. The figures above exclude recurring revenues which currently run at approximately $2m per month. Tendering activity remains high across the business but as previously discussed market conditions continue to be challenging in the domestic resources construction sector. Markets Current market conditions are expected to continue for the foreseeable future as clients are faced with depressed commodity prices. The pipeline of large scale construction work has decreased significantly as a result. We expect this to be offset in part by an increase in operations and maintenance and sustaining capital opportunities as capital projects are completed. Iron Ore remains a core commodity for the Company and we expect this to continue to provide the majority of our revenues in 2016. We have existing construction work on the CITIC Pacific Sino Iron and Roy Hill projects and continue to build our relationship with BHP Billiton Iron Ore under our sustaining capital framework agreement. We also have a long standing relationship with Rio Tinto. We continue to target increased operations and maintenance work and have recently been awarded a framework agreement for this work at an Iron Ore project. In the LNG sector we have ongoing work for Bechtel on Curtis Island through KSJV. With multiple Australian LNG plants currently in construction we expect to see the requirement for electrical contractors on these projects hit its peak during 2016. We remain hopeful that KSJV can secure work on one or more of these other projects. During the year we performed some work on Queensland Coal Seam Gas projects. We continue to see opportunity for growth in this sector as once the LNG projects become operational there is a continued requirement for new gas supply to provide throughput to the plants. We expect the coal market to remain depressed in the near term and continue to view metals and minerals as a spot market and will tender opportunities as they arise. Internationally we have resumed limited tendering for work through our Peruvian subsidiary and we are currently evaluating a number of other overseas opportunities. Strategy With the volume of available work in the domestic resources construction sector expected to remain low in the near to medium term, we continue to evaluate the entry into other potential revenue streams, both geographical and in other adjacent or complementary sectors. Increasing revenue from operational maintenance and sustaining capital programs remains a core strategic target. Management continues to monitor and evaluate merger and acquisition opportunities that are consistent with this strategy. We will continue to monitor and manage overheads closely to ensure that the business is appropriately sized for activity levels. 11 2015 Annual ReportManaging Directors’ Review continued Conclusion While it was disappointing to report a loss in the current year we enter 2016 with a strong balance sheet, streamlined structure and healthy order book. The Board has a strategy in place that we hope will see the Company expand beyond its historic core market as a resources focussed E&I construction player. As always we will continue to focus on delivering the exceptional service that our clients associate with SCEE. I would like to thank the management and staff of SCEE for their hard work and dedication during what has been a difficult year and our shareholders for their continued support. Chris Douglass Interim Managing Director 12 2015 Annual ReportWe will continue to focus on delivering the exceptional service that our clients associate with SCEE. 13 2015 Annual ReportDirectors’ Report For the year ended 30 June 2015 Your Directors submit their report for Southern Cross Electrical Engineering Limited (“SCEE” or “the Company”) for the year ended 30 June 2015. Directors The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. 14 Derek Parkin OAM Independent Chairman and Non-Executive Director Derek has been a Non-Executive Director of SCEE since March 2011 and was appointed Chairman in May 2015. Derek is a Fellow of the Institute of Chartered Accountants Australia and New Zealand (CAANZ) and a Fellow of the Australian Institute of Company Directors. He is currently Professor of Accounting at the University of Notre Dame, Australia, having previously been an assurance partner with Arthur Andersen and Ernst & Young. Derek’s accounting experience has spanned some 40 years and four continents, primarily in the public company environment. Derek is a past national Board member of the ICAA and has served on a number of the ICAA’s national and state advisory committees. In 2011, he was a recipient of the ICAA’s prestigious Meritorious Service Award. Derek’s non-executive directorships to date have been in the non-listed sphere, principally in the oil & gas and manufacturing sectors. He has also chaired a number of advisory committees in both the government and not-for-profit sectors. Derek is the Chairman of the Audit and Risk Management Committee and became a member of the Nomination and Remuneration Committee on 6 May 2015. Derek was awarded the Medal of the Order of Australia in the 2015 Australia Day honours list. The award recognised Derek’s service to accountancy through a range of professional, academic, business and advisory roles. Chris Douglass Interim Managing Director and Chief Executive Officer (appointed 30 March 2015) Chris was appointed as Interim Managing Director and Chief Executive Officer in March 2015 when the Board commenced the recruitment of a permanent appointment. Chris is also the Company’s Chief Financial Officer and Joint Company Secretary. Prior to joining SCEE in 2011 Chris was the Chief Financial Officer at Pacific Energy Ltd and has previously held a number of senior finance roles with Clough Ltd. Chris, a Chartered Accountant and member of the Governance Institute of Australia, commenced his finance career with Deloitte. Prior to his time with Deloitte, Chris qualified and practiced as a solicitor in London. 2015 Annual ReportBack row (left to right): Karl Paganin, Simon Buchhorn, Chris Douglass, Colin Harper Front (left to right): Gianfranco Tomasi, Derek Parkin Gianfranco Tomasi AM Non-Executive Director Frank is the founder of the Company. He was the Chairman of SCEE from 1978 until he retired from that role in March 2011. Frank has over 40 years experience in the electrical construction industry. Prior to founding SCEE he worked at Transfield from 1968 – 1978, serving as the National Manager Electrical Department from 1971 – 1978. Frank holds an Electrical Engineering Certificate (NSW) and is a Fellow of the Australian Institute of Company Directors. Frank is a member of the Nomination and Remuneration Committee. Frank was also a member of the Audit and Risk Management Committee from the 6 May 2015 to 30 June 2015. Frank was awarded the Order of Australia in the 2013 Australia Day Honours list. The award recognised Frank’s service to business through leadership roles in the electrical contracting industry and his contribution to the community. Simon Buchhorn Non-Executive Director (appointed 6 May 2015) Simon was appointed to the Board in May 2015. Simon has a comprehensive understanding of SCEE’s operations having been employed by the Company for over 30 years prior to retiring in 2014. During this time he worked in a number of key positions across the business including over 6 years as Chief Operating Officer and a period as interim Chief Executive Officer. He was also the General Manager of SCEE’s LNG focussed Joint Venture KSJV. Simon brings to the Board significant experience in contract delivery and operational performance both domestically and internationally. Karl Paganin Independent Non-Executive Director (appointed 4 June 2015) Karl was appointed to the Board in June 2015. Karl has 15 years of senior executive experience in Investment Banking, specialising in transaction structuring, equity capital markets, mergers and acquisitions and providing strategic management advice to listed public companies. Prior to that, Karl was Director of Major Projects and Senior Legal Counsel for Heytesbury Pty Ltd (the private company of the Holmes a Court family) which was the proprietor of John Holland Group Pty Ltd. Karl is also a board member of Autism West Support Inc. a non for profit charity supporting families affected by autism. Simon is a member of the Audit and Risk Management Committee. Simon was also a member of the Nomination and Remuneration Committee from the 6 May 2015 to 30 June 2015. On 30 June 2015 Karl was appointed as Chairman of the Nomination and Remuneration Committee and as a member of the Audit and Risk Management Committee. 15 2015 Annual ReportDirectors’ Report continued Company Secretaries Colin Harper Colin is a Chartered Accountant with over 15 years experience of resources sector finance. Colin is also a member of the Governance Institute of Australia. Prior to joining SCEE in 2012 Colin was the Chief Financial Officer and Company Secretary of FAR Limited and previously worked for Ernst & Young in both Australia and the UK. Chris Douglass Details provided on page 14. John Cooper Independent Chairman and Non-Executive Director (resigned 5 May 2015) John resigned from the Board in May 2015 having served as a Director since 2007 and as Chairman since 2011. John is a Non-Executive Director of NRW Holdings Limited, Aurizon Holdings Limited and UGL Limited. Simon High Managing Director (resigned 27 March 2015) Simon resigned from the Board in March 2015 having served as Managing Director and Chief Executive Officer since 2010. Peter Forbes Independent Non-Executive Director (resigned 5 May 2015) Peter resigned from the Board in May 2015 having served as a Director since 2011. Peter was also Chairman of the Nomination and Remuneration Committee and a member of the Audit and Risk Management Committee. Peter served as a Non-Executive Director of Dart Energy Limited for part of financial year 2014. John (“Jack”) Hamilton Independent Non-Executive Director (resigned 5 May 2015) Jack resigned from the Board in May 2015 having served as a Director since 2011. Jack was also a member of both the Nomination and Remuneration Committee and the Audit and Risk Management Committee. Jack is a Non-Executive Director of Geodynamics Ltd and DUET Group and the Non-Executive Chairman of Antilles Oil And Gas NL. 16 2015 Annual ReportDirectors’ Report continued Directors’ interests As at the date of this report, the relevant interests of the directors in the shares and rights or options over shares issued by the Company are as follows: Director Derek Parkin Chris Douglass Gianfranco Tomasi Simon Buchhorn Karl Paganin Directors’ meetings Ordinary shares Rights over ordinary shares Options over ordinary shares 70,000 - 65,227,131 765,108 22,668 - 526,515 - - - - - - - - The number of Directors’ meetings and meetings of committees of Directors held and attended by each of the Directors of the Company during the financial year are: Board Meetings Audit and Risk Management Committee Meetings Nomination and Remuneration Committee Meetings Held Attended Held Attended Held Attended 15 5 15 3 1 12 10 12 12 15 5 14 3 1 10 10 11 12 4 - 1 1 - - - 3 3 4 - 1 1 - - - 3 3 2 - 4 1 1 - - 2 2 2 - 4 1 1 - - 2 2 Director Derek Parkin Chris Douglass Gianfranco Tomasi Simon Buchhorn Karl Paganin John Cooper Simon High Peter Forbes Jack Hamilton The number of meetings held represents the time the director held office or was a member of the committee during the year. Principal Activities The principal activities during the year of the entities within the consolidated group were the provision of large scale specialised electrical, control and instrumentation installation and testing services for the resources, infrastructure and heavy industrial sectors. 17 2015 Annual ReportDirectors’ Report continued Significant Changes in the State of Affairs There have been no significant changes in the state of affairs of the Company or consolidated group during this financial year. Operating and Financial Review A review of operations of the consolidated group during the financial year, the results of those operations and the likely developments in the operations are set out in the Managing Director’s Review on page 6. Operating results for the year were: Contract revenue (Loss)/Profit after income tax from continuing operations 2015 $’000 238,329 (9,801) 2014 $’000 218,220 7,723 Dividends Operating results for the year were: Cents per share Declared and paid during the period (fully franked at 30%) Final franked dividend for 2014 Interim franked dividend for 2015 Declared after balance date and not recognised as a liability (fully franked at 30%) Final franked dividend for 2015 2.70c - 2.70c Total amount $’000 4,361 - 4,272 Significant Events after Sheet Balance Date There are no matters or circumstances that have arisen since the end of the financial year which significantly affected 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 financial years. Likely Developments and Expected Results Other than as referred to in this report, further information as to the likely developments in the operations of the consolidated entity would, in the opinion of the directors, be likely to result in unreasonable prejudice to the consolidated entity. Environmental Regulation The operations of the Group are subject to the environmental regulations that apply to our clients. During 2015 the Group complied with the regulations. Share Options and Performance Rights At the date of this report there are no unissued ordinary shares of the Company under options. During the reporting period, no shares were issued from the exercise of options or performance rights previously granted as remuneration. Further details are contained in note 26 to the accounts. 