Annual Report 2019 Our purpose Helping people reach their destination Viva Energy Group Limited ABN 74 626 661 032 Who we are Viva Energy is one of Australia’s leading energy companies with more than 110 years of operations in Australia. We refine, store and market specialty petroleum products across the country and we are the sole supplier of Shell fuels and lubricants in Australia. In 2019, we supplied approximately a quarter of Australia’s liquid fuel requirements to a national network of retail sites and directly to our commercial customers. We also operate a nationwide fuel supply chain, including the strategically located Geelong Refinery, an extensive import, storage and distribution infrastructure network, including a presence at over 50 airports and airfields. Our values Integrity The right thing always Responsibility Safety, environment, our communities Curiosity Be open, learn, shape our future Commitment Accountable and results focused Respect Inclusiveness, diversity, people We are proud to present our inaugural Reconciliation Action Plan (RAP) 2019–2021. See page 49 for details. Viva Energy Group Limited Annual Report 2019 01 Contents About us Chairman and Chief Executive Officer’s report Board of Directors Executive Leadership Team Operating and financial review Sustainability Remuneration report Directors’ report Auditor’s independence declaration 04 06 08 10 13 32 56 73 78 Financial report Consolidated financial statements 79 80 Notes to the consolidated financial statements 85 Directors’ declaration Independent auditor’s report Disclosures Additional information Corporate directory 135 136 143 146 149 About this Annual Report This Annual Report contains information on the operations, activities and performance of the ‘Viva Energy Group’ for the period ended 31 December 2019 and its financial position as at 31 December 2019. The Viva Energy Group comprises Viva Energy Group Limited (ACN 626 661 032) (the ‘Company’) and its controlled entities. In this Annual Report, references to ‘we’, ‘us’, ‘our’, and ‘Group‘ are references to the Viva Energy Group. The Company was admitted to the Official List of ASX on 13 July 2018. In connection with its ASX listing, the Company completed a corporate restructure, which included the acquisition of Viva Energy Holding Pty Limited (the former holding company of the Viva Energy Group) and its controlled entities. Accordingly, the previous period results presented for comparison, adopt and incorporate the results of Viva Energy Holding Pty Limited and its controlled entities at such time. Printed copies of this Annual Report will be posted to those shareholders who have requested to receive a printed copy. Otherwise, shareholders are notified when the Annual Report becomes available and provided details of where the report can be accessed electronically. Corporate Governance Statement You can find our 2019 Corporate Governance Statement on the Investor Centre section of our website at www.vivaenergy.com.au. 02 Viva Energy Group Limited Annual Report 2019 See the rest of our 2019 annual reporting suite at www.vivaenergy.com.au • Annual Report 2019 • Taxes Paid Report 2019 • Corporate Governance Statement 2019 Corporate Governance Statement 2019 Viva Energy Group Limited Annual Report 2019 03 Taxes Paid Report 2019 About us Our operations We source crude oil (domestic and international) for domestic refining, and refined products from international refineries. Sourcing Domestic and imported crude oil Imported refined products Domestic refineries We refine crude oil into fuel products – including petrol, diesel and specialty products. We transport refined product to bulk storage fuel terminals by pipe or ship. Pipelines Shipping 1. Procurement/Supply 2. Domestic Refining 3. Primary Distribution Our year at a glance Terminals are typically located near major metropolitan, industrial and mining centres (closer to end customers). People and community Pipelines We sell bulk fuel products directly to commercial Safety and environment customers. Commercial customers Wholesale distributors Shipping 1,320 Terminal storage We transport product from terminal to retail sites and commercial end customers. Trucking Employees 4. Storage 5. Secondary Distribution 24% Women in our workforce FY2018: 22% 4.55 We sell fuel products to retail customers through a retail fuel network of more than 1,260 sites. Total recordable injury frequency rate (per million hours worked) Retail customers 6. Fuels Marketing Retail sites FY2018: 5.77 2 Significant spills >1,000kg FY2018: 3 $382,448 Raised by our employees through Double My Donation and Team Fundraising (includes Viva Energy matching) Process Safety Events 0 API Tier 1 Events 2 API Tier 2 Events FY2018: 0 FY2018: 4 04 Viva Energy Group Limited Annual Report 2019 We source crude oil (domestic and international) for domestic refining, and refined products from international refineries. Sourcing Domestic and imported crude oil Imported refined products Domestic refineries We refine crude oil into fuel products – including petrol, diesel and specialty products. We transport refined product to bulk storage fuel terminals by pipe or ship. Pipelines Shipping A b o u t u s 1. Procurement/Supply 2. Domestic Refining 3. Primary Distribution Terminals are typically located near major metropolitan, industrial and mining centres (closer to end customers). Pipelines Wholesale distributors Commercial customers Shipping Trucking Terminal storage We transport product from terminal to retail sites and commercial end customers. Retail sites Retail customers We sell bulk fuel products directly to commercial customers. We sell fuel products to retail customers through a retail fuel network of more than 1,260 sites. 4. Storage 5. Secondary Distribution 6. Fuels Marketing Operational and financial performance 14.7BL Fuel sales volume $644.5M Group Underlying EBITDA (RC)* Up 4.6% on FY2018 Down 17% on FY2018 42.0Mbbl 4.7¢ Refining intake Up 4.7% on FY2018 FY2019 dividend per share, fully franked 65MLpw Average weekly Alliance volumes for 2H2019 Up 9% from 1H2019 $161.7M FY2019 Capex Down from $241.3M in FY2018 Viva Energy Group Limited Annual Report 2019 05 Chairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership Team Chairman and Chief Executive Officer’s report Robert Hill Chairman Scott Wyatt Chief Executive Officer Dear Shareholders, 2019 performance and progress on strategic priorities Over the last year we have seen several changes which have altered the industry landscape. Changes in the ownership of competitor fuel and convenience businesses and the renegotiation of our retail Alliance arrangements were material developments in the retail market, while the global transition to lower sulphur marine fuels and, more generally, changes in crude flows as a result of regional conflict and trade barriers led to periods of volatility in oil prices and refining margins. Retail and refining margins were particularly impacted, with Group underlying EBITDA (RC) down 17% on FY2018 at $644.5 million. Notwithstanding these results, we are pleased with the underlying performance of the business and the progress made on our strategic priorities. Total sales volumes were up 4.6% on 2018 as a result of substantially improved performance in our retail Alliance business, continued growth in our Liberty channels, and solid sales across our commercial and wholesale sectors. Refining operations were strong, with periods of record production, high levels of unit availability and utilisation, and a focus on optimisation to minimise earnings exposure in a lower margin environment. Over the course of the year we re-negotiated the Alliance agreement with Coles and the brand license agreement with Shell through to 2029. Under the new arrangement with Coles, Viva Energy took responsibility for retail fuel pricing and marketing, collecting the full retail fuel margin and an enhanced royalty on convenience sales. The renegotiated Alliance agreement provides a stronger platform to restore sales growth and better leverage our leading retail network and partnership. We also fully acquired the Liberty wholesale business, and established a 50/50 joint venture with Liberty Retail to grow our business in regional markets. Our decision to take responsibility for retail fuel pricing across the Alliance retail network has delivered steady improvements in sales performance and brand perception. We expect to continue this during 2020 as we maintain our price and value positioning in the market. Lower retail market margins recovered towards the end of 2019 and we are now well placed to benefit from any sustained improvement in trading conditions. Several expiring commercial contracts were successfully renewed during the year, and we also expanded strategic relationships with key partners, such as the Australian Defence Force, which provide opportunities for growth in the years ahead. We maintained strong capital discipline, with operating capital expenditure reducing by 33% to $162 million and relatively low net debt of $137 million. Following the sell down of our stake in Viva Energy REIT (VVR), we also intend to undertake a Share buyback to return proceeds to shareholders (subject to obtaining the required regulatory and shareholder approvals). We have maintained a dividend pay-out ratio of 60% of distributable net profit after tax Sustainability We are pleased to present our second report on sustainability. The objective of our sustainability program is to maintain and grow a resilient and sustainable company that is aligned to our values, strategy and the expectations of our employees, the communities in which we operate, and our external stakeholders. Operating sustainably also provides us with opportunities to be part of the solution to help address the climate change challenge and to expand and diversify our operations as a trusted energy provider seeking to participate in the transition to a low-carbon future. This year we advanced our sustainability reporting by taking an in-depth look at our focus areas that underpin our sustainability program. To further support the program and the work of the Board’s Sustainability Committee, we have also established a cross departmental management working group, to coordinate and direct our priorities in this area. We encourage you to review our Sustainability Report within this Annual Report. Our people Our people are key to our success, and we are pleased with the progress we have made on improving diversity and inclusiveness across the workplace. We were particularly delighted to be awarded the WGEA Employer of Choice for Gender Equality citation for the third consecutive year, and are proud to launch our inaugural Reconciliation Action Plan (RAP). Our RAP builds upon the strong foundations of our Indigenous1 Participation Plan and captures our commitment to celebrating Indigenous culture, promoting reconciliation, building respect, and raising cultural awareness. 