18 2015 Annual ReportDirectors’ Report continued Indemnification and Insurance of Directors and Officers During or since the end of the financial year, the Company has paid premiums in respect of a contract insuring all the directors of the Company against a liability incurred in their role as directors of the Company, except where: a) the liability arises out of conduct involving a wilful breach of duty; or b) there has been a contravention of Sections 182 or 183 of the Corporations Act 2001. The total amount of insurance contract premiums paid was $72,492 (2014: $81,679). Proceedings on Behalf of Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Non-audit Services The Board of Directors is satisfied that the provision of non-audit services during the year was compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that such services will not compromise the external auditor’s independence for the following reasons: • • all non-audit services are reviewed and approved by the Audit and Risk Management Committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and the nature of the services provided do not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. Auditor’s Independence Declaration The lead auditor’s independence declaration is set out on page 75 and forms part of the Directors’ report for the financial year ended 30 June 2015. Remuneration Report The Remuneration Report is set out on pages 20 to 27 and forms part of this report. Rounding off The Company is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with that Class Order, amounts in the consolidated financial statements and directors’ report have been rounded off to the nearest thousand dollars, unless otherwise stated. Signed in accordance with a resolution of the directors. Derek Parkin Chairman 25 August 2015 19 2015 Annual ReportRemuneration Report – Audited This Remuneration Report outlines the Director and executive remuneration arrangements of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent Company. Nomination and Remuneration Committee The Nomination and Remuneration Committee of the Board of Directors is responsible for determining and reviewing remuneration arrangements for the directors and executives. The Nomination and Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality, high performing director and executive team. Remuneration Structure In accordance with best practice corporate governance, the structure of executive and non-executive remuneration is separate and distinct. Executive Remuneration Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group so as to: • • • • attract, motivate and retain highly skilled executives; reward executives for Group, business and individual performance against targets set by reference to appropriate benchmarks; align the interests of executives with those of shareholders; and ensure remuneration is competitive by market standards. Structure The Company has entered into contracts of employment with the Managing Director and the executives. These contracts contain the following key elements: • • • Fixed remuneration; Variable remuneration - Short term incentive (“STI”); and Variable remuneration - Long term incentive (“LTI”). The nature, amount and proportion of remuneration that is performance related for each executive is set out in Table 1 on page 23. Fixed Remuneration Executives are given the opportunity to receive their fixed remuneration in a variety of forms including cash and fringe benefits such as motor vehicles. It is intended that the manner of payment chosen will be optimal for the recipient without undue cost for the Group. Fixed remuneration is reviewed annually by the Nomination and Remuneration Committee. There are no guaranteed base pay increases for any executive. For the 2016 financial year the Board has accepted management’s recommendation that pay levels are held at existing levels other than in exceptional circumstances. 20 2015 Annual ReportRemuneration Report – Audited continued Variable Remuneration – Short Term Incentive (STI) The objective of the STI program is to link the achievement of the Group’s operational targets with the remuneration received by the executives charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and such that the cost to the Group is reasonable in the circumstances. Actual STI payments granted to each executive depend on the extent to which specific targets as set at the beginning of the financial year are met. The targets consist of a number of Key Performance Indicators (“KPIs”) covering both financial and non-financial measures of performance. For the year ended 30 June 2015, the financial KPIs accounted for 70% of the executive team’s STI and set specific profit and order book targets. The non-financial KPIs comprised the achievement of strategic objectives. The strategic objectives set for each executive were chosen to align with the key drivers for the short term success of the business and provide a framework for delivering long term value. The assessment of performance against KPIs is based on the audited financial results for the company. For each component of the STI against a KPI no award is made where performance falls below the minimum threshold for that KPI. The Nomination and Remuneration Committee recommends the STI to be paid to the individuals for approval by the Board. Variable Remuneration – Long Term Incentive (LTI) The objective of the LTI plan is to retain and reward the members of the executive management team in a manner which aligns this element of remuneration with the creation of shareholder wealth. LTI grants to executives are delivered at the discretion of the Nomination and Remuneration Committee in the form of performance rights or share options under the Senior Management Long Term Incentive Plan. The Key Performance Indicators (“KPIs”) used to measure performance for these incentives are earnings per share growth and absolute total shareholder return. These KPIs are measured over a three year performance period and were chosen because they are aligned to shareholder wealth creation. Non-Executive Director Remuneration Objective The Board seeks to set aggregate remuneration at a level that provides the Group with the ability to attract and retain Non-Executive Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. 21 2015 Annual ReportRemuneration Report – Audited continued Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a general meeting. The aggregate remuneration as approved by shareholders at the annual general meeting held on 26 November 2008 is $600,000 per year. The Non-Executive Director fee structure is reviewed annually. The Board considers external market surveys as well as the fees paid to Non-Executive Directors of comparable companies in our sector when undertaking the annual review process. Effective May 2015, the Board agreed to reduce the annual fee paid to the Chairman of the Board from $130,000 to $110,000. The base fee paid to other Non-Executive Directors was maintained at $80,000 per annum but it was agreed to indefinitely suspend the payment of additional fees to Directors who sit on Board Committees. Prior to May 2015 an additional fee of $7,500 per annum was paid for each Board Committee on which a Non-Executive Director sat or $10,000 per annum if the Director was a Chair of that Board Committee in recognition of the additional time commitment required by the Non-Executive Directors who serve on one or more Sub-Committees. Directors also receive superannuation at the statutory rate in addition to their Director and Committee fees. The Non-Executive Directors do not receive retirement benefits, nor do they participate in any incentive programs. The remuneration paid to Non-Executive Directors is detailed in Table 1 of this report. Consequences of performance on shareholder wealth In considering the impact of the Group’s performance on shareholder wealth and the related rewards earned by executives, the Nomination and Remuneration Committee had regard to the following measures over the years below: Profit/(loss) attributable to owners of the company Dividends declared and paid during the year Change in share price Return on capital employed 2015 $’000 (9,801) 4,361 (38%) (10%) 2014 $’000 7,723 4,361 (42%) 10% 2013 $’000 17,341 3,633 (31%) 24% 2012 $’000 13,708 - 43% 21% 2011 $’000 (1,652) 5,588 (20%) (2%) 22 2015 Annual ReportRemuneration Report – Audited continued d e s a b - e r a h S s t n e m y a p d n a s n o i t p O ) B ( s t h g i r $ t n e m y o l p m e - t s o P m r e t - t r o h S s t fi e n e b $ s t fi e n e b $ n o i t a n m r e T i n o i t a u n n a r e p u S l a t o T $ - n o N y r a t e n o m s t fi e n e b $ h s a c I T S ) A ( s u n o b $ & y r a l a S s e e f $ e t o N : e r a l e n n o s r e p t n e m e g a n a m y e k e r a o h w s e v i t u c e x e y n a p m o C d e m a n e h t f o h c a e d n a y n a p m o C e h t f o r o t c e r i d h c a e f o n o i t a r e n u m e r f o t n e m e e r o a m h c a e f o t n u o m a d n a e r u t a n e h t f o s l i l j a t e D l e n n o s r e P t n e m e g a n a M y e K f o n o i t a r e n u m e R 1 e b a T l f o t c e p s e r n i n o i t a r e n u m e r s e d u l c n i o s l a 5 1 0 2 r o f n o i t a r e n u m e r d e s o l c s i D . 5 1 0 2 h c r a M 0 3 n o r o t c e r i D g n g a n a M d n a O E C m i i r e t n i i d e t n o p p A . r a e y l l u f e h t r o f y n a p m o C e h t f o e v i t u c e x e n a s a w s s a g u o D r l M 4 1 0 2 n I . r e c ffi O l i a i c n a n F f e h C s a e o r l i l ’ s s a g u o D r M . 4 1 0 2 t s u g u A 2 1 d e t n o p p A i . 5 1 0 2 h c r a M 7 2 d e n g i s e R l a t o T $ 3 3 3 , 1 0 1 5 2 3 , 8 9 7 0 0 , 5 9 4 9 5 , 5 9 8 1 1 , 1 1 - - 0 7 5 , 6 8 8 2 , 4 2 1 5 2 0 , 2 4 1 5 1 2 , 3 9 9 1 5 , 6 0 1 0 1 9 9 8 , 3 1 7 , 4 1 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 9 6 5 , 0 3 4 4 6 3 7, 3 1 5 3 , 5 3 9 7 1 4 - - 2 4 9 0 1 4 , 4 6 7 7, 0 4 - - 9 3 7 , 8 6 5 0 9 2 , - - - - - , 2 7 8 8 4 2 , 1 , ) 0 6 4 0 0 2 ( , 1 0 4 9 2 7 9 6 4 , 3 0 9 , 1 6 5 1 , 9 - , 6 4 6 8 0 6 , 2 ) 0 4 0 4 3 1 ( , , 1 0 4 9 2 7 1 9 7 , 8 5 2 3 , 8 3 4 2 , 8 4 9 0 8 , - - - 0 7 5 3 8 7 , 0 1 5 2 0 , 2 1 7 8 0 8 , 9 1 0 9 , 0 0 8 7, 3 1 7 , 9 - 1 5 5 , 4 2 0 0 0 , 5 3 0 0 0 , 5 3 - - 0 0 0 , 5 2 7 8 9 0 3 , 2 1 8 4 3 1 , 6 7 1 7, 0 1 2 4 5 , 2 9 0 0 0 0 9 , 4 6 7 , 6 8 0 0 5 7, 8 8 1 1 , 1 1 - 0 0 0 6 , - 5 0 5 , 3 1 1 0 0 0 0 3 1 , 8 2 1 , 5 8 0 0 5 7, 9 0 1 1 , 2 8 0 0 0 , 5 0 1 4 5 6 8 6 3 , - , 1 3 9 4 8 6 , 4 3 9 9 9 8 - - 3 0 2 7, 7 3 1 2 7 7, 4 3 , 3 7 4 8 7 8 , 1 7 3 1 7, 8 7 , 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 3 7 1 , 0 2 1 - 6 8 6 8 7 , 9 5 8 8 9 1 , 2 4 5 , 2 9 0 0 0 0 9 , 4 6 7 , 6 8 0 0 5 7, 8 8 1 1 , 1 1 - 0 0 0 6 , - 5 0 5 , 3 1 1 0 0 0 0 3 1 , 8 2 1 , 5 8 0 0 5 7, 9 0 1 1 , 2 8 0 0 0 , 5 0 1 4 5 6 8 6 3 , - , 1 3 9 4 8 6 1 6 7 , 9 7 7 - - 7 1 5 , 8 9 2 1 2 7 7, 4 3 , 3 7 4 8 7 8 , 1 8 7 2 , 8 8 5 , 1 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 5 1 0 2 4 1 0 2 1 2 3 4 4 4 5 6 5 7 . 5 . 6 7. s r o t c e r i d e v i t u c e x E - n o N n a m r i a h C , n i k r a P k e r e D i s a m o T o c n a r f n a G i n r o h h c u B n o m S i i n n a g a P l r a K r e p o o C n h o J s e b r o F r e t e P n o t l i m a H k c a J s r o t c e r i d e v i t u c e x E l s s a g u o D s i r h C i h g H n o m S i r e c ffi O l i a i c n a n F f e i h C – s s a g u o D s i r h C l s e v i t u c e x E r e c ffi O g n i t a r e p O f e i h C – s n i l o z O y d n A 5 1 0 2 l a t o T 4 1 0 2 l a t o T . 5 1 0 2 y a M 6 n a m r i a h C d e t n o p p A i . 5 1 0 2 y a M 6 d e t n o p p A i . 5 1 0 2 e n u J 4 d e t n o p p A i . 5 1 0 2 y a M 5 d e n g i s e R . 1 . 2 . 3 . 