1. The term Indigenous in this report is used to respectfully refer to Australian Aboriginal and Torres Strait Islander peoples. 06 Viva Energy Group Limited Annual Report 2019 In 2019, we welcomed Amanda Fleming and Megan Foster to our team. Amanda joined as Chief People and Technology Officer and brings over 20 years’ experience across retail, Fast Food and FMCG leading business-wide transformations. Megan brings over 25 years’ experience in retail to her role as Executive General Manager, Retail. There will be further changes to our leadership team that will take effect in, or around, April 2020. Daniel Ridgway, Chief Operating Officer, has decided to leave the Company after more than 22 years with the business. Thys Heyns will succeed Daniel in this role, with Dale Cooper joining the company to replace Thys as Executive General Manager, Refining. The Board extend their appreciation to Daniel for his significant contribution to the business during his many years of service. Capital Management In February 2020, we divested our 35.5% interest in VVR following a strategic review of this investment. This divestment is an important step for the Company and its shareholders. VVR has performed well since its listing in 2016 and realising our investment at an attractive price means we can offer substantial returns to our shareholders. We announced that we intend to return to our shareholders all $680 million in after-tax proceeds from the sale, subject to obtaining the required regulatory and shareholder approvals. Looking forward In early 2020, we have seen a period of unprecedented disruption to the wider Australian economy driven by the impacts of the Covid-19 novel coronavirus outbreak, and the measures taken by Government, industry and society to address the matter. At the current time the impacts and outcomes for our business remain uncertain. Our initial focus and priority is addressing the health and wellbeing of our people, and contributing to the management of the wider-health issue for the communities in which we operate. E x e c u t i v e O f fi c e r ’ s r e p o r t C h a i r m a n a n d C h e f i We are focussed on appropriate measures to support our employees, while also ensuring continued safe and reliable operations across our network. We are also working closely with the relevant regulators, our customers, and suppliers to ensure we are able to respond appropriately to the changing circumstances, maintain a strong operational performance, and ensure continued supply of liquid fuels to the Australian economy. We have established stronger business foundations during 2019, and with a much improved retail operating platform, strong operating performance, and positive action on capital management, we consider that we are in a good position to manage the disruption and uncertainty. The situation remains dynamic, with the capacity for significant impacts in our market and to our business and operations, and accordingly we continue to develop appropriate plans and responses, and we will communicate these to the market and our shareholders as appropriate. Through this disruption, we also remain focussed on progressing our existing business strategies, where practicable. In the year ahead, this includes building our brand perception and sales growth in our core retail channels, optimising volumes and margin mix across both Retail and Commercial, and continued focus on cost efficiency, especially within our supply chain. In our refining business we aim to maintain production flexibility to optimise margins, and to execute our major maintenance turnaround (as announced in February 2020) on-time and within budget. We will continue to maintain strong focus on capital management. We look forward to updating you about our progress in 2020. Robert Hill Chairman Scott Wyatt Chief Executive Officer Viva Energy Group Limited Annual Report 2019 0707 About usOperating and financial reviewSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Board of Directors Robert Hill Scott Wyatt Arnoud De Meyer Jane McAloon Chief Executive Officer and Executive Director BCA Independent Non-Executive Director MSc.E, MSc.BA, PhD Management, Hon Phd Independent Non-Executive Director BEc(Hons), LLB, GDip CorpGov, FAICD Term of office Appointed as CEO on 13 August 2014. Appointed to the Board on 7 June 2018. Skills and experience Scott Wyatt has more than 30 years’ experience in the oil and gas sector and has held various leadership roles within Viva Energy’s downstream oil and gas business (formerly Shell) including strategy, marketing (consumer and commercial) and supply and distribution. After a long career with Shell in New Zealand, Australia and Singapore, Scott relocated to Australia in 2006 as Distribution Manager (Australia and New Zealand) and in 2009 was appointed General Manager of Supply and Distribution Australia. In July 2013, he was appointed Vice President Downstream Australia, responsible for the downstream businesses in Australia. Scott was appointed as CEO in August 2014. Scott serves as Chairman of the Australian Institute of Petroleum (since January 2020). Board Committee memberships • Member of the Investment Committee Term of office Appointed to the Board on 18 June 2018. Term of office Appointed to the Board on 18 June 2018. Skills and experience Jane McAloon has over 25 years of business, government and regulatory experience at senior executive and board levels across the energy, infrastructure and natural resources sectors. Jane was an executive at BHP Billiton and AGL. Prior to this, she held positions in government in energy, rail and natural resources. Jane is currently a Non-Executive Director of Home Consortium (since 2019), GrainCorp (since 2019) and Energy Australia (since 2012). She is a former Board member of Healthscope Limited (2016 to 2019), Cogstate Limited (2017 to 2019), Civil Aviation Safety Authority (2018 to 2019) and Port of Melbourne (2018 to 2020). Jane is also a Board member of the Allens Advisory Board. Board Committee memberships • Chair of the Sustainability Committee • Member of the Audit and Risk Committee • Member of the Investment Committee Skills and experience Arnoud De Meyer is a former President of Singapore Management University (SMU) and was previously a Professor in Management Studies at the University of Cambridge and Director of Judge Business School. Arnoud was also associated with INSEAD as a professor for 23 years, and was the founding Dean of INSEAD’s Asia Campus in Singapore. Currently he is part-time University Professor at SMU. Arnoud currently serves on the board of Singapore Symphonia Company and he is the Chair of Temasek’s Stewardship Asia Centre. He was previously an Independent Director of Dassault Systèmes (2005 to 2019) and served as an independent director for the Department for Business Enterprise and Regulatory Reform (UK) and the Singapore Economic Review Committee. Arnoud also served on the boards of Singapore International Chamber of Commerce and Temasek Management Services. Board Committee memberships • Chair of the Investment Committee • Member of the Remuneration and Nomination Committee Independent Non-Executive Director and Chairman LLB, BA, LLD(Hon), LLM, DPolSc(Hon) Term of office Appointed to the Board on 18 June 2018. Formerly an Independent Non-Executive Director of Viva Energy Holding Pty Limited (5 February 2015 to 17 July 2018). Skills and experience The Hon. Robert Hill is a former barrister and solicitor who specialised in corporate and taxation law and who now consults in the area of international political risk. He has had extensive experience serving on boards and as chairman of public and private institutions, particularly in the environment and defence sectors. Robert Hill was previously Australia’s Minister for Defence, Minister for the Environment and Leader of the Government in the Senate during his time as a Senator for South Australia. He served as Australia’s Ambassador and Permanent Representative to the United Nations in New York. Robert is a former Chancellor of the University of Adelaide. In 2012, he was made a Companion of the Order of Australia for services to government and the parliament. Robert is currently Chairman of the NSW Biodiversity Conservation Trust, and Chairman of Re Group Pty Limited. Board Committee memberships • Chair of the Remuneration and Nomination Committee • Member of the Sustainability Committee • Member of the Investment Committee 08 Viva Energy Group Limited Annual Report 2019 Sarah Ryan Dat Duong Hui Meng Kho Non-Executive Director Non-Executive Director BBA, CFA BSc (Chemical Engineering) (Hon) Term of office Appointed to the Board on 7 June 2018. Formerly a Non-Executive Director of Viva Energy Holding Pty Limited (1 January 2017 to 17 July 2018). Term of office Appointed to the Board on 18 June 2018. Formerly a Non-Executive Director of Viva Energy Holding Pty Limited (23 June 2014 to 17 July 2018). Skills and experience Dat Duong is the Head of Investments for Vitol in Asia Pacific. Dat joined Vitol in 2010, prior to which he was an Associate Partner at Leopard Capital, an investment fund focused on Asia’s frontier and emerging markets. Dat has extensive international investment banking experience, including with Merrill Lynch in the Global Energy and Power Investment Banking Group in both Hong Kong and Canada, where he led multiple landmark downstream oil transactions. Skills and experience Hui Meng Kho is the President and CEO of Vitol Asia Pte Ltd and a member of the Vitol Group Board of Directors. Hui Meng joined Vitol in 1987 and has been the head of Vitol Asia since 1999. Prior to joining Vitol, Hui Meng was with Esso Singapore, involved in logistics, planning, trading and refinery operations. Hui Meng is currently a director of Boustead Petroleum Sdn Bhd (formerly BP Malaysia) and on the Board of Trustees of Singapore Management University. Dat commenced his career at Esso Imperial Oil in Canada as a business analyst. Hui Meng was conferred the title ‘Dato’ by the Ruler of the Malaysian state of Pahang in 2004. Board Committee memberships • Member of the Audit and Risk Committee • Member of the Investment Committee Board Committee memberships • Member of the Remuneration and Nomination Committee • Member of the Investment Committee Independent Non-Executive Director PhD (Petroleum Geology and Geophysics), BSc (Geophysics) (Hons 1), BSc (Geology), FTSE Term of office Appointed to the Board on 18 June 2018. Skills and experience Sarah Ryan has over 30 years of international experience in the energy industry, ranging from technical, operational and leadership roles at a number of oil and gas and oilfield services companies, to a decade of experience as an equity analyst covering natural resources. Sarah is a Fellow of the Australian Academy of Technological Sciences and Engineering (ATSE), a Fellow of the Australian Institute of Energy, a Member of the Australian Institute of Company Directors, a Member of Women Corporate Directors and a Member of Chief Executive Women. She serves as a member of ASIC’s Director Advisory Panel, as non-executive director of the Future Battery Industries Cooperative Research Centre, and is Deputy Chair of the ATSE Energy Forum. Sarah is currently a Non-Executive Director of Woodside Petroleum Limited (since 2012), Aurizon Holdings Limited (since 2019), Akastor ASA, a company listed on the Oslo Stock Exchange (since 2014), and MPC Kinetic Pty Ltd (since 2016). She is a former director of Central Petroleum Limited (2017 to 2018) and Aker Solutions ASA (2010 to 2014). Board Committee memberships • Chair of the Audit and Risk Committee • Member of the Sustainability Committee • Member of the Investment Committee B o a r d o f D i r e c t o r s 09 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Executive Leadership Team Scott Wyatt Jevan Bouzo Daniel Ridgway Amanda Fleming Chief Executive Officer Chief Financial Officer Chief Operating Officer Prior to joining Viva Energy, Jevan Bouzo worked at Ernst & Young in assurance and business services, where he led assurance and business improvement projects for clients in the energy and retail sectors as well as a number of ASX-listed companies. Since joining Viva Energy, Jevan has overseen corporate finance, business finance and credit, treasury and a number of strategic projects culminating in his appointment as Chief Financial Officer. Jevan is currently a Non-Executive Director of Viva Energy REIT. Jevan is a Chartered Accountant and holds a Bachelor of Commerce (majoring in Accounting and Finance) from Monash University. Daniel Ridgway has more than 20 years’ experience in the oil and gas industry, after starting his career as a petroleum engineer in Shell’s upstream exploration business in the North Sea. Daniel went on to fulfil a diverse range of leadership roles across downstream oil and gas, both in Australia and overseas. Prior to being appointed to the role of Chief Operating Officer at Viva Energy, Daniel held the role of General Manager, Retail and prior to that General Manager, Supply Chain. Daniel holds a Bachelor of Engineering (with Honours) from RMIT University. Scott Wyatt has more than 30 years’ experience in the oil and gas sector and has held various leadership roles within Viva Energy’s downstream oil and gas business (formerly Shell) including strategy, marketing (consumer and commercial) and supply and distribution. After a long career with Shell in New Zealand, Australia and Singapore, Scott relocated to Australia in 2006 as Distribution Manager (Australia and New Zealand) and in 2009 was appointed General Manager of Supply and Distribution Australia. In July 2013, he was appointed Vice President Downstream Australia, responsible for the downstream businesses in Australia. Scott was appointed as CEO in August 2014. Scott holds a Bachelor of Commerce and Administration from Victoria University of Wellington. Chief People and Technology Officer Amanda Fleming was appointed Chief People and Technology Officer in October 2019, with over 20 years of experience across Retail, Fast Food and FMCG leading business-wide transformations, as well as Human Resources, Merchandise, Operations and Commercial functions. Prior to Viva Energy, Amanda was the Chief Transformation Officer (CTO) and Managing Director, Commercial, for Super Retail Group, the owners of Super Cheap Auto, rebel, Boating, Camping, Fishing (BCF) and MacPac. Previously Amanda has held executive roles including Director of Human Resources for Coles Group in the Wesfarmers organisation, Chief Operations Officer and Chief People Officer for Pizza Hut USA, and Human Resources Director for Mars in Australia (where she also served as European Organisational Development Manager for Mars in the UK and Europe). Amanda holds a Masters of Organisational Change from Hult International Business School and a Bachelor of Business from Deakin University. There were changes in our Leadership Team during the year. Megan Foster joined the team as Executive General Manager, Retail and brings over 25 years’ experience in retail. Megan succeeded Dan Ridgway, who took on the newly created role of Chief Operating Officer in January 2019. Dan Ridgway, Chief Operating Officer, has decided to leave the Company after more than 22 years with the business, The Board extends their appreciation to Dan for his significant contribution to the business during his many years of service. Jodie Haydon, General Manager People and Culture left the Company in June 2019, after almost 25 years with the business. Succeeding Jodie and taking on additional responsibilities for technology and digital, Amanda Fleming joined the team as Chief People and Technology Officer in October 2019. Amanda brings over 20 years’ experience across Retail, Fast Food and FMCG leading business-wide transformations. We also announced the following changes that will take effect from the end of March 2020. 10 Thys Heyns will step down as Executive General Manager, Refining, and will take on the role of Chief Operating Officer. Dale Cooper will join the Company and the executive team as Executive General Manager, Refining. Dale brings more than 30 years’ experience in the refining sector. Viva Energy Group Limited Annual Report 2019 Megan Foster Thys Heyns Lachlan Pfeiffer Denis Urtizberea Executive General Manager, Retail Executive General Manager, Geelong Refinery Executive General Manager, Legal and External Affairs Executive General Manager, Commercial Megan Foster has over 25 years’ experience in retail across FMCG, Grocery, Specialty, Food, and general Retail. Having recently joined Viva Energy in January 2019, she brings with her extensive senior executive experience across Marketing and Brand, Digital, Sales, Property and Development, Operations, Merchandise and M&A. Prior to joining Viva Energy, she led the Retail division for QIC, responsible for the retail product strategy across Australia and their 22 Australian assets. Previously she has held general management positions with Myer and Sass and Bide after an earlier career with Woolworths and Unilever, and running a highly successful retail consultancy. Megan holds a Bachelor of Commerce from University of Western Sydney. Thys Heyns has more than 30 years’ experience in the oil and gas industry. Prior to joining Viva Energy in February 2015, Thys was with BP for 28 years in an international career across four continents that covered Supply Chain, Oil Trading and Refining. Thys is an experienced Refining executive with his most recent roles including General Manager of the 400kb/d BP Rotterdam Refinery and the 140kb/d BP Kwinana Refinery in Western Australia. Prior to that, Thys was the Commercial General Manager for BP’s global refining portfolio. Thys holds a Master in Business Administration and a Bachelor of Commerce (Hons) in Accounting and Economics. Thys has attended executive education programs at Stanford University, Cambridge University and Massachusetts Institute of Technology (MIT). He has held leadership roles in various industry associations and is currently a Director of the Geelong Manufacturing Council. Prior to joining Viva Energy in October 2014, Lachlan Pfeiffer worked as a corporate lawyer for Skadden, Arps, Slate, Meagher and Flom (UK) LLP, based in London for seven years. Lachlan started his career in Melbourne working for Norton Rose Fulbright (Australia). Denis Urtizberea joined Viva Energy Australia late 2015, bringing 25 years of experience in the oil and gas industry. He developed a passion for customer centricity through a number of diverse sales and marketing leadership positions, primarily in the business to business arena. L e a d e r s h p i T e a m E x e c u t i v e Lachlan is currently a Non-Executive Director of Viva Energy REIT. Lachlan is a legal practitioner and holds a Bachelor of Commerce from Melbourne University and a Bachelor of Laws (with Hons) from Monash University. He is also a member of the Australian Institute of Company Directors. Starting his career in a small subsidiary of Total, moving then to BP/Castrol Group before joining Puma Energy and finally Vivo Energy and Viva Energy Australia, Denis has had the opportunity to build a strong international culture through negotiating deals in more than 100 countries across the globe. Denis holds a qualification in engineering (Physics and Chemistry). 11 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsViva Energy Group Limited Annual Report 2019 12 Viva Energy Group Limited Annual Report 2019 Operating and financial review Company overview Supply, Corporate and Overheads Viva Energy is one of Australia’s leading energy companies. Our origins date back over 110 years when Shell Transport and Trading Company and the Royal Dutch Petroleum Company established the British Imperial Oil Company in Australia as a joint venture in 1907. In 2014, a Vitol-led consortium, Vitol Investment Partnership, acquired the Shell Australia downstream business (excluding the aviation business) and the business was renamed Viva Energy. The aviation business was subsequently acquired and reintegrated in 2017. Viva Energy was admitted to the Official List of the ASX in 2018. In 2019, Viva Energy supplied 14.7 billion litres of petroleum products (approximately one quarter of Australia’s liquid fuel requirements) through a national network of retail service stations and directly to commercial customers. The Group owns and operates an oil refinery in Victoria together with an extensive import, storage and distribution infrastructure network, including a presence at over 50 airports and airfields across the country. Crude oil and refined products are procured and imported by Vitol, one of the world’s largest independent energy commodity trading companies. Viva Energy is the exclusive supplier of Shell fuels and lubricants in Australia, and holds a number of investments, including a 35.5% interest in ASX listed Viva Energy REIT (as at 31 December 2019), which owns service station property assets that it leases to the Group, as well as a 50% interest in the Liberty Oil retail business. Retail, Fuels and Marketing – Retail Viva Energy supplies and markets quality fuel products through a national network of nearly 1,300 retail service stations. The majority of this network is Shell-branded, and over 700 of the sites are operated by Coles Express under the Coles Alliance. Viva Energy also supplies other retail operators and wholesalers. Retail, Fuels and Marketing – Commercial Viva Energy is a leading supplier of fuel, lubricants and specialty hydrocarbon products to commercial customers in the aviation, marine, transport, resources, construction, agriculture and manufacturing industries. Viva Energy has market leading positions in many segments which are underpinned by long-standing customer relationships. Refining Viva Energy owns and operates the country’s second largest and most complex refinery in Australia, located at Geelong in Victoria. Refineries play an important role in processing Australian and imported crude oil into petroleum products which meet Australian