4 23 2015 Annual Report Remuneration Report – Audited continued Notes in relation to the table of directors’ and executive officers’ remuneration A. The STI bonus is for the amount that vested in the financial year based on achievement of personal goals and satisfaction of specified performance criteria which was set out for the previous financial year. The amount is finally determined after performance reviews are completed and approved by the Nomination and Remuneration Committee. B. The fair value of the options and performance rights with market related vesting conditions were valued using a Monte Carlo simulation model. The use of a Monte Carlo Simulation model simulates multiple future price projections for both SCEE shares and the shares of the peer group against which they are tested. The options and performance rights with non-market related vesting conditions were valued using the Black-Scholes option model. The values derived from these models are allocated to each reporting period evenly over the period from grant date to vesting date. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. The value disclosed is the fair value of the options and performance rights recognised in this reporting period. Employment Contracts All executives have non-fixed term employment contracts. The company may terminate the employment contract by providing the other party notice as follows: Executive Chris Douglass Andy Ozolins Notice Period 6 months 6 months The Group retains the right to terminate a contract immediately by making a payment in lieu of the notice period. An executive may be terminated immediately for a breach of their employment conditions. Upon termination the executive is entitled to receive their accrued annual leave and long service leave together with any superannuation benefits. There are no other termination payment entitlements. Options and rights over equity instruments The movement during the reporting period in the number of options and rights over ordinary shares in Southern Cross Electrical Engineering Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows: Performance Rights over equity instruments Executive Held at 1 July 2014 Granted as remuneration Exercised Forfeited Held at 30 June 2015 Vested during the year Vested and exercisable at 30 June 2015 Chris Douglass Andy Ozolins Simon High 470,270 - 1,230,829 1,701,099 341,837 260,204 842,026 1,444,067 - - - - (164,868) - (2,072,855) 647,239 260,204 - (2,237,723) 907,443 - - - - - - - - Subsequent to 30 June 2015 it was determined that the vesting conditions in respect of the 2013 performance rights held by Mr Douglass have not been met and 120,724 performance rights have been forfeited. 24 2015 Annual Report Remuneration Report – Audited continued Performance rights granted as remuneration in 2015 During the period performance rights over ordinary shares in the company were granted as remuneration to KMP. These performance rights will vest subject to the meeting of performance set out below. Details on performance rights that were granted during the period are as follows: Executive Number Grant date Fair value per performance right at grant date ($) Exercise price per performance right ($) Vesting Date Expiry Date Chris Douglass1 Chris Douglass2 Andy Ozolins1 Andy Ozolins2 Simon High1, 3 Simon High2, 3 170,919 170,918 130,102 130,102 421,013 421,013 1,444,067 4/11/14 4/11/14 4/11/14 4/11/14 4/11/14 4/11/14 0.42 0.25 0.42 0.25 0.42 0.25 0.00 0.00 0.00 0.00 0.00 0.00 30 June 2017 30 June 2018 30 June 2017 30 June 2018 30 June 2017 30 June 2018 30 June 2017 30 June 2018 30 June 2017 30 June 2018 30 June 2017 30 June 2018 1. 2. 3. Performance rights granted with EPS growth as the vesting condition Performance rights granted with Absolute TSR as the vesting condition All performance rights granted to Simon High were forfeited during the year on cessation of employment Up to 100% of the allocated performance rights may vest, subject to the achievement of the performance conditions as set out below. The key terms of the performance rights are: • • • To be performance tested over a three year period from 1 July 2014 to 30 June 2017 (“Performance Period”); No performance rights will vest until 30 June 2017; Performance testing criteria are 50% against Absolute Total Shareholder Return (“TSR”) performance, and 50% against Earnings Per Share (“EPS”) performance; and • Expiry on the 4th anniversary of the grant date unless an earlier lapsing date applies The TSR formula is: ((Share Price at Test Date – Share Price at Start Date) + (Dividends Reinvested))/Share Price at Start Date TSR will be assessed against targets for threshold performance of 8% per annum compounded over the Performance Period and for stretch performance of 15% per annum compounded over the Performance Period. The vesting schedule is as follows for TSR performance over the Performance Period: Less than 8% per annum compounded 8% per annum compounded 0% vesting 50% vesting Between 8% and 15% per annum compounded Pro-rata vesting between 50% and 100% At or above 15% per annum compounded 100% vesting 25 2015 Annual Report Remuneration Report – Audited continued EPS will be assessed against targets for threshold performance of 5.7 cents per share in the 2017 financial year and for stretch performance of 7.3 cents per share in the 2017 financial year. The vesting schedule is as follows for EPS performance in the 2017 financial year: Less than 5.7 cents per share 5.7 cents per share 0% vesting 50% vesting Between 5.7 and 7.3 cents per share Pro-rata vesting between 50% and 100% At or above 7.3 cents per share 100% vesting Once the performance measurement calculation has been finalised the company will allot and issue the equivalent number of shares at nil consideration on the basis of one ordinary share per vested performance right for all performance rights exercised. Where a participant ceases employment prior to the vesting of their share options or performance rights, the share options or performance rights are forfeited unless in the event of retirement, permanent disablement or death the Board, at their at their absolute discretion, waive the exercise and vesting conditions associated with the performance rights or allow the performance rights to continue to be assessed over the original performance assessment period. In the event of a change of control of the Company, all options and performance rights that have not lapsed may be exercised. Details of equity incentives affecting current and future remuneration Executive Instrument Number Grant date % vested in year % forfeited in year Vesting Date Expiry Date (A) Chris Douglass 2012 Rights 164,868 2 May 2012 2013 Rights 120,724 25 September 2012 2014 Rights 184,678 8 October 2013 2015 Rights 341,837 4 November 2014 Andy Ozolins 2015 Rights 260,204 4 November 2014 Simon High 2012 Rights 419,664 29 October 2012 2013 Rights 323,396 29 October 2012 2014 Rights 487,769 28 October 2013 2015 Rights 842,026 4 November 2014 - - - - - - - - - 100% 30 June 2014 30 June 2015 - - - - 30 June 2015 30 June 2016 30 June 2016 30 June 2017 30 June 2017 30 June 2018 30 June 2017 30 June 2018 100% 100% 100% 100% 30 June 2014 30 June 2015 30 June 2015 30 June 2016 30 June 2016 30 June 2017 30 June 2017 30 June 2018 A. Performance rights are performance tested following completion of the performance period, which ends on the vesting date. Subsequent to 30 June 2015 it has been determined that the vesting conditions in respect of the 2013 performance rights have not been met and all 2013 performance rights have been forfeited. Simon High forfeited all remaining performance rights on cessation of employment. 26 2015 Annual Report Remuneration Report – Audited continued Movements in shares The movement during the reporting period in the number of ordinary shares in Southern Cross Electrical Engineering Limited held, directly, indirectly or beneficially, by each key management person, including their related parties, is as follows Ordinary shares Directors Derek Parkin Chris Douglass Gianfranco Tomasi Simon Buchhorn Karl Paganin John Cooper Simon High Peter Forbes Jack Hamilton Executives Andy Ozolins Held at 30 June 2014 Purchases Net change other (A) Held at 30 June 2015 70,000 - 65,227,131 - - 116,667 500,000 200,000 114,670 - - - - - - - - 90,000 - - - 765,108 22,668 (116,667) (500,000) (200,000) (204,670) - - - 70,000 - 65,227,131 765,108 22,668 - - - - - A. Net change other represents shares held at the date of appointment or resignation. Refer to Table 1 above for the relevant dates for each director and executive. Transactions with key management personnel The Group has entered into rental agreements over the following properties: • • • F & A Tomasi Superannuation Fund owns the properties at 41 and 44 Macedonia St, Naval Base WA, which are leased to Southern Cross Electrical Engineering Limited. G & A Tomasi own the properties at 45, 47, 49 & 51 Macedonia Street, Naval Base WA which are leased to Southern Cross Electrical Engineering Limited. Frank Tomasi Nominees Pty Ltd owns the property at 43 Hope Valley Road, Naval Base WA, which was leased to Southern Cross Electrical Engineering Limited. Gianfranco Tomasi and spouse are sole directors of Frank Tomasi Nominees Pty Ltd and are the sole shareholders. Frank Tomasi Nominees Pty Ltd as trustee for the Frank Tomasi Family Trust is a major shareholder of Southern Cross Electrical Engineering Ltd. Under the terms of each of the above property leases, the rent payable is subject to an annual review. This review adjusts the annual rent by the movement in the consumer price index. At the completion of every third year the annual rent is subject to a market review. The rental payments made above are all at normal market rates and were reviewed by an independent valuer in July 2014 except for 41 Macedonia Street which is due to be reviewed in October 2016. Total rent paid by SCEE in the 2015 financial year in respect of the above agreements was $834,000. 27 2015 Annual ReportConsolidated Statement of Comprehensive Income For the year ending 30 June 2015 Contract revenue Contract expenses Gross profit Other (expense)/income Employee benefits expenses Occupancy expenses Administration expenses Other expenses Depreciation expense Amortisation of customer contract intangibles Restructuring and impairment expenses (Loss)/profit from operations Finance income Finance expenses Net finance expense (Loss)/profit before tax Note 4 5 6 9 9 7 8 8 8 2015 $’000 2014 $’000 238,329 218,220 (205,319) (174,378) 33,010 (1,025) (15,886) (1,817) (4,651) (982) (6,817) (75) (10,984) 43,842 103 (18,161) (1,988) (4,794) (1,097) (7,124) (151) - (9,227) 10,630 846 (988) (142) 993 (1,143) (150) (9,369) 10,480 Income tax expense (Loss)/profit from continuing operations 10 (432) (9,801) (2,757) 7,723 Other comprehensive income Items that are or may be reclassified to the profit and loss: Foreign currency translation gain for foreign operations Other comprehensive income net of income tax Total comprehensive (loss)/income (Loss)/profit attributable to: Owners of the Company Earnings per share: Basic (loss)/earnings per share (cents) Diluted (loss)/earnings per share (cents) 297 297 68 68 (9,504) 7,791 (9,504) 7,791 11 11 (6.12) (6.12) 4.78 4.78 The above statement of comprehensive income should be read in conjunction with the accompanying notes. 28 2015 Annual ReportConsolidated Balance Sheet For the year ending 30 June 2015 As at 30 June 2015 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Construction work in progress Prepayments Assets held for sale Total current assets Non-current assets Property, plant and equipment Intangible assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Unearned revenue Loans and borrowings Provisions Tax payable Total current liabilities Non-current liabilities Loans and borrowings Provisions Deferred tax liability Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Retained earnings Total equity Note 2015 $’000 2014 $’000 12 13 14 15 16 17 18 19 20 21 20 21 10 22 44,550 34,064 2,947 8,556 987 909 37,869 28,461 2,649 28,909 686 - 92,013 98,574 22,863 8,784 31,647 30,741 17,249 47,990 123,660 146,564 21,961 3,163 - 6,005 3,257 23,968 1,134 1,875 5,459 2,117 34,386 34,553 - 353 223 576 820 326 6,612 7,758 34,962 88,698 42,311 104,253 56,036 702 31,960 88,698 57,578 553 46,122 104,253 The above balance sheet should be read in conjunction with the accompanying notes. 29 2015 Annual ReportConsolidated Statement of Changes in Equity For the year ending 30 June 2015 Balance as at 1 July 2013 Total comprehensive income for the period Profit for the period Foreign currency translation gain Total comprehensive income Transactions with owners, recorded directly in equity Dividends to equity holders Cost of share-based payment Total transactions with owners Balance as at 30 June 2014 Balance as at 1 July 2014 Total comprehensive income for the period Profit for the period Foreign currency translation gain Total comprehensive income Transactions with owners, recorded directly in equity Dividends to equity holders Buyback of share Cost of share-based payment Total transactions with owners Balance as at 30 June 2015 Share Capital Retained Earnings Share Based Payments Reserve Translation Reserve Total Equity $’000 57,578 $’000 42,760 $’000 1,822 $’000 (843) $’000 101,317 - - - - - - 57,578 7,723 - 7,723 (4,361) - (4,361) 46,122 - - - - (494) (494) 1,328 - 68 68 - - - 7,723 68 7,791 (4,361) (494) (4,855) (775) 104,253 Share Capital Retained Earnings Share Based Payments Reserve Translation Reserve Total Equity $’000 57,578 $’000 46,122 $’000 1,328 $’000 (775) $’000 104,253 - - - - (1,542) - (9,801) - (9,801) (4,361) - - (1,542) (4,361) 56,036 31,960 - - - - - (148) (148) 1,180 - 297 297 - - - - (9,801) 297 (9,504) (4,361) (1,542) (148) (6,051) (478) 88,698 The above statement of changes in equity should be read in conjunction with the accompanying notes. 