specifications and help to enhance fuel supply security for the country. Geelong Refinery supplies more than 10% of Australia’s total fuel requirements (more than 50% of Victoria’s fuel demand) and is the only manufacturer of bitumen, Avgas for use in piston engine aircraft, and other hydrocarbon solvents. fi n a n c i a l r e v i e w O p e r a t i n g a n d Viva Energy owns or contracts access to a national infrastructure network comprising import terminals, storage tanks, depots and pipelines positioned across metropolitan and regional Australia in all states. The Group has three barges which provide marine fuels to cruise and container shipping industries in Sydney and Melbourne, and also contracts with a number of fuel transport companies to distribute fuels to customers throughout the country. Our strategy As a large and diverse country, Australians rely on affordable energy to move around, transport products to every corner of the country and beyond our shores, and produce the goods and services that drive the economy. Petrol, diesel, jet and fuel oils have provided this energy for more than 100 years and remain an important part of every Australian’s daily life. Through our extensive retail network, commercial business, national terminal and pipeline infrastructure position and strategically located refinery in Geelong, Victoria, Viva Energy supplies approximately 25% of Australia’s liquid fuel requirements. In the future, new energies may emerge which can provide potentially greener alternatives to meet our mobility needs and produce the goods and services that we need to build a successful economy. While this energy transition will present new opportunities for investment and encourage new products and services which will drive future growth, hydrocarbon derived fuels will continue to be a very important part of the energy mix. As a leading energy company with significant presence across all geographies and sectors, Viva Energy can play a very important role in meeting these changing customer needs and benefiting from the new opportunities that emerge. Viva Energy’s strategy is to maintain sharp focus and outperform our competitors in our core businesses, develop opportunities for new growth in emerging products and services, and explore new horizons for growth in new markets and aligned businesses. Outperform: We aim to operate the most efficient business and be the most preferred oil company in Australia. This means improving our brand preference by leveraging our unique partnerships, maintaining the highest quality retail fuel and convenience network, delivering recognised value to our customers, and protecting our highly regarded reputation with customers and stakeholders. The renegotiation of our Alliance with Coles during 2019, and the subsequent improvement in retail fuel pricing, was an important part of this strategy and it is pleasing to see customers respond positively to these changes. New growth: Beyond our traditional fuels, there are opportunities in emerging fuels and in other products and services that Viva Energy is well placed to provide. Viva Energy is the only manufacturer of bitumen, Avgas used in piston engine aircraft, and hydrocarbon solvents that drive earnings opportunities at our refinery in Geelong, but also broader market opportunities. Our national infrastructure is well established and securely linked into energy supply chains in all major cities and regional markets around the country, and presents opportunities for development to meet emerging energy needs. 13 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued New horizons: Over more than 110 years we have developed significant capability in managing complex manufacturing processes, diverse supply chains, retail networks, and business to business relationships. This capability naturally extends to other industries and geographies, which presents opportunities to grow from our core business to capture synergies and exploit opportunities. As the environment evolves in the future, we will continue to monitor changes and carefully consider these opportunities. In support of these key strategies, we aim to maintain a lower capital operating model and reduce exposure to high levels of fixed costs and volatility where this is possible. For example, our retail business operates under a leasehold model to reduce capital allocated to real estate, but at the same time share the fixed lease costs with our partner Coles under the Alliance agreement. Our partnership with Vitol provides access to a competitive supply of crude oils and refined products while more effectively managing traditional risks associated with procuring significant volumes on the open market. Most importantly, we maintain a strong commitment to safe and reliable operations. We believe every incident is preventable and are committed to pursuing the goal of no harm to people and protecting the environment. We call this ‘Goal Zero’. To achieve this we manage safety in a systematic way and we believe that providing a safe workplace and ensuring safe outcomes is an ethical responsibility. We seek to achieve this through effective management of both personal and process safety matters, as well as focused asset integrity management and proactive health and wellness initiatives. payment to Coles Express of $137M. As a result of a more competitive retail fuel pricing strategy, the Group returned fuel volumes through the Alliance network to growth in 2H2019 after an extended period of decline. Despite the volume growth and additional margin as a result of the Alliance re-set, industry retail fuel margins compressed relative to the prior year impacting Underlying EBITDA (RC) of the Group. Retail fuel margins did however improve during the final quarter of the 2019 year, which contributed to finishing above the retail Underlying EBITDA (RC) range provided in December 2019. The Group also extended its licence of the Shell brand on retail automotive fuels in Australia until 31 December 2029, successfully renegotiated and extended approximately one third of commercial customer contracts, completed the acquisition of the remaining 50% of the Liberty Oil Holdings wholesale business and achieved periods of record production at the Geelong Refinery. There was a marked improvement in both personal and process safety performance compared to 2018, with a 20% decrease in recordable injuries and a 50% decrease in Process Safety Events. The Refining business experienced a 50% reduction in the number of recordable injuries and we exceeded 12 months free of driver injury in our contracted transport operations. We increased the number of fitness to work assessments conducted this year and the Pinkenba terminal achieved renewal of its safety case and major hazard facility licence for a period of five years, free of any licence conditions. In 2020, we will be reviewing and updating the safety case for our major hazard facility at Clyde. 2019 business performance summary Retail During 2019, the Group delivered strong top line sales growth, with volumes up 4.6% on FY18. This increase in sales volumes was driven largely by restoration of growth in the retail Alliance channel, continued growth in the Liberty and wholesale businesses, and strong sales performance in commercial segments. Refining operating performance was also strong, with periods of record production. The Group achieved an Underlying EBITDA (RC) of $644.5 million (M) in FY2019, down $130.1M compared with $774.6M for the Pro Forma comparative period2. Lower refining margins due to poor gasoline margins and higher crude premiums, weaker industry retail fuel margins, compressed commercial margins due to heightened competition and increased ocean freight combined with the effects of lower exchange rates, and increased Supply, Corporate and Overhead costs all impacted earnings negatively during the year. In 1H2019, Viva Energy successfully renegotiated and extended the Alliance arrangements with Coles, taking full responsibility for the provision of the fuel offering under the Alliance agreement, including retail fuel pricing and marketing across the Alliance network. In return for the changes to commercial terms and additional margin, Viva Energy made a one-off Retail achieved an Underlying EBITDA (RC) of $564.3M for FY2019, down $44.5M compared with the Pro Forma comparative period. The decline in Underlying EBITDA (RC) was driven primarily by weaker industry retail fuel margins, partially offset by margin improvements as a result of the Alliance renegotiation and growth in fuel volumes in 2H2019. In the first quarter of 2019, Viva Energy successfully renegotiated and extended the Alliance with Coles to 2029. As a result, Viva Energy took responsibility for retail fuel pricing and marketing, collecting the full retail fuel margin and an enhanced royalty on convenience sales, in effect transforming the business from a wholesaler to a retail fuel marketer. Coles Express continued to earn the convenience store margin and receive a commission per litre on fuel sales achieved. In consideration of the commercial terms and the margin forgone by Coles, Viva Energy made a one-off payment of $137M to Coles Express. Notwithstanding a focus on providing a more competitive fuel offering across the Shell branded Alliance network, margin improvements as a result of the revised Alliance arrangements were impacted by weaker industry retail fuel margins as a result of a sustained rise in underlying oil cost prices during the 1H2019 and heightened competition during the 2H2019. 2. The 31 December 2018 non-IFRS Pro Forma numbers are provided to illustrate the impact of AASB 16 Leases, had the standard applied from 1 January 2018. In determining these Pro Forma amounts, current lease rentals have been de-escalated in line with contractual escalation clauses, leases entered into prior to 1 January 2018 have been excluded and an additional 12 months of future lease payments have been incorporated. Refer to Summary of Statement of Profit and Loss for further details. 14 Viva Energy Group Limited Annual Report 2019 fi n a n c i a l r e v i e w O p e r a t i n g a n d Improved market conditions in the fourth quarter of 2019 were positive as movements in oil price and competitor activity began to stabilise. These factors combined resulted in challenging market conditions for most of 2019, and weaker year-on-year margin performance in the Retail business. Despite industry retail fuel margin compression during 2019, sales volume growth was achieved within the Alliance channel, with average weekly fuel volumes increasing from 60.0ML in 1HY2019 to an average of 64.7ML per week for 2H2019. The sales volume growth was achieved as a result of more competitive pricing nationally and targeted joint marketing campaigns with Coles Express such as the ‘Little Shop’, ‘Win Free Fuel’ Promotions and partnerships with Carsales and others. We have seen evidence of improved Customer Brand and Price perception during 2019, and expect to continue to build on this by having a consistent and competitive offer in market. Coles Express continues to operate the stores and provides a compelling convenience offer under the Coles Express brand. During the year, the Group continued to expand the retail network and added four sites through the Alliance platform as well as securing 20 new Shell branded supply contracts with independent operators. On 1 December 2019, the Group completed the acquisition of the remaining 50% interest in Liberty Oil’s wholesale business and established a new retail joint venture, Liberty Oil Convenience, in which it holds a 50% interest. The Group will continue to target selected network growth through the Alliance, Liberty Oil Convenience and Dealer Owned platforms and views the Liberty Oil Wholesale business as an opportunity to accelerate growth, especially in regional areas. 15 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Commercial Refining Commercial achieved an Underlying EBITDA (RC) of $296.5M for FY2019, down $32.5M compared with the Pro Forma comparative period. Movement in ocean freight costs combined with a weaker AUD/USD FX rate that were not recoverable from customers during the year accounted for approximately two thirds the difference with the Pro Forma comparative period. More than a third of the overall Commercial portfolio came up for renewal during the year. The vast majority of those contracts were successfully renewed and extended; however, markets remained highly competitive in 2019, which lead to some margin erosion and a reduction in earnings compared to the prior year. A good number of prospects were also converted as new customers. At an overall level, the Group continued to grow sales volumes particularly in the Aviation, Transport and Resources segments. The Group successfully secured a contract with the Australian Defence Force (ADF) to manage, maintain and supply fuel to the HMAS Cairns Defence Fuel Installation, allowing the Group to commercialise the facility in order to generate supply efficiencies. The business successfully introduced a new marine product, Very Low Sulphur Fuel Oil (VLSFO), which is compliant with the new International Marine Organisation (IMO2020) regulations, allowing the Group to secure its future position in this segment. VLSFO is manufactured at our Geelong Refinery. Refining delivered an EBITDA (RC) of $117.0M, lower than FY2018 EBITDA of $124.5M, primarily due to lower regional refining margins. The Geelong Refining Margin decreased to an average of US$6.6/BBL in FY2019 against an average of US$7.4/BBL in FY2018. Weakness in regional gasoline margins, plus higher crude premia for light sweet crudes were the primary drivers of lower refining margins. Gasoline margins through most of FY2019 continued their low trends from 2018, due to weak regional demand, additional exports from China, and additional production from regional refineries that have upgraded their production of light products in advance of the IMO 2020 Fuel Oil specification change. Despite lower margins, the refinery recorded its highest intake with total throughput of 42.0 MBBLs, which was 4.8% higher than FY2018 throughput of 40.1 MBBLs. Improved plant availability of 91.9% was due to lower unplanned downtime compared to FY2018 plant availability of 88.4%. Key unplanned events in FY2019 include the extended turnaround of both sulphur recovery units and an outage on a crude distillation unit. In the second half of FY2019, the refinery safely completed the planned intervention on Platformer 3. This included an upgrade of the compressor that will allow the unit to increase its availability, lower maintenance costs and improve margin delivery from this unit. 16 Viva Energy Group Limited Annual Report 2019 Additionally, the planned intervention on Platformer 3 included a catalyst change and a number of key reliability initiatives which contributed to the refinery achieving a record intake of 42MBBLs for the year, with an average production of white barrel products of 105 KBpd. A new 25ML gasoline tank was commissioned to address key infrastructure opportunities and allow unconstrained operation of the refinery by efficiently aggregating gasoline parcels for coastal export and reducing associated demurrage. The refinery performed a number of successful trials with key customers for a new grade of Very Low Sulphur Fuel Oil (VLSFO) in preparation for the new International Marine Organisation (IMO 2020) regulations, which limits the sulphur content of bunker fuel from 3.5% to 0.5% from 1 January 2020. Supply, Corporate and Overheads Supply, Corporate and Overheads delivered an Underlying EBITDA (RC) of ($333.3M) in FY2019, a decrease of $45.6M compared with ($287.7M) for the Pro Forma comparative period due to increased property outgoings and coastal shipping costs, higher salary costs relating to natural and contracted wage inflation, the full year impacts of being a publicly listed company, higher insurance costs and inflation. During the year the Group also incurred one-off costs relating to the purchase of the remaining 50% share of Liberty Oil Wholesale and the extension of the Alliance agreement. There were several highlights in the Group’s terminal infrastructure, which included the commissioning of a new 8ML jet fuel storage tank at the Newport terminal. Work has also continued on modernising the marine fuel oil tanks in Sydney including additional capacity to service the growing demand from Australian leisure cruise ships. The Group’s focus on shipping economics saw the continued leveraging of berthing capabilities in Sydney and Geelong harbours. Viva Energy consolidated results for the full year ended 31 December 2019 The Group Net Profit After Tax (NPAT) on a historical cost basis (HC) for FY2019 was $113.3M. After adjusting for significant one-off items and net inventory gain/(loss), Underlying NPAT on a replacement cost basis for the period was $135.8M. A reconciliation from Statutory Profit After Tax (HC) to Underlying NPAT (RC) is summarised in the table below. Reconciliation of Statutory Profit After Tax to Underlying NPAT (RC) Statutory Profit After Tax Add: Significant one-off items net of tax Add: Net inventory loss net of tax Less: One-off tax benefits including tax consolidation Underlying NPAT (RC) A$M 113.3 (4.0) 34.7 (8.2) 135.8 The Underlying NPAT (RC) result is in line with the guidance update provided to the market on 9 December 2019. Historical cost is calculated in accordance with IFRS and shows the cost of goods sold at the actual prices paid by the business using a First In, First Out (FIFO) accounting methodology. As such, HC accounting includes gains and losses resulting from timing differences between purchases and sales of inventory and the rise and fall of oil and product prices during that time. Gains and losses arising from the rise and fall of oil and product prices are typically offset by a change in working capital because of the higher or lower cost to replenish inventory. Replacement cost is a non-IFRS measure under which the cost of goods sold is calculated on the basis of theoretical new purchases of inventory instead of the historical cost of inventory. As a result, it removes the effect of timing differences to enable users of the financial information to more consistently assess the underlying performance of the business. This represented basic earnings per share (EPS) on a replacement cost basis of 7.0 cents. AASB 16 Leases On adoption of AASB 16, the Group recognised lease liabilities in relation to leases which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 January 2019. Various extension and termination options are included in a number of leases across the Group. Management have determined that the extension of the current Alliance with Coles Express to 2029 is an appropriate timeframe to base option renewals across the lease portfolio. Beyond this timeframe there is significant flexibility in terms of managing lease contracts. For the purposes of the requirements of AASB 16, all lease extension periods that occur prior to February 2029 have been assumed to be exercised. In relation to the Group’s sublease and licensing arrangements, after consideration of the underlying contracts, it has been determined that as at 1 January 2019, the arrangements continued to exhibit the characteristics of operating leases. A re-assessment of the application of AASB 16 in relation to the sublease and licensing contracts was triggered by the Alliance reset with Coles Express announced to the market on 6 February 2019 and due to the changes in the underlying arrangements it has been determined that the inflows under these arrangements fall within the scope of AASB 15 Revenue from contracts with customers. The Group would have recognised these arrangements as a lease receivable of $1,191.0M on adoption of AASB 16 and a year-end balance of $1,156.4M had the assessment concluded that the arrangements met the criteria of a finance lease. fi n a n c i a l r e v i e w O p e r a t i n g a n d 17 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Summary statement of profit and loss (A$M) Revenue Cost of goods sold (RC) Gross Profit (RC) Retail, Fuels and Marketing Retail Commercial Refining Supply, Corporate and Overheads 1. Total Underlying EBITDA (RC) Retail, Fuels and Marketing Retail Commercial Refining Under AASB 16 Leases (new standard) Under AASB 117 Leases (old standard) FY2019 Actual FY2018 Pro Forma1 Variance FY2019 Pro Forma2 FY2018 Actual Variance 16,541.6 16,395.1 146.5 16,541.6 16,395.1 (15,025.8) (14,750.1) (275.7) (15,025.8) (14,750.1) 1,515.8 1,645.0 (129.2) 1,515.8 1,645.0 688.5 545.8 299.8 (18.3) 644.5 564.3 296.5 117.0 720.3 584.1 301.5 39.1 (31.8) (38.3) (1.7) (57.4) 774.6 (130.1) 608.8 329.0 124.5 (44.5) (32.5) (7.5) (45.6) 688.5 545.8 299.8 (18.3) 387.1 563.3 291.3 117.0 720.3 584.1 301.5 39.1 608.8 323.8 124.5 528.9 (141.8) Supply, Corporate and Overheads (333.3) (287.7) (584.5) (528.2) Lease straight-lining Share of profit from associates Net gain/(loss) on other disposal of PP&E 2. Revaluation gain/(loss) on FX and oil derivatives 3. Depreciation and amortisation Profit before interest and tax (HC) 4. Add: Net inventory loss Profit before interest and tax (RC) 5. Net finance costs Profit before tax (HC) 6. Income tax expense Underlying Net Profit After Tax (HC) Add: Net inventory loss net of tax at 30% Underlying Net Profit After Tax (RC) 7. Significant one-off items (net of tax) 6. One-off tax benefit including tax consolidation Net Profit After Tax (HC) 8. Net Profit After Tax (RC) - 60.2 (1.9) 43.1 (355.7) 340.7 49.5 390.2 (188.2) 152.5 (51.4) 101.1 34.7 135.8 4.0 8.2 113.3 148.0 - 63.5 10.2 1.9 (319.6) 437.0 93.6 530.6 (208.2) 228.8 (62.8) 166.0 65.5 231.5 (6.3) 358.4 518.1 583.6 - (21.4) (25.3) (3.3) (12.1) 41.2 (36.1) (96.3) (44.1) (140.4) 20.0 (76.3) 11.4 (64.9) (30.8) (95.7) 10.3 (350.2) (404.8) (435.6) 60.2 (1.9) 43.1 63.5 10.2 1.9 (159.3) (129.7) 258.3 49.5 307.8 (33.6) 224.7 (73.1) 151.6 34.7 186.3 4.0 8.2 163.8 198.5 355.9 93.6 449.5 (39.2) 316.7 (89.2) 227.5 65.5 293.0 (6.3) 358.4 579.6 645.1 1. The 31 December 2018 Pro Forma numbers are provided to illustrate the impact of AASB 16 Leases, had the standard applied from 1 January 2018. In determining these Pro Forma amounts, current lease rentals have been de-escalated in line with contractual escalation clauses, leases entered into prior to 1 January 2018 have been excluded and an additional 12 months of future lease payments have been incorporated. 2. The 31 December 2019 Pro Forma numbers exclude the impact of AASB 16 Leases and instead apply AASB 117 and are provided to allow comparison to prior year’s financial statements. 18 146.5 (275.7) (129.2) (31.8) (38.3) (1.7) (57.4) (45.5) (32.5) (7.5) (56.3) 3.9 (3.3) (12.1) 41.2 (29.6) (97.6) (44.1) (141.7) 5.6 (92.0) 16.1 (75.9) (30.8) (106.7) 10.3 (350.2) (415.8) (446.6) Viva Energy Group Limited Annual Report 2019 Summary statement of profit and loss analysis 1. Underlying EBITDA (RC) (A$M) a. Retail, Fuels and Marketing a(i). Retail a(ii). Commercial b. Refining Under AASB 16 Leases (new standard) Under AASB 117 Leases (old standard) FY2019 Actual FY2018 Pro Forma Variance FY2019 Pro Forma FY2018 Actual Variance 564.3 296.5 117.0 608.8 329.0 124.5 (44.5) (32.5) (7.5) (45.6) 563.3 291.3 117.0 608.8 323.8 124.5 (584.5) (528.2) (45.5) (32.5) (7.5) (56.3) c. Supply, Corporate and Overheads (333.3) (287.7) Total Underlying EBITDA (RC) 644.5 774.6 (130.1) 387.1 528.9 (141.8) a(i). Retail The Retail segment comprises a national network of nearly 1,300 retail fuel and convenience sites which are operated through various channels such as sites operated with Coles Express under a long-term alliance (the Alliance), unmanned truck stops owned and operated by Viva Energy and sites operated by independent dealer owners. Retail also includes sales to wholesalers and independent retail operators, fuel supply to Westside Petroleum Pty Ltd (Westside) and Liberty Oil. fi n a n c i a l r e v i e w O p e r a t i n g a n d The Group holds a 50% equity interest in Westside and during the year, acquired the remaining 50% interest of Liberty Oil’s wholesale business. The Group’s interest in Liberty Oil’s retail business has remained at 50%. The following commentary compares 31 December 2019 Actual results to 31 December 2018 Pro Forma results Retail achieved an Underlying EDITDA (RC) of $564.3M down $44.5M compared with $608.8M for the Pro Forma comparative period. Viva Energy successfully renegotiated and extended the Alliance arrangements, taking control of board pricing at all Coles Express Shell sites from 1 March 2019, collecting the full retail fuel margin and an enhanced royalty on convenience sales. Improvements as a result of the Alliance renegotiation were more than offset as industry retail fuel margins suffered compression relative to the prior year predominantly due to the volatility in oil price and increased competition in the market. Despite the challenging market environment, volumes in the Alliance increased throughout the year as a result of more competitive national retail fuel pricing and strong consumer marketing campaigns. During the period, four Company controlled retail sites were opened and another 20 independently owned retail sites were added to the Shell branded network. The following commentary compares 31 December 2019 Actual results to 31 December 2018 Actual results The Group’s adoption of AASB 16 Leases has impacted the Retail results for 2019 by $1.0M due to the recognition of Liberty leases on 1 December 2019. There is no Pro Forma adjustment required to the 2018 results. 19 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Summary statement of profit and loss analysis 1. Underlying a(ii). Commercial Commercial consists of the supply of fuel, lubricants and specialty products to commercial EBITDA (RC) continued customers in the aviation, marine, bulk transport, resources, government, construction and manufacturing industries. The following commentary compares 31 December 2019 Actual results to 31 December 2018 Pro Forma results Commercial achieved an Underlying EBITDA (RC) of $296.5M down $32.5M compared with $329.0M for the Pro Forma comparative period. Competitive pressures, increased supply chain costs and weaker foreign exchange rates impacting costs that were not able to be passed on to customers during the period have impacted the full year result. Despite these challenging market conditions during 2019, a significant number of our commercial sales contracts were successfully renegotiated and extended, with a number of new contracts also secured. The business was successful in growing sales volume by approximately 2% during the year. The Group has a series of key strategic initiatives focused on expanding its commercial customer base, increasing volumes, improving margins and achieving cost savings. The most significant of these initiatives includes maximising value through Geelong via manufacturing, optimisation and additional bitumen sales, barge cost optimisation, and rollout of Very Low Sulphur Fuel Oil (VLSFO). The following commentary compares 31 December 2019 Actual results to 31 December 2018 Actual results Commercial achieved an Underlying EBITDA (RC) of $296.5M compared with $323.8M for the prior comparative period, a decrease of $27.3M. In addition to the factors commented on above, the period-on-period variance was impacted by the adoption of AASB 16 Leases, which resulted in an increase to Underlying EBITDA (RC) of $5.2M. b. Refining Refining relates to the earnings from the refinery located in Geelong, Victoria (the Geelong Refinery), which is owned and operated by the Group and converts imported and locally sourced crude oil into petroleum products including gasoline, diesel, jet fuel, aviation gasoline, gas, solvents, bitumen and other specialty products. Refining delivered an EBITDA of $117.0M, lower than FY2018 EBITDA of $124.5M, primarily due to lower regional refining margins. The Geelong Refining Margin dropped to an average of US$6.6/BBL in FY2019 against an average of US$7.4/BBL in FY2018. Despite challenging regional refining margins, improved plant availability of 91.9% was due to lower unplanned downtime compared to FY2018 plant availability of 88.4%. Despite lower margins, the refinery recorded its highest intake with total throughput of 42.0 MBBLs, which was 4.8% higher than FY2018 throughput of 40.1 MBBLs. Total refinery costs of $283M were higher than in FY2018 ($275M) due to the Platformer 3 intervention, an energy study to identify and quantify efficiency opportunities, a new safety training program rolled out to all employees and contractors on site, and other one-off type expenditure. Benefits from the Power Purchase Agreement with Acciona Energy’s Mt Gellibrand Wind Farm, to cover approximately a third of Geelong Refinery’s annual electricity requirements, were also realised throughout FY2019. 20 Viva Energy Group Limited Annual Report 2019 c. Supply, Corporate and Overheads Supply, Corporate and Overheads consists of Viva Energy’s integrated supply chain of terminals, facilities, depots, pipelines and distribution assets located across Australia, as well as site maintenance costs and all head office costs. The following commentary compares 31 December 2019 Actual results to 31 December 2018 Pro Forma results Supply, Corporate and Overheads delivered an Underlying EBITDA (RC) of ($333.3M) in FY2019, a decrease of $45.6M compared with ($287.7M) for the Pro Forma comparative period due to increased property outgoings and coastal shipping costs, higher salary costs relating to natural and contracted wage inflation, the full year impacts of being a publicly listed company, higher insurance costs and inflation. During the year the Group also incurred one-off costs relating to the purchase of the remaining 50% share of Liberty Oil Wholesale and the extension of the Alliance agreement. The following commentary compares 31 December 2019 Actual results to 31 December 2018 Actual results Supply, Corporate and Overheads achieved an Underlying EBITDA (RC) of ($333.3M) compared with ($528.2M) for the prior comparative period, a increase of $194.9M. In addition to the factors commented on above, the period-on-period variance was impacted by the adoption of AASB 16 Leases, which resulted in operating lease expenditure of $251.2M (2018: $240.5M) being reclassified as interest expense and reduction in lease liability. 2. Revaluation gain/ (loss) on FX and oil derivatives Revaluation gain/(loss) on FX and oil derivatives is impacted by realised and unrealised foreign exchange and associated hedges, flat oil price hedges and refinery margin hedging. During the period a gain of $43.1M was recognised, $1.7M of which remained unrealised at 31 December 2019. This gain was recorded primarily as a result of successful foreign exchange management, which exhibited volatility within the period, some of which is reported as part of net inventory gain/loss. fi n a n c i a l r e v i e w O p e r a t i n g a n d 3. Depreciation and amortisation Depreciation and amortisation includes $196.4M relating to leases previously accounted for as operating, now classified as depreciation with the adoption of AASB 16 Leases. Depreciation and amortisation excluding the impact of AASB 16 has increased by $29.6M compared to the prior comparative period primarily as a result of a large number of assets under construction in 2018 completing and commencing deprecation in 2019 combined with the additional amortisation of the one off payment of $137M made to Coles Express in relation to the renegotiated and extended Alliance agreement. 4. Net inventory gain/(loss) Net inventory gain/(loss) relates to the effect of movements in oil price and foreign exchange on inventory recorded at historical cost using the First In, First Out (FIFO) principle of accounting. 5. Net finance costs Net finance costs consisted of interest income, interest expense on borrowings, fees associated with trade finance instruments, finance costs associated with finance leases, amortised financing transaction costs and the unwind of discounting on balance sheet provisions. Finance costs associated with finance lease includes $154.6M relating to leases previously accounted for as operating, now classified as finance with the adoption of AASB 16 Leases. Finance costs excluding the impact of the adoption of AASB 16 Leases decreased by $5.6M compared to the previous period due to lower average net debt during the period combined with reduced charges from the unwinding of provisions. 21 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Summary statement of profit and loss analysis continued 6. Income tax expense and one- off tax benefit Viva Energy is subject to income tax expense on the basis of historical cost earnings (NPAT HC) rather than replacement cost earnings (NPAT RC). The effective tax rate of the current period (excluding the impact of the $8.2M significant one-off gain) was 33.6% due primarily to the non-deductibility of the $137.0M payment to Coles Express under the extended Alliance agreement. The significant one-off gain of $8.2M relates primarily to an adjustment to the impact of the formation of a new tax consolidated group in 2018 associated with the finalisation of the outcomes of tax consolidation after lodgement of the FY2018 tax return. The treatment of this item as significant one-off is consistent with the treatment of the initial impact on formation of the tax consolidated group recorded in the results for the full year ended 31 December 2018. 7. Significant one-off items (net of tax) Significant items include the impact of a revision to of the Group’s Asset Retirement Obligation (ARO) provision due to changes made to underlying estimates ($3.0M) together with the gain recognised on revaluation of the Liberty Oil Holdings (LOH) investment as part of the accounting for the acquisition of the remaining 50% share of the LOH group ($1.0M). 8. Underlying Net Profit After Tax (RC) The Underlying Net Profit After Tax (RC) of $135.8M is lower than FY2018 due to the lower Underlying EBITDA (RC) relating to each of the segments, reduced share of profit from associates and higher depreciation and amortisation. Reduced finance costs and gains of FX and oil derivative revaluations assisted in partly offsetting these impacts. The Underlying NPAT (RC) result is in line with the guidance update provided to the market on 9 December 2019. FY2019 Actual 197.4 1,474.8 2,328.1 657.0 641.8 (137.4) (2,448.3) (155.5) 166.0 FY2018 Actual 268.0 1,471.3 Variance (70.6) 3.5 - 2,328.1 432.5 664.9 0.2 (50.8) (143.6) 136.6 224.5 (23.1) (137.6) (2,397.5) (11.9) 29.4 (55.2) 2,723.9 2,779.1 Summary statement of financial position A$M 1. Working capital 2. Property, plant and equipment 3. Right-of-use assets 4. 5. Intangible assets Investment in associates 6. Net debt (excluding lease liabilities) 7. Lease liability 8. Long-term provisions, other assets and liabilities 9. Net deferred tax asset 10. Total equity 22 Viva Energy Group Limited Annual Report 2019 Summary statement of financial position analysis 1. Working capital Working capital decreased primarily as a result of the receipt of tax refunds during the year and the reclassification of lease related prepayments to right-of-use assets offset in part by the combined overall net effect of an increase in average benchmark crude and refined product prices of A$18.7/BBL between December 2018 and December 2019. 2. Property, plant and equipment (PP&E) Property, plant and equipment relates to freehold terminal property, leasehold retail and terminal improvements, plant and infrastructure such as tanks and pipelines held at terminals, airports and retail sites and the Geelong Refinery land and equipment. Property, plant and equipment (PPE) increased during the year as a result of expenditure and other additions ($162.1M) and PPE acquired through the acquisition for the remaining 50% of Liberty Oil Holdings Pty Limited ($21.8M). Offsetting these increases were depreciation of $128.1M, disposals of $9.1M, transfers of completed software projects to intangibles of $3.4M and the reclassification of $39.8M existing finance leased assets to right-of-use assets on adoption of AASB 16 Leases. A breakdown of capital expenditure by segment is outlined below. A$M a. Retail, Fuels and Marketing b. Refining c. Supply, Corporate and Overheads FY2019 Actual FY2018 Actual Variance 18.4 88.5 54.8 161.7 45.9 84.5 110.9 241.3 (27.5) 4.0 (56.1) (79.6) a. Retail, Fuels and Marketing Retail, Fuels and Marketing capital expenditure of $18.4M is lower than FY2018 predominantly due to a lower number of retail site developments completed compared with the prior period as the Group focused on optimising the existing network post the Alliance re-set. The prior comparative period included additional tank replacements and the conclusion of the Shell brand refresh project. b. Refining Refining capital expenditure in FY2019 at $88.5M was higher than FY2018 primarily due to higher costs relating to the turnarounds on the sulphur recovery units. The total spend includes significant projects such as the Bitumen Manufacturing Complex enhancement to improve the efficiency of the bitumen plant and deliver the full benefits of the Bitumen Import/Export facility project to enable additional bitumen production, the commissioning of a new 25ML gasoline tank to enable more efficient operations and export logistics, and the Distributed Controls Systems project to upgrade the computerised controls system for automated processes at the refinery. c. Supply, Corporate and Overheads Supply Chain and Corporate capital expenditure of $54.8M was lower than FY2018 primarily due to the Clyde Terminal conversion project and ERP implementation project that were both completed in FY2018. fi n a n c i a l r e v i e w O p e r a t i n g a n d 3. Right-of-use assets As a result of the adoption of AASB 16, from 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability is recorded at the date at which the leased asset is available for use by the Group. The right-of-use asset recognised on 1 January 2019 is $23.6M less than the corresponding lease liability as the balance of prepaid leases and straight-line provisions held in the balance sheet at the date of adoption were transferred to the right-of-use asset account on adoption of the Standard. The Group recognised $2.4B on adoption of the Standard and has subsequently amortised $199.1M of the amount through the consolidated statement of profit or loss. Amortisation is recognised on a straight-line basis over the life of the right-of-use asset. 4. Intangible assets Intangible assets increased by $224.5M during the period primarily due to the $137.0M payment made to Coles Express as part of the arrangement to extend the Alliance agreement and the recognition of goodwill ($97.5M) and other intangibles ($15.0) on acquisition of the remaining 50% of Liberty Oil Holdings Pty Limited. Also contributing to the increase is the capitalisation of software projects ($3.4M). Amortisation charges of $28.5M were recognised during the year. 23 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Summary statement of financial position analysis continued 5. Investment in associates Investments in associates decreased by $23.1M during the year primarily due to the acquisition of the remaining 50% of Liberty Oil Holdings Pty Limited (LOH) on 1 December 2019, resulting in a derecognition of the existing 50% investment in the wholesale business. The investment balance relating to the Liberty retail business ($15.5M) remains in the balance sheet as an equity accounted investment. This balance also includes Viva Energy’s investment in the Viva Energy REIT and Westside Petroleum. Share of profit/(loss) from associates is recorded against this investment offset by distributions or dividends received. 6. Net debt Net debt relates to Viva Energy’s Revolving Credit Facility (RCF), which is used as a working capital facility to fund fluctuations in working capital, net of cash in bank. Viva Energy does not hold any long-term structural debt. Net debt drawn for the full year was close to nil driven primarily by the change in working capital and the management of stock levels throughout the second half of the year. 7. Lease liability Finance lease liability has increased significantly due to the adoption of AASB 16 Leases on 1 January 2019. Refer to Note 13 Leases in the financial statements for further analysis of the impact. 8. Long-term provisions, other assets and liabilities Long-term provisions, other assets and liabilities predominantly relate to: (i) long-term provisions associated with asset retirement obligations required by accounting standards; (ii) long-term environmental provisions; and (iii) provisions associated with lease straight lining on lease obligations with Viva Energy REIT (2018 only). The increase of $11.9M during the year primarily represents the recognition of a long-term payable to Coles Express of $91.9M (present value) in relation to the transfer of inventory which took place at the time of the Alliance Agreement Amendments that took effect 1 March 2019. This was offset in part by the derecognition of the lease straight-line provision of $66.4M on adoption of AASB 16 Leases and the recognition of a receivable from LOC Global Pty Limited, an associate of the Group. 9. Net deferred tax asset Net deferred tax asset relate to the tax effected difference between the carrying value of assets and liabilities recorded under accounting and those recorded for tax purposes. The increase in net deferred tax assets of $29.4M was due to adjustments in the current period connected with the significant one-off gain of $8.2M, combined with typical movements in deferred tax due to origination or reversal of temporary differences between taxable income and profit during the year, along with movements posted directly to equity or other comprehensive income. The significant one-off gain of $8.2M relates primarily to an adjustment to the impact of the formation of a new tax consolidated group in 2018 associated with the finalisation of the outcomes of tax consolidation after lodgement of the FY2018 tax return. The treatment of this item as significant one-off is consistent with the treatment of the initial impact on formation of the tax consolidated group recorded in the results for the full year ended 31 December 2018. 10. Total equity Total equity decreased by $55.2M primarily due to the payment of dividends during the year ($134.2M) offset in part by NPAT (HC) of $113.3M. Dividends were paid with reference to Distributable NPAT (RC) of $153.0M for FY2019. Other transactions impacting reserves were the exercising of options by senior management, the recognition of the remeasurement of retirement benefit obligations, unrealised losses on cash flow hedges recognised by Viva Energy REIT, tax adjustments relating to the transaction costs recognised from the IPO and the purchase of Viva Energy shares in preparation for the exercising of options by executives in early 2020. 24 Viva Energy Group Limited Annual Report 2019 FY2019 Actual1 FY2018 Actual1 Variance 485.6 (46.1) (83.5) 210.8 (126.8) 81.3 299.6 (299.4) Summary statement of cash flows A$M Profit before interest, tax, depreciation and amortisation (HC) before significant items 1. 2. 3. 4. (Increase) in inventories (Increase) in receivables and prepayments Increase in payables Increase in long-term payables (Decrease) in provisions Changes in working capital 5. Non-cash items in profit before interest, tax, depreciation and amortisation Operating free cash flow before capital expenditure Capital expenditure 6. Coles Express Alliance payment 7. Net payment for share options exercised Proceeds from sale of PP&E and intangibles Dividends received from associates 696.4 (172.9) (2.2) 70.2 91.9 (19.9) (32.9) (54.5) 609.0 (161.7) (137.0) (20.0) 0.3 40.8 Significant one-off items Net loans to associates 8. Finance costs Acquisition of Liberty Oil Holdings net of cash 9. Net income tax payments 10. Dividends paid 8. Repayment of lease liability Net cash flow before borrowings Net drawings/(repayment) of borrowings Net cash flow Opening net debt Amortisation of capitalised borrowing costs Closing net debt Change in net debt - 4.1 (180.3) (24.8) (26.2) (134.2) (106.2) (136.2) 147.1 10.9 0.2 (1.4) (137.4) (136.2) Net free cash flow before financing, tax and dividends 331.4 349.4 - (24.4) 145.6 (95.5) 535.7 (241.3) - - 17.5 37.5 38.6 (3.5) (28.0) - (280.1) - - 91.9 4.5 (178.5) 41.0 73.3 79.6 (137.0) (20.0) (17.2) 3.3 (18.0) (38.6) 7.6 (152.3) (24.8) 253.9 (134.2) (106.2) fi n a n c i a l r e v i e w O p e r a t i n g a n d 76.4 (212.6) (132.5) (56.1) (74.6) (1.6) 0.2 76.4 279.6 67.0 74.8 0.2 (137.6) (212.6) 1. The adoption of AASB 16 Leases on 1 January 2019 resulted in the reclassification of current period operating lease expenditure from operating cash to finance costs and repayment of lease liability. The 2018 cash flow results reflect classification under the previous leasing standard. 25 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Summary statement of cash flows analysis 1. Increase in inventories Inventory increased as a result of an increase in average benchmark crude and refined product prices of A$18.7/BBL offset in part by reduced closing stock levels. Also driving the increase is the recognition of $97.9M of inventory as a result of the return of fuel stock at the time of the Alliance reset. 2. Increase in receivables and prepayments Receivables and prepayments increased as a result of an increase in average benchmark crude and refined product prices of A$18.7/BBL between December 2018 and December 2019. Offsetting part of the increase is the transfer of $50.1M of prepaid head lease expenditure to right-of-use assets on adoption of AASB 16 Leases. 3. Increase in payables Payables increased as a result of increased purchase terms largely align with customer receivable terms combined with an increase in benchmark crude and refined product prices of A$18.7/BBL between December 2018 and December 2019. 4. Decrease in provisions This relates to payment of annual and long service leave entitlements, settlement of environmental provisions and change in lease straight-lining provisions. With the adoption of AASB 16 Leases the lease straight-line provision held at 31 December 2018 was offset against the right-of-use asset on 1 January 2019. 5. Non-cash items Profit before interest, tax, depreciation and amortisation (HC) before significant items includes certain non-cash items including share of profit of associates of $60.2M and loss on sale of assets ($1.9M), non-cash employee options taken up in reserves ($2.2M) and offset by other minor items totalling $1.7M. 6. Coles Express Alliance payment In consideration of the changed commercial terms under the Alliance agreement as announced on 6 February 2019, the Group made a one-off payment of $137.0M to Coles Express. 7. Net payment for share options exercised During the period, 7,882,734 share options were exercised by senior management in relation to the Legacy LTI Plan. The Company chose to acquire shares on market to effect this rather than issue new equity. Shares were also purchased prior to year-end in anticipation of the exercising of 7,113,691 options by senior management in early January 2020. 8. Finance costs and repayment of lease liability Finance costs and repayment of lease liability have increase year-on-year predominately due to the adoption of AASB 16 Leases, which resulted in lease payments now being classified as finance costs and reduction in finance lease liability. 9. Net income tax payments Monthly tax instalments totalling $95.5M were paid during the period based on prior year assessments prior to the receipt of tax refunds totalling $69.3M upon lodgement of the FY2018 tax return, which was completed during July 2019. 10. Dividends paid On 15 April 2019, the Company paid a fully franked dividend of 4.8 cents in relation to the six months ended 31 December 2018 ($93.3M) and on 14 October 2019 paid a fully franked dividend of 2.1 cents in relation to the six months ended 30 June 2019 ($40.9M). 26 Viva Energy Group Limited Annual Report 2019 Risk management We identify: Our growth and success depends on our ability to understand and respond to the challenges of an uncertain and changing environment. This uncertainty generates risk, with the potential to be a source of both opportunities and threats. By understanding and managing risk, we provide greater certainty and confidence for all our stakeholders. Our Enterprise Risk Management (ERM) Framework and related risk management policies and procedures are designed to identify, assess, monitor and manage risk and where appropriate, keep relevant stakeholders informed of material changes to the Group’s risk profile. The Board considers risk management fundamental and pertinent to the success of the Group and takes ultimate responsibility for its oversight and stewardship. Notwithstanding, risk oversight and management is a responsibility shared by all in the Group. • Those risks, being operational, financial and regulatory that have the capability of impacting achievement of the Group’s strategy and goals (Strategic Risks). • Those risks that have the capability to cause harm to people, the environment, assets or our reputation as a result of Viva Energy undertaking its operations (Health, Safety, Security and Environment (HSSE) risks). Some risks are both strategic and HSSE in nature. Executive management and the Board regularly review the risks identified, challenge how they are mitigated and assess the assurance activities directed toward the key controls over each of the risks. Strategic risk Operational and supply chain risks Our operations and supply chain can be disrupted by events such as extreme weather, accidents, breakdown or failure of infrastructure, and interruption of power supply. Disruption to any part of Viva Energy’s supply chain could impact our operations and Total Shareholder Returns (TSR). The Geelong Refinery may be disrupted by mechanical failures, equipment shutdowns, major accidents and other events that disrupt operations. Any such event may have a material adverse impact on refining capacity and revenues. Having regard to the current threat from coronavirus disease (COVID-19), we note this has not yet had a material impact on operations or financial results; however, it could do so in the event of substantial expansion of the issue. In addition to the impacts on operations, it could also impact financial results should it lead to a decline in demand for our products, or affect the credit position of our customers (amongst other matters). Our response Supply chain • We maintain minimum stock levels. • We conduct due diligence assessments on shipping and road transport providers. • We also manage this risk through alternative supply options. • We maintain insurance coverage for major events and supply interruptions. fi n a n c i a l r e v i e w O p e r a t i n g a n d Refinery • The Geelong Refinery has a proactive monitoring, inspection and preventative maintenance program to manage the risk of HSSE incidents and unplanned plant outages. • The business has emergency and crisis management plans in place and regularly undertakes simulated response exercises to test the effectiveness of these plans. These exercises often include the relevant community and emergency response authorities. • We invest in utility infrastructure to minimise the impact of disruptions to externally provided resources such as gas, electricity or water. • Specific actions to address the current COVID-19 outbreak include restrictions on international travel to affected jurisdictions, which is, until advised otherwise, considered non- essential for Viva Energy employees and will not be approved. • We are also monitoring and vetting international shipping and procurement activities, and providing regular updates to all employees, including current advice from the Department of Health. 27 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Strategic risk Compliance and regulatory risk Compliance Our response Compliance Viva Energy is subject to a wide range of legislative and regulatory obligations and we operate a number of facilities under various permits, licences and approvals (Regulatory Approvals). Failure to comply with legislative requirements or the conditions of Regulatory Approvals may cause damage to our brand and reputation. It could also result in fines and penalties and/or loss of applicable Regulatory Approvals, which would adversely impact TSR. Action by governments and regulators Changes in laws or the conditions of Regulatory Approvals could also materially impact our strategic objectives, operations and TSR. Commodity price exposure Viva Energy is exposed to the risk of movements in global hydrocarbon pricing, particularly in respect of the refining margin earned by the Geelong Refinery. Fluctuation in the refinery margin can impact TSR. HSSE risks Processing, transportation and storage of crude oil and petroleum products, and the operation of the Geelong Refinery and fuel storage facilities, include inherently hazardous and dangerous activities. A major incident could result in injury or fatality and/or damage to the environment. This could also negatively impact our brand and reputation, and TSR. There is also a risk of smaller spills and leaks of petroleum and crude oil to the environment, which would give rise to liabilities for clean-up and remediation costs. • Our compliance program incorporates Business Principles and Code of Conduct, policies and procedures, staff compliance training and audits. • We have detailed operating procedures, standards, training, audit and assurance programs. • We have the specialised knowledge we need in our teams and from external consultants and we involve subject matter experts to minimise the risk of non-compliance with permits, legislation and regulation. • We monitor existing regulatory requirements. • We have a robust licence renewal submission process to ensure that the business is not subject to onerous to additional conditions. Action by governments and regulators • We monitor political activity and proposed changes to the law. • We work with select industry bodies to influence on issues that may affect our industry. • We engage with regulatory bodies and lawmakers both directly and through industry bodies on issues that may affect our industry. • We manage commodity price exposure through active monitoring of commodity price exposure, hedging and the purchase or sale of swap contracts up to 24 months forward. • We have in place a comprehensive HSSE control framework and management system. • Our HSSE Management System is supported by a number of policies, procedures and standards designed to ensure that HSSE risks are either eliminated or reduced so far as reasonably practicable. • We provide appropriate information, instruction