30 2015 Annual ReportConsolidated Statement of Cash Flows For the year ending 30 June 2015 As at 30 June 2015 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Interest received Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Proceeds from the sale of assets Acquisition of property, plant and equipment Net cash (used in) investing activities Cash flows from financing activities Repayment of borrowings Dividends paid Share buy back Net cash (used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Effect of exchange rate fluctuations on cash held Note 2015 $’000 2014 $’000 254,855 220,628 (232,039) (212,221) 846 (988) (5,681) 16,993 273 (2,284) (2,011) (2,695) (4,361) (1,542) (8,598) 6,384 37,869 297 993 (1,143) (895) 7,362 113 (4,329) (4,216) (1,878) (4,361) - (6,239) (3,093) 40,865 97 Cash and cash equivalents at 30 June 44,550 37,869 The above cash flow statement should be read in conjunction with the accompanying notes. 31 2015 Annual ReportIndex to Notes to the Financial Statements 1. Reporting entity 2. Basis of preparation 3. Segment reporting 4. Contract revenue 5. Other (expense)/income 6. Employee benefits expenses 7. Restructuring and impairment expenses 8. Finance income and expenses 9. Depreciation and amortisation expenses 10. Income tax expense 11. Earnings per share 12. Cash and cash equivalents 13. Trade and other receivables 14. Inventories 15. Construction work in progress 16. Property, plant and equipment 17. Intangible assets – goodwill and customer contracts 18. Trade and other payables 19. Unearned revenue 33 33 35 35 36 36 36 37 37 38 40 40 40 41 41 42 43 44 44 20. Loans and borrowings 21. Provisions 22. Capital and reserves 23. Financial instruments 24. Investments in subsidiaries 25. Interest in joint operations 26. Share-based payments 27. Reconciliation of cash flows from operating activities 28. Commitments 29. Contingencies 30. Subsequent events 31. Auditor’s remuneration 32. Parent entity disclosures 33. Related parties 34. Significant accounting policies 35. Determination of fair values 45 45 45 47 51 52 52 57 57 58 58 58 59 59 61 71 32 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 1. Reporting Entity Southern Cross Electrical Engineering Limited (“the Company”, “the parent”) is a company incorporated and domiciled in Australia. The company’s shares are publicly traded on the Australian Stock Exchange. The consolidated financial statements for the year ended 30 June 2015 comprise the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”). The Group is a for-profit entity and the nature of the operations and principal activities of the Group are described in the Directors’ Report. 2. Basis of Preparation (a) Statement of compliance The consolidated financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (“AASBs”) (including Australian Accounting Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial report of the Group complies with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). A listing of new standards and interpretations not yet adopted is included in note 34(u). The consolidated financial statements were authorised for issue by the Board of Directors on 25 August 2015. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except as set out below: • Share-based payment arrangements are measured at fair value. The methods used to measure fair values are discussed further in note 35. (c) Functional and presentation currency i. Functional and presentation currency Both the functional and presentation currency of Southern Cross Electrical Engineering Limited and its Australian subsidiaries are Australian dollars ($). The functional currency for the Peruvian subsidiary is Neuvos Soles. Overseas functional currencies are translated to the presentation currency (see below). ii. Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. iii. Translation of Group Entities functional currency to presentation currency The results of the overseas subsidiaries are translated into Australian Dollars as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at balance sheet date. Exchange variations resulting from the translation are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity. 33 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 2. Basis of Preparation (continued) (d) Use of estimates and judgements The preparation of financial statements in conformity with AASBs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about accounting estimates is included in the following notes: • • Note 26 – measurement of share based payments; and Note 17 – recoverable amount for testing goodwill. Critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements relate to contract revenue (note 34(n)(i) and 4) and contract work in progress (note 34(h)(i) and 15). Revenue from construction contracts is recognised using the percentage of completion method. Judgement is exercised in determining the stage of completion of the contract and in reliably estimating the total contract revenue and contract costs to completion. The stage of contract completion is generally measured by reference to physical completion. An assessment of total labour hours and other costs incurred to date as a percentage of estimated total costs for each contract is used if it is an appropriate proxy for physical completion. Task lists and milestones are also used to calculate or confirm the percentage of completion if appropriate. The key judgement in determining revenue from construction contracts is estimating the unapproved variations and claims to be included in project forecast revenue. The Company uses its best estimate and its expertise to determine the value included supported by qualified external experts where necessary. The outcome of the events which are the subject of these judgements are by nature uncertain such that final positions resolved with clients can differ materially from original estimates. Details of the Groups accounting policies are included in notes 34 and 35. 34 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 3. Segment reporting Revenue is principally derived by the Group from the provision of electrical and instrumentation services to the resources, energy and infrastructure sectors. The Group has branded itself into the following three operating divisions: SCEE Construction, SCEE Infrastructure and SCEE Services. For the year ended 30 June 2015, the Construction division contributed revenue of $123.9 million (2014: $133.8 million), the Infrastructure division contributed revenue of $45.7 million (2014: $50.9 million) and the Services division contributed revenue of $68.7 million (2014: $33.5 million). Excluded from these amounts is $5.8 million (2014: $6.3 million) of inter-entity revenue, which is eliminated on consolidation. The divisions are exposed to similar operational risks and rewards and are only divisions for the purposes of addressing target market opportunities and facilitating appropriate project management structures. The directors believe that the aggregation of the operating divisions for segment reporting purposes is appropriate as they: • • • • • have similar economic characteristics; perform similar services using similar business processes; provide their services to a similar client base; have a centralised pool of shared assets and services; and operate in similar regulatory environments. All divisions have therefore been aggregated to form one operating segment. In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment assets are based on the geographical location of the assets. Australia South America and Caribbean 2015 2014 Revenue Non-current assets Revenue Non-current assets $’000 237,964 365 238,329 $’000 31,299 348 31,647 $’000 217,762 458 218,220 $’000 47,675 315 47,990 Revenues from the three largest customers of the Group’s Australian segment generated respectively $90 million, $48 million and $38 million of the Group’s total revenue (2014: $168 million generated from the two largest customers). 4. Contract Revenue Contract revenue Note 2015 $’000 2014 $’000 238,329 218,220 The contract revenue has been determined based on the percentage of completion using the costs incurred to date and the total forecast contract costs. The amount of revenue recognised is based on the construction contract, variation notices and claims under negotiation between the Group and its customers. 35 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 5. Other (expenses)/income Net (loss)/gain on sale/write-off of non-current assets Foreign exchange gain/(loss) Other Note 2015 $’000 (1,219) 16 178 (1,025) 2014 $’000 29 (167) 241 103 The contract revenue has been determined based on the percentage of completion using the costs incurred to date and the total forecast contract costs. The amount of revenue recognised is based on the construction contract, variation notices and claims under negotiation between the Group and its customers. 6. Employee benefits expenses Remuneration, bonuses and on-costs Amounts provided for employee entitlements Share-based payments expense Note 2015 $’000 2014 $’000 (15,637) (18,375) (397) 148 (15,886) (280) 494 (18,161) The above employee benefits expenses do not include employee benefits expenses recorded within contract expenses. Employee benefits included in contract expenses were $143.0m (2014: $111.7m). 7. Restructuring and impairment expenses Impairment of goodwill and intangible assets (a) Onerous Lease Provision (b) Asset write-downs (c) Other restructuring expenses (d) Note 17 2015 $’000 (8,390) (498) (944) (1,152) (10,984) 2014 $’000 - - - - - a. Goodwill has been impaired to its recoverable amount. Refer to note 17. b. Onerous lease provision has been recognised at 30 June 2015 against property leases that are not expected to be fully utilised following the restructure. c. Certain assets have been identified as surplus to business requirements. These have been written down to their expected recoverable value. d. This represents redundancy costs incurred as part of the restructure 36 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 8. Finance income and expenses Interest income on bank deposits Finance income Interest expense on bank borrowings Finance charges payable under finance lease Bank charges Bank guarantee fees Finance expense Net finance expense 9. Depreciation and amortisation expenses Buildings Leasehold improvements Plant and equipment Motor vehicles Office furniture and equipment Note Note 2015 $’000 846 846 (29) (142) (548) (269) (988) (142) 2015 $’000 (14) (247) (2,557) (1,523) (2,476) (6,817) 2014 $’000 993 993 (75) (265) (559) (244) (1,143) (150) 2014 $’000 (17) (233) (2,775) (1,913) (2,186) (7,124) Amortisation of customer contract intangibles (75) (151) 37 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 10. Income tax expense (a) Income Statement Current tax expense Current period Under provision from prior year Deferred tax expense Origination and reversal of temporary differences Income tax expense reported in the income statement (b) Reconciliation between tax expense and pre-tax accounting profit Accounting profit/(loss) before income tax Income tax (expense)/credit using the Company’s domestic tax rate of 30% (2014: 30%) Goodwill impairment Tax effect of permanent differences Tax losses of foreign operations not recognised Research and development Share based payments Amortisation of Intangibles Other Income tax expense reported in the income statement The applicable effective tax rates are: Note 2015 $’000 2014 $’000 (6,774) (47) (6,821) 6,389 (432) (9,369) 2,811 (2,517) - (165) (526) 45 (23) (57) (432) (4.6%) (5,643) - (5,643) 2,886 (2,757) 10,480 (3,144) - (156) (23) 612 - - (46) (2,757) 26.3% 38 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 10. Income tax expense (continued) Deferred tax assets and liabilities Balance Sheet 2015 $’000 2014 $’000 Movement recognised in Income Statement 2015 $’000 2014 $’000 Movement recognised in Equity 2015 $’000 2014 $’000 Deferred tax liabilities Retentions Work in progress Property, plant and equipment Deferred tax assets Provision for onerous lease Provision assets held for sale value Accruals Employee benefits Property, plant and equipment Other Employee share trust LTI equity settlement Borrowing costs Net deferred tax liability - (2,640) (23) (2,663) 149 134 59 1,934 19 144 - 1 2,440 (223) (36) (12,512) (23) (12,571) - - 46 2,023 19 153 - 6 2,247 (6,612) (164) (6,033) - 128 (3,840) - (6,197) (3,712) (149) (134) (12) 89 9 - - 5 (192) - - (5) 409 12 29 382 (1) 826 (6,389) (2,886) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 39 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 11. Earnings per share Basic earnings per share The calculation of basic earnings per share at 30 June 2015 was based on the loss attributable to ordinary shareholders of $9,801,000 (2014: Profit; $7,723,000) and a weighted average number of ordinary shares outstanding of 160,080,407 (2014: 161,523,130), calculated as follows: Profit/(loss) attributable to ordinary shareholders Profit/(loss) for the period Weighted average number of ordinary shares Note 2015 $’000 (9,801) 2014 $’000 7,723 Issued ordinary shares at 1 July Effective new balance resulting from buy back of shares in the year Weighted average number of ordinary shares at 30 June Diluted earnings per share Note 22 2015 2014 161,523,130 161,523,130 (1,442,723) - 160,080,407 161,523,130 Basic earnings per share and diluted earnings per share are the same at 30 June 2015 and 30 June 2014 as there are no dilutive potential shares at those dates 12. Cash and cash equivalents Bank balances Short term deposits Cash and cash equivalents in the statement of cash flows Note 2015 $’000 2,873 41,677 44,550 2014 $’000 10,080 27,789 37,869 The effective interest rate on cash and cash equivalents was 2.5% (2014: 3.1%); these deposits are either at call or on short term deposit. 13. Trade and other receivables Current Trade receivables Cash and cash equivalents in the statement of cash flows Note 2015 $’000 34,064 34,064 2014 $’000 28,461 28,461 Trade receivables are non-interest bearing and are generally on 30 day terms. A provision for impairment loss has not been recognised due to the collection record of the counterparties with whom the Group transacts. 40 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 14. Inventories Trade receivables Cash and cash equivalents in the statement of cash flows 15. Construction work in progress Costs incurred to date Recognised profit Progress billings Construction work in progress Note Note 2015 $’000 2,947 2,947 2015 $’000 114,840 19,649 (125,933) 8,556 2014 $’000 2,649 2,649 2014 $’000 133,935 37,961 (125,933) 28,909 Work in progress represents the gross unbilled amount expected to be collected from customers for contract work performed to date. Cost includes all expenditure related directly to specific projects. Recognised profit is based on the percentage completion method and is determined using the costs incurred to date and the total forecast contract costs. 41 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 16. Property, plant and equipment Land and Buildings Leasehold Improvements Plant and equipment Motor Vehicles Office Furniture and Equipment Total $’000 $’000 $’000 $’000 $’000 $’000 916 - - - 916 916 - - (671) - 245 (85) (17) - - 2,940 412 (11) - 22,710 15,418 586 (114) (29) - (594) - 8,069 3,331 (5) 1 50,053 4,329 (724) (28) 3,341 23,153 14,824 11,396 53,630 3,341 17 (898) - - 23,153 14,824 993 (292) (1,516) 72 26 (1,130) (479) - 11,396 1,248 (2,395) - 4 53,630 2,284 (4,715) (2,666) 76 2,460 22,410 13,241 10,253 48,609 (826) (233) 11 - (8,003) (2,775) 133 (1) (5,317) (1,913) 493 - (2,173) (2,186) 3 - (16,404) (7,124) 640 (1) (102) (1,048) (10,646) (6,737) (4,356) (22,889) (102) (14) - 115 - (1) 831 814 814 244 (1,048) (247) 403 - - (10,646) (2,557) 257 801 (74) (6,737) (1,523) 1,004 393 - (4,356) (2,476) 1,061 - - (22,889) (6,817) 2,725 1,309 (74) (892) (2,219) (6,863) (5,771) (25,746) 2,114 2,293 2,293 1,568 14,707 12,507 12,507 10,191 10,101 8,087 8,087 6,378 5,896 7,040 7,040 4,482 33,649 30,741 30,741 22,863 Cost Balance at 1 July 2013 Additions Disposals Exchange differences Balance at 30 June 2014 Balance at 1 July 2014 Additions Disposals/write-downs Reclassification to assets held for sale Exchange differences Balance at 30 June 2015 Depreciation and impairment losses Balance at 1 July 2013 Depreciation for the year Disposals Exchange differences Balance at 30 June 2014 Balance at 1 July 2014 Depreciation for the year Disposals/write-downs Reclassification to assets held for sale Exchange differences Balance at 30 June 2015 Carrying amounts At 1 July 2013 At 30 June 2014 At 1 July 2014 At 30 June 2015 42 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 17. Intangible assets – goodwill and customer contracts Reconciliation of carrying amount Cost Balance as at 1 July 2013 Acquisitions through business combinations Balance as at 30 June 2014 Balance as at 1 July 2014 Acquisitions through business combinations Balance as at 30 June 2015 Amortisation and impairment losses Balance as at 1 July 2013 Amortisation Balance as at 30 June 2014 Balance as at 1 July 2014 Impairment loss Amortisation Balance as at 30 June 2015 Carrying amounts At 1 July 2013 At 30 June 2014 At 1 July 2014 At 30 June 2015 Note Goodwill $’000 Customer Contracts $’000 17,174 - 17,174 17,174 - 17,174 - - - - 7 (8,390) - 1,811 - 1,811 1,811 - 1,811 (1,585) (151) (1,736) (1,736) - (75) Total $’000 18,985 - 18,985 18,985 - 18,985 (1,585) (151) (1,736) (1,736) (8,390) (75) (8,390) (1,811) (10,201) 17,174 17,174 17,174 8,784 226 75 75 - 17,400 17,249 17,249 8,784 Impairment testing for cash-generating units containing goodwill For the purpose of impairment testing, goodwill is allocated to the Group’s operating divisions which represent the lowest level within the Group at which goodwill is monitored for internal management purpose. The aggregate carrying amounts of goodwill allocated to each unit are as follows: Construction Infrastructure Services 2015 $’000 - 3,306 5,478 8,784 2014 $’000 7,066 3,616 6,492 17,174 The recoverable amount of the above cash generating units (“CGUs”) was based on their value in use. The group performed its annual impairment test in June 2015. In June 2015 the carrying amount of all CGUs was determined to be higher than their recoverable amounts and therefore an impairment charge has been recognised. 43 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 17. Intangible assets – goodwill and customer contracts (continued) Value in use was determined by discounting the future cash flows generated from the continuing operations of the CGU. Five years of cash flows were included in the discounted cash flow models together with a terminal value reflecting a long term growth rate of 2.5% (2014: 2%). The calculation of value in use was based on the following key assumptions: • • • • Cash flows were projected based on past experience, actual operating results and independent research on the markets in which the CGUs operate. EBITDA for 2016 is based on the board approved budget with EBITDA for 2017 – 2020 based on management forecasts. The anticipated annual revenue growth included in the cash flow projections has been based on growth rates that have been estimated by management. The margins included in the projected cash flow are the same rate that has been achieved by projects commencing in 2015. A post-tax discount rate of 12.15% (2014: 12.4%) was applied. This discount rate was estimated based on past experience and industry average weighted cost of capital As a result a total goodwill impairment charge of $8,390,000 (2014: Nil) was recognised for the period ended 30 June 2015 made up of Construction CGU: $7,066,000, Infrastructure CGU: $310,000 and Services CGU: $1,014,000. The impairment charge is included in the Consolidated Statement of Profit or Loss and Other Comprehensive Income for the financial year 30 June 2015. • Any adverse movement in the assumptions above would result in further impairment charge. 18. Trade and other payables Current Trade payables Accrued expenses Goods and services tax payable 2015 $’000 6,541 12,965 2,455 21,961 2014 $’000 8,100 14,680 1,188 23,968 Due to the short-term nature of these payables, their carrying value is assumed to approximate their fair value. The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 23. 19. Unearned revenue Current Unearned revenue 2015 $’000 3,163 3,163 2014 $’000 1,134 1,134 Unearned revenue arises when the Group has invoiced the client in advance of performing the contracted services. 44 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 20. Loans and borrowings This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings which are measured at amortised cost. For more information about the Group’s exposure to interest rate, liquidity and risk, see note 23. Current liabilities Finance lease liabilities Non-current liabilities Finance lease liabilities During the year all finance lease liabilities were paid out in full. 21. Provisions Current Annual leave Long service leave Onerous Lease Non-current Long service leave 2015 $’000 - - - - 2015 $’000 4,760 747 498 6,005 2014 $’000 1,875 1,875 820 820 2014 $’000 4,622 837 - 5,459 353 326 A provision has been recognised for employee entitlements relating to long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. The measurement and recognition accounting policy relating to employee benefits have been included in note 34(k) to this report. 22. Capital and reserves Ordinary shares Issued and fully paid Movements in shares on issue 2015 2014 Number $’000 Number $’000 158,210,370 56,036 161,523,130 57,578 Balance at the beginning of the financial year 161,523,130 57,578 161,523,130 57,578 Share buy backs (3,312,760) (1,542) - - Balance at the end of the financial year 158,210,370 56,036 161,523,130 57,578 45 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 22. Capital and reserves (continued) Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. Share based payments reserve The share based payments reserve records the fair value of share based payments provided to employees. Dividends Dividends recognised in the current year by the Group are: 2015 Final 2014 ordinary Total amount 2014 Final 2013 ordinary Total amount Cents per share Total amount $’000 Franked Date of payment 2.70 2.70 4,361 4,361 4,361 4,361 Franked 14th October 2014 Franked 17th October 2013 Franked dividends declared or paid during the year were franked at the tax rate of 30%. Declared after end of year After the balance sheet date a dividend of 2.70 cents per share in the amount of $4.272 million was proposed by the directors. The dividend has not been provided in the financial statements. Franking account balance Company 2015 $’000 12,013 2014 $’000 8,201 The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: (a) franking credits that will arise from the payment of the current tax liabilities; and (b) franking debits that will arise from the payment of dividends recognised as a liability at the year end. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. 46 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 23. Financial instruments Overview The Group has exposure to the following risks from their use of financial instruments: • • Credit risk Liquidity risk • Market risk This note presents information about the Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risks, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established an Audit and Risk Management Committee, which is responsible for overseeing how management monitors risk and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Group. The committee reports regularly to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations in relation to the management and mitigation of these risks. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers. Exposure to credit risk The carrying amount of the Group’s financial assets represents the maximum credit exposure. The Group’s maximum exposure to credit risk at the reporting date was: Cash and cash equivalents Trade and other receivables Cash Carrying amount 2015 $’000 44,550 34,064 78,614 2014 $’000 37,869 28,461 66,330 The Group’s cash and cash equivalents are held with major banks and financial institutions. 47 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 23. Financial instruments (continued) Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group’s customer base, including the default risk of the industry and country, in which customers operate, has less of an influence on credit risk. Approximately 50 percent (2014: 79 percent) of the Group’s trade receivables are attributable to transactions with three major customers. Geographically, the concentration of credit risk is within Australia and, by industry, the concentration is within the mining, and oil and gas industry. When entering into new customer contracts for service, the Group only enters into contracts with reputable companies. Management monitors the Group’s exposure on a monthly basis. In the last five years no provision for impairment loss has been recognised against the customers with whom the Group transacts. In monitoring customer credit risk, customers are grouped according to their credit characteristics, including whether they are an individual or legal entity, aging profile, maturity and existence of previous financial difficulties. The Group does not require collateral in respect of trade and other receivables. The Group has not established an allowance for impairment that represents their estimate of incurred losses in respect of trade and other receivables as it not considered necessary based on the payment history of its client base. The Group’s maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: Australia South America and Caribbean Impairment losses The ageing of the Group’s trade receivables at the reporting date was: Carrying amount 2015 $’000 34,009 55 34,064 2014 $’000 28,349 112 28,461 Not past due Past due 0-30 days Past due 30-60 days Past due 60 days and less than 1 year More than 1 year Gross 2015 $’000 26,458 6,909 120 577 - 34,064 Impairment 2015 $’000 - - - - - - Gross 2014 $’000 19,586 7,018 1,684 173 - 28,461 Impairment 2014 $’000 - - - - - - Based on historic default rates, the Group believes no impairment allowance is necessary in respect of trade receivables as the customers have a good credit history with the Group. There was no renegotiation in credit terms during the period. 48 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 23. Financial instruments (continued) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group uses project costing to assess the cash flows required for each project currently underway and entered into. Management monitors cash flow using rolling forecasts and annual budgets that are monitored at a Board level on a monthly basis. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: Carrying amount Contractual cash flows 6 mths or less 6-12 mths 1-2 years 2-5 years $’000 $’000 $’000 $’000 $’000 $’000 - 21,961 21,961 - 21,961 21,961 - 21,961 21,961 2,695 23,968 26,663 2,849 23,968 26,817 1,032 23,968 25,000 - - - 974 - 974 - - - 796 - 796 - - - 47 - 47 More than 5 years $’000 - - - - - - 30 June 2015 Non-derivative financial liabilities Finance lease liabilities Trade and other payables 30 June 2014 Non-derivative financial liabilities Finance lease liabilities Trade and other payables Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the functional currency in which they are measured. The Group has no material currency risk exposures at 30 June 2015 or 30 June 2014. In respect of other monetary assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. 49 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 23. Financial instruments (continued) Interest rate risk Profile At the reporting date the interest rate profile of the Company’s and the Group’s interest-bearing financial instruments was: Fixed rate instruments Financial liabilities Variable rate instruments Financial assets Carrying amount 2015 $’000 2014 $’000 - 2,695 44,550 37,869 Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore a change in interest rates at the reporting date would not affect profit or loss. Cash flow sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2015. Profit or loss Equity 100bp increase $’000 100bp decrease $’000 100bp increase $’000 100bp decrease $’000 671 671 630 630 (671) (671) (630) (630) - - - - - - - - 30 June 2015 Variable rate instruments Cash flow sensitivity (net) 30 June 2014 Variable rate instruments Cash flow sensitivity (net) Fair values Fair values versus carrying amounts The fair values of financial assets and liabilities materially equates to the carrying values shown in the balance sheet. Other Price Risk The Group is not directly exposed to any other price risk. 50 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 23. Financial instruments (continued) Capital Management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors has not implemented a formal capital management policy however they have implemented a dividend policy. The Group intends to make an annual distribution to shareholders in the form of fully franked dividends, subject to the Group’s financial results in a given year, general business and financial conditions, the Group’s taxation position, its working capital and future capital expenditure requirements, the availability of sufficient franking credits and any other factors the Board considers relevant. There were no changes in the Group’s approach to capital management during the year. The Group is not subject to externally imposed capital requirements. 24. Investments in subsidiaries The consolidated financial statements include the financial statements of Southern Cross Electrical Engineering Ltd and the subsidiaries listed in the following table. Country of Incorporation Equity Interest (%) 2015 2014 Cruz Del Sur Ingeniería Electra (Peru) S.A Southern Cross Electrical Engineering (WA) Pty Ltd Southern Cross Electrical Engineering Tanzania Pty Ltd Southern Cross Electrical Engineering Ghana Pty Ltd K.J. Johnson & Co. Pty Ltd FMC Corporation Pty Ltd Southern Cross Electrical Engineering (Australia) Pty Ltd Hazquip Industries Pty Ltd Peru Australia Tanzania Ghana Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 25. Interest in joint operations The Group has a 50% interest in KSJV Unincorporated and KSJV Australia Pty Ltd, of which the principal activity is to deliver electrical, instrumentation and telecommunication works to onshore processing elements of the region’s LNG projects. These joint arrangements are accounted for as joint operations. The Group’s share of the underlying assets and liabilities as at 30 June 2015 and 2014 and revenues and expenses of the joint operations for the year 30 June 2015 and 2014, which are proportionally consolidated in the consolidated financial statements, is as follows: Share of the joint operations statement of financial position: Current assets Current liabilities Non-current liabilities Equity Share of the joint operations revenue and profit: Revenue Contract expenses Other expenses Profit before tax Income tax expense Profit for the year from continuing operations 2015 $’000 4,400 (1,540) (1,158) 1,702 37,558 (32,852) (714) 3,992 (1,198) 2,794 2014 $’000 1,395 (1,197) (88) (110) 5,237 (4,654) (323) 260 (78) 182 The joint operations have no contingent liabilities or capital commitments as at 30 June 2015 and 30 June 2014. 26. Share-based payments (a) Expense recognised in profit or loss Share based payments expenses for the year comprises: 2015 Performance Rights 2014 Performance Rights 2013 Performance Rights (i) (ii) (iii) 2015 $’000 110 (203) (55) (148) 2014 $’000 297 (136) (655) (494) The amount recognised is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. 52 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 26. Share-based payments (continued) (i) 2015 Performance Rights During the year Performance Rights were offered to key management personnel and senior management under the terms of the Senior Management Long Term Incentive Plan. The terms and conditions of the Performance Rights are as follows. All Performance Rights are to be settled by the physical delivery of shares. Grant date / employees entitled Performance rights issued to senior management on 04 November 2014 Performance rights issued to key management on 04 November 2014 Total /performance rights Number of instruments 676,874 1,444,067 2,120,941 Vesting conditions Contractual life Employed on 30 June 2017 and exceed performance hurdles Employed on 30 June 2017 and exceed performance hurdles 32 months 32 months Up to 100% of the allocated performance rights may vest, subject to the achievement of the performance conditions as set out below. The key terms of the performance rights are: • • • To be performance tested over a three year period from 1 July 2014 to 30 June 2017 (“Performance Period”); No performance rights will vest until 30 June 2017; Performance testing criteria are 50% against Absolute Total Shareholder Return (“TSR”) performance, and 50% against Earnings Per Share (“EPS”) performance; and • Expiry on the 4th anniversary of the grant date unless an earlier lapsing date applies The TSR formula is: ((Share Price at Test Date – Share Price at Start Date) + (Dividends Reinvested))/Share Price at Start Date TSR will be assessed against targets for threshold performance of 8% per annum compounded over the Performance Period and for stretch performance of 15% per annum compounded over the Performance Period. The vesting schedule is as follows for TSR performance over the Performance Period: Less than 8% per annum compounded 8% per annum compounded 0% vesting 50% vesting Between 8% and 15% per annum compounded Pro-rata vesting between 50% and 100% At or above 15% per annum compounded 100% vesting 53 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 26. Share-based payments (continued) EPS will be assessed against targets for threshold performance of 5.7 cents per share at the end of the Performance Period and for stretch performance of 7.3 cents per share at the end of the Performance Period. The vesting schedule is as follows for EPS performance at the end of the Performance Period: Less than 5.7 cents per share 5.7 cents per share 0% vesting 50% vesting Between 5.7 and 7.3 cents per share Pro-rata vesting between 50% and 100% At or above 7.3 cents per share 100% vesting Once the performance measurement calculation has been finalised the company will allot and issue the equivalent number of shares at nil consideration on the basis of one ordinary share per vested performance right for all performance rights exercised. During the year 1,135,240 of the 2015 performance rights were forfeited. (ii) 2014 Performance Rights There were 1,005,211 2014 Performance Rights on issue at 1 July 2014. No 2014 Performance Rights were granted, none vested and 617,399 were forfeited during the year. The 2014 Performance Rights were performance tested over a three-year period from 1 July 2013 to 30 June 2016. The hurdles used to determine performance are Relative Total Shareholder Return (TSR) and Earnings per Share (EPS) performance. TSR will be assessed against targets for threshold performance of 12% per annum compounded over the Performance Period and for stretch performance of 15% per annum compounded over the Performance Period. The vesting schedule is as follows for TSR performance over the Performance Period: Less than 12% per annum compounded 12% per annum compounded 0% vesting 50% vesting Between 12% and 15% per annum compounded Pro-rata vesting between 50% and 100% At or above 15% per annum compounded 100% vesting EPS will be assessed against targets for threshold performance of 17 cents per share at the end of the Performance Period and for stretch performance of 22 cents per share at the end of the Performance Period. The vesting schedule is as follows for EPS performance at the end of the Performance Period: Less than 17 cents per share 17 cents per share 0% vesting 50% vesting Between 17 and 22 cents per share Pro-rata vesting between 50% and 100% At or above 22 cents per share 100% vesting 54 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 26. Share-based payments (continued) (iii) 2013 Performance Rights There were 579,435 2013 Performance Rights on issue at 1 July 2014. No 2013 Performance Rights were granted, none vested and 323,396 were forfeited during the year. The 2013 Performance Rights were performance tested over a three-year period from 1 July 2012 to 30 June 2015. The hurdles used to determine performance are Relative Total Shareholder Return (TSR) and Earnings per Share (EPS) performance. TSR will be assessed against targets for threshold performance of 12% per annum compounded over the Performance Period and for stretch performance of 15% per annum compounded over the Performance Period. The vesting schedule is as follows for TSR performance over the Performance Period: Less than 12% per annum compounded 12% per annum compounded 0% vesting 50% vesting Between 12% and 15% per annum compounded Pro-rata vesting between 50% and 100% At or above 15% per annum compounded 100% vesting EPS will be assessed against targets for threshold performance of 17 cents per share at the end of the Performance Period and for stretch performance of 22 cents per share at the end of the Performance Period. The vesting schedule is as follows for EPS performance at the end of the Performance Period: Less than 17 cents per share 17 cents per share 0% vesting 50% vesting Between 17 and 22 cents per share Pro-rata vesting between 50% and 100% At or above 22 cents per share 100% vesting (b) Measurement of fair values The fair value of the TSR Performance Rights has been measured using the Monte-Carlo simulation. The EPS Performance Rights has been measured using the Binomial tree methodology. The inputs used in the measurement of the fair values at grant date were as follows: 2015 The performance rights issued in respect of the 2015 financial year were granted in one tranche as follows: Grant Date Vesting date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Fair value of TSR component Fair value of EPS component 4 November 2014 30 June 2017 $0.49 2.7 years 45% 2.54% 5.40% $0.25 $0.42 55 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 26. Share-based payments (continued) 2014 The performance rights issued in respect of the 2014 financial year were granted in three separate tranches as follows: Grant Date Vesting date Share price at grant date Expected life Volatility Risk free interest rate Dividend yield Fair value of TSR component Fair value of EPS component 8 October 2013 30 June 2016 28 October 2013 12 December 2013 30 June 2016 30 June 2016 $1.21 2.7 years 40% 2.88% 2.2% $0.80 $1.14 $1.10 2.7 years 40% 2.85% 2.4% $0.68 $1.03 $0.80 2.6 years 40% 2.83% 3.3% $0.34 $0.73 (c) Reconciliation of outstanding performance rights The number and weighted average exercise prices of performance rights under the programmes were as follows: 2015 2014 Number of rights Number of rights Outstanding at 1 July Granted during the year Forfeited during the year Outstanding at 30 June Vested and exercisable at 30 June 2,914,382 2,120,941 (3,405,771) 1,629,552 - 2,782,667 1,214,583 (1,082,868) 2,914,382 - Subsequent to 30 June 2015 it has been determined that the vesting conditions in respect of the 2013 Performance rights have not been met and 256,039 performance rights included as outstanding above will be forfeited. 56 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 27. Reconciliation of cash flows from operating activities 2015 $’000 2014 $’000 (9,801) 7,723 6,892 1,715 8,390 (148) (5,603) - 20,354 (298) (301) 7,274 (29) - (494) (9,894) 2,632 12,800 (333) (122) (2,008) (10,250) 2,030 1,020 1,140 (6,389) 16,993 (571) (604) 2,117 (2,887) 7,362 Cash flows from operating activities (Loss)/profit for the year Adjustments for: Depreciation and amortisation (Profit)/Loss on sale of property, plant and equipment Impairment expense Equity-settled share-based payment transactions (Increase)/decrease in assets: Trade and other receivables Income tax receivable Work in progress Inventories Prepayments Increase/(decrease) in liabilities: Trade and other payables Unearned revenue Provisions and employee benefits Income tax payable Deferred income tax Net cash from operating activities 28. Commitments Leasing commitments Operating lease commitments – as lessee The Group has entered into commercial property leases. These leases have an average life of 3 years remaining with options to renew at the end of the initial term. Future minimum rentals payable under non-cancellable operating leases as at 30 June 2015 are: Within one year After one but no more than five years After more than five years Total minimum lease payments 2015 $’000 1,038 2,199 458 3,695 2014 $’000 1,051 2,787 987 4,825 Under the terms of the above property leases, the rent payable is subject to annual review. This review adjusts the annual rent by the movement in the consumer price index. At the end of every third year annual rent is subject to a market review. 57 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 29. Contingencies The directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Bank Guarantees Surety Bonds 2015 $’000 20,143 8,493 2014 $’000 19,677 14,641 Total bank guarantee facilities at 30 June 2015 were $60 million and the unused portion was $39.9 million. This facility is subject to annual review. Total surety bonds facilities at 30 June 2015 were $30 million and the unused portion was $21.5 million. This facility is subject to annual review. Both facilities are set to mature on 31 August 2015. It is management’s intention to renew these facilities at level appropriate to support ongoing business. 30. Subsequent events There are no matters or circumstances that have arisen since the end of the financial year which significantly affected 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 financial years. 31. Auditor’s remuneration Remuneration of KPMG Australia as the auditor of the parent entity for: - Auditing or reviewing the financial report - All other services 2015 $’000 2014 $’000 200,000 105,984 305,984 255,577 - 255,577 58 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 32. Parent entity disclosures As at, and throughout, the financial year ending 30 June 2015 the parent company of the Consolidated entity was Southern Cross Electrical Engineering Limited. Result of the parent entity (Loss)/profit for the period Total comprehensive (loss)/income for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising: Share capital Reserves Retained earnings Total Equity Parent entity contingencies: Company 2015 $’000 (12,390) (12,390) 81,512 123,605 34,125 41,305 56,036 757 25,507 82,300 2014 $’000 7,564 7,564 93,153 151,790 50,746 58,693 57,578 905 34,613 93,097 The parent entity has commitments and contingent liabilities which are included in note 28 and 29. At 30 June 2015 there were in existence guarantees of performance of a subsidiary. 33. Related parties Transactions with key management personnel (i) Key management personnel compensation Key management personnel compensation comprised the following: Short-term employee benefits Post-employment benefits Termination benefits Share-based payments 2015 $’000 1,878 135 729 (134) 2,608 2014 $’000 1,787 107 - 9 1,903 Compensation of the Group’s key management personnel includes salaries and non-cash benefits made up of a short term incentive and long term incentive scheme (see note 26 (i)). 59 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 33. Related parties (continued) (ii) Key management personnel transactions Directors of the Company control 42% of the voting shares of the Company. The aggregate value of transactions and outstanding balances related to key management personnel and entities over which they have control or significant influence were as follows: Transactions value year ended 30 June 2015 $’000 2014 $’000 Other related parties Gianfranco Tomasi Rental income 834 772 The Group has entered into rental agreements over the following properties: • • • F & A Tomasi Superannuation Fund owns the properties at 41 and 44 Macedonia St, Naval Base WA, which are leased to Southern Cross Electrical Engineering Limited. G & A Tomasi own the properties at 45, 47, 49 & 51 Macedonia Street, Naval Base WA which are leased to Southern Cross Electrical Engineering Limited. Frank Tomasi Nominees Pty Ltd owns the property at 43 Hope Valley Road, Naval Base WA, which was leased to Southern Cross Electrical Engineering Limited. Gianfranco Tomasi and spouse are sole directors of Frank Tomasi Nominees Pty Ltd and are the sole shareholders. Frank Tomasi Nominees Pty Ltd as trustee for the Frank Tomasi Family Trust is a major shareholder of Southern Cross Electrical Engineering Ltd. Under the terms of each of the above property leases, the rent payable is subject to an annual review. This review adjusts the annual rent by the movement in the consumer price index. At the completion of every third year the annual rent is subject to a market review. The rental payments made above are all at normal market rates and were reviewed by an independent valuer in July 2014 except for 41 Macedonia Street which is due to be reviewed in October 2016. 60 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies Except as described below the accounting policies applied by the Group in this financial report are the same as those applied by the Group in its consolidated financial report as at and for the year ended 30 June 2014. The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application 1 July 2014. AASB 8 Operating Segments AASB 119 Employee Benefits AASB 124 Related Party Disclosures AASB 2012-3 Amendments to AASB 132 Financial Instruments: Presentation AASB 2013-3 Amendments to AASB 136 Impairment of Assets AASB 2013-4 Amendments to AASB 139 Financial Instruments: Recognition and Measurement AASB 1031 Materiality Interpretation 21 Levies AASB 2014 – 1 Part A Annual Improvements 2010-2012 Cycle & 2011-2013 Cycle. These changes have not had either a material recognition or measurement impact on the financial report however disclosure has been updated as follows. (i) Operating Segment Disclosure Requires entities to disclose factors used to identify the entity’s reportable segments when operating segments have been aggregated. An entity is also required to provide a reconciliation of total reportable segments’ asset to the entity’s total assets. (ii) Related Party Disclosure Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements. This amendment deletes from AASB 124 individual key management personnel disclosure requirements for disclosing entities that are not companies. It also removes the individual KMP disclosure requirements for all disclosing entities in relation to equity holdings, loans and other related party transactions. (a) Basis of consolidation i. Subsidiaries Subsidiaries are entities controlled by the Group. The group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. ii. Interest in a joint venture The Group has interests in joint arrangements which are classified as joint operations, which are jointly controlled entities, whereby the venturers have a contractual arrangement that establishes joint control over the economic activity of the entities. The Group recognises its interest in the joint operations using the proportionate consolidation method. The Group combines its proportionate share of each of the assets, liabilities, income and expenses which are accounted for by separately recognising the Group’s share of underlying assets and liabilities of the joint venture with similar items, line by line, in its consolidated financial statements. 61 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) iii. Transactions eliminated on consolidation Intra-group balances and any unrealised income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investments to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency i. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. ii. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. Income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income and presented in the foreign currency translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profit or loss. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income and presented in the foreign currency translation reserve in equity. (c) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and on hand and short term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in fair value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. 62 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (d) Financial instruments i. Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. The Group has the following non-derivative financial assets: • • Loans and receivables. Cash and cash equivalents. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables (see note 13). ii. Non-derivative financial liabilities Financial liabilities are recognised initially on the trade date at which the Group becomes party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. The Group’s non-derivative financial liabilities comprise Loans and borrowings and Trade and other payables. iii. Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. 63 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (e) Property, plant and equipment i. Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Borrowing costs related to the acquisition or construction of qualifying assets are recognised as part of the asset. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net within “other income” in profit or loss. ii. Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. iii. Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognised in profit or loss on a diminishing value basis over the estimated useful life of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: Buildings Leasehold improvements Plant and equipment Motor vehicles Office furniture and fittings 40 years 6 – 38 years 2 – 20 years 2 – 10 years 2 – 10 years Depreciation methods, useful lives and residual values are reviewed at each reporting date. 64 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (f) Intangible assets i. Goodwill Goodwill is measured at cost less accumulated impairment losses. The Group measures goodwill at the acquisition date as: • • the fair value of the consideration transferred; plus the recognised amount of any non-controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. ii. Other intangible assets Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and accumulated impairment losses. iii. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure including expenditure on internally generated goodwill and brands is recognised in profit or loss as incurred. iv. Amortisation Amortisation is calculated over the cost of the asset, or another amount substituted for cost, less its residual value. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current period are as follows: • Customer contracts 1 – 5 years 1 – 5 years 2015 2014 Amortisation methods, useful lives and residual values are reviewed at each financial year-end and adjusted if appropriate. (g) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the net present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and are not recognised in the Group’s Balance Sheet. (h) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. 65 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (i) Construction work in progress Construction work in progress represents the gross unbilled amount expected to be collected from customers for contract work performed to date. It is measured at cost plus profit recognised to date (see note 34(n)(i)) less progress billings and recognised losses. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities based on normal operating capacity. If payments received from customers exceed the income recognised, then the difference is presented as deferred income in the balance sheet. (j) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets which continue to be measured in accordance with the Group’s other accounting policies. Impairment losses on initial classification as held-for-sale and subsequent gains and losses on re-measurement are recognised in profit or loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortised or depreciated, and any equity-accounted investee is no longer equity accounted. (k) Impairment i. Financial assets A financial asset not carried at fair value through the profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of the asset that can be estimated reliably. Objective evidence that a financial asset (including equity securities) is impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Group considers evidence of impairment for receivables at both a specific asset level and collective level. All individually significant receivables are assessed for specific impairment. All individually significant receivables found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Receivables that are not individually significant are collectively assessed for impairment by grouping together receivables with similar risk characteristics. In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that actual losses are likely to be greater or less than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. 66 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (k) Impairment (continued) ii. Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill the recoverable amount is estimated each year at the same time. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination. The Group’s corporate assets do not generate separate cash inflows. If there is an indication that a corporate asset may be impaired, then the recoverable amount is determined for the CGU to which the corporate asset belongs. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash- generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (l) Employee benefits i. Long-term benefits The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on costs; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on AAA credit-rated or government bonds that have maturity dates approximating the terms of the Group’s obligations and that are denominated in the same currency in which the benefits are expected to be paid. The calculation is performed using the Projected Unit Credit method. ii. Termination benefits Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the Group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be estimated reliably. 67 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) iii. Short-term benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. iv. Share-based payment transactions The fair value of performance rights and share options granted to employees is recognised at grant date as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the performance rights and share options. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. (m) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. (n) Revenue Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: i. Construction contracts Contract revenue includes the initial amount agreed in the contract plus any variations in contract work, claims and incentive payments to the extent that it is probable that they will result in revenue and can be measured reliably. As soon as the outcome of a construction contract can be estimated reliably, contract revenue is recognised in profit or loss in proportion to the stage of completion of the contract. Contract expenses are recognised as incurred unless they create an asset related to future contract activity. The stage of completion is assessed by reference to surveys of work performed. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are likely to be recoverable. An expected loss on a contract is recognised immediately in profit or loss. ii. Services Revenue from services rendered is recognised in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed. All revenue is stated net of the amount of goods and services tax (GST). 68 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (o) Lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (p) Finance income and expenses Finance income comprises interest income on funds invested and dividend income. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date that the Group’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date. Finance expenses comprise interest expense on borrowings, bank charges and lease payments. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest rate method. Foreign currency gains and losses are reported on a net basis. (q) Income tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. 69 2015 Annual ReportNotes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (r) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows. (s) Earnings per share The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares, which comprise performance rights and share options granted to employees. (t) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s components. All operating segments’ operating results are reviewed regularly by the Group’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Managing Director include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. (u) Financial guarantees Financial guarantee contracts are initially measured at their fair values and subsequently measured at the higher of: - - the amount of obligation under the contract, as determined in accordance with AASB 137 Provisions, Contingent Liabilities and Contingent Assets; and the amount recognised initially less cumulative amortisation recognised in accordance with AASB 118 Revenue. The fair value of financial guarantee contracts has been assessed using a probability weighted discounted cash flow approach. The probability has been based on: the likelihood of the guaranteed party defaulting in a year period; the proportion of the exposure that is not expected to be recovered due to the guaranteed party defaulting; and the maximum loss exposed if the guaranteed party were to default. - - - 70 2015 Annual Report Notes to the Financial Statements For the year ending 30 June 2015 34. Significant accounting policies (continued) (v) New standards and interpretations issued but not yet effective A number of new standards, amendments to standards and interpretations are effective for annual reporting periods beginning after 1 July 2014, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except AASB 9 Financial Instruments, which will become mandatory for the Group’s 2018 consolidated financial statements and could change the classification and measurement of financial assets. The Group does not plan to adopt this standard early and the extent of the impact has not been determined. 35. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non- financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. i. Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is the estimated amount for which a property could be exchanged on the date of acquisition between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The fair value of items of plant, equipment, fixtures and fittings is based on the quoted market prices for similar items. ii. Inventories The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories. iii. Trade and other receivables The fair value of trade and other receivables acquired in a business combination, excluding construction work in progress, but including service concession receivables, is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. iv. Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. v. Share-based payment transactions The fair value of employee performance rights and share options is measured using an appropriate pricing model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. 71 2015 Annual ReportDirectors’ Declaration For the year ending 30 June 2015 1. In the opinion of the directors of Southern Cross Electrical Engineering Limited (the “Company”): A. The consolidated financial statements and notes, and the Remuneration report in the Directors’ report, are in accordance with the Corporations Act 2001, including: i. ii. giving a true and fair view of the Group’s financial position as at 30 June 2015 and of its performance for the financial year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; B. the financial report also complies with International Financial Reporting Standards as disclosed in note 2(a), C. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the managing director and chief financial officer for the financial year ended 30 June 2015. This declaration is made in accordance with a resolution of the Board of Directors. Signed in accordance with a resolution of the directors: Derek Parkin Chairman 25 August 2015 72 2015 Annual ReportIndependent Auditor’s Report For the year ending 30 June 2015 73 2015 Annual ReportIndependent Auditor’s Report For the year ending 30 June 2015 74 2015 Annual ReportLead Auditor’s Independence Declaration Under Section 307C of the Corporations Act 2001 75 2015 Annual ReportASX Additional Information Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information is current as at 18 August 2015. Distribution of equity security holders Category Ordinary shares Performance rights Number of equity security holders 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over 171 330 178 356 53 1,088 - - - - 4 4 The number of shareholders holding less than a marketable parcel of ordinary shares is 194. Twenty largest shareholders Name Frank Tomasi Nominees Pty Ltd J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited Zero Nominees Pty Ltd UBS Nominees Pty Ltd National Nominees Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited Carman Super Pty Ltd Ghisa Pty Ltd Offshore Electrical Services Pty Ltd Mr Raymond John Wise Mr Andrew William McKenzie + Mrs Catherine Patricia McKenzie Chemco Superannuation Fund Pty Ltd Chemco Superannuation Fund Pty Ltd Map Capital Pty Ltd Buchhorn Pty Ltd ABN Amro Clearing Sydney Nominees Pty Ltd Ziziphus Pty Ltd Number of ordinary shares % of issued capital 62,213,231 13,825,530 12,483,128 8,873,000 7,272,664 7,087,346 6,458,540 6,171,443 2,078,396 2,000,000 1,513,900 1,500,000 1,280,846 1,025,052 900,000 830,000 800,000 765,108 537,171 398,667 39.32 8.74 7.89 5.61 4.60 4.48 4.08 3.90 1.31 1.26 0.96 0.95 0.81 0.65 0.57 0.52 0.51 0.48 0.34 0.25 Substantial shareholders The number of shares held by substantial shareholders and their associates as advised to the Company are set out below: 138,014,022 87.23 Shareholder Gianfranco Tomasi Commonwealth Bank of Australia Celeste Funds Management Acorn Capital Number 65,227,131 16,624,675 12,299,349 12,018,795 % of issued capital 41.2% 10.5% 7.8% 7.6% 76 2015 Annual ReportCorporate Directory Directors Derek Parkin Chairman Independent Non-Executive Director Chris Douglass Interim CEO and Executive Director Gianfranco Tomasi Non-Executive Director Simon Buchhorn Non-Executive Director Karl Paganin Independent Non-Executive Director Company Secretaries Chris Douglass Colin Harper Auditors KPMG 235 St Georges Terrace Perth WA 6000 Solicitors K & L Gates Level 32, 44 St Georges Terrace Perth WA 6000 Share Registry Computershare Investor Services Pty Limited Level 11, 172 St Georges Terrace Perth WA 6000 T: 1300 787 272 F: +618 9323 2033 Registered Office Southern Cross Electrical Engineering Limited 41 Macedonia Street Naval Base WA 6165 T: +618 9236 8300 F: +618 9410 2504 ASX code: SXE scee.com.au SCEE Perth Office: 41 Macedonia Street Naval Base WA 6165 T: +61 (0)8 9236 8300 F: +61 (0)8 9410 2504 SCEE Brisbane Office: 12 Trade Street Lytton QLD 4178 T: +61 (0)7 3308 8900 F: +61 (0)7 3348 2095 SCEE Newman Office: 6 Shovelanna Street Newman WA 6753 T: +61 (0)8 9236 8300 E: scee@scee.com.au SCEE Cruz del Sur, Lima, Peru Office: Av. Benjamin Franklin #220 (Altura Km 2 ½ Carretera Central) Ate Lima, Peru T: +51 1 326 7436 F: +51 1 3267437 E: csiesa@akemiperu.com scee.com.au WA EC 001681 QLD 12707 NSW 17066C NT C 0977 SA PGE 262507 ABN: 92 009 307 046 Established 1978 SCEE Infrastructure, SCEE Construction & SCEE Services are divisions of Southern Cross Electrical Engineering Limited (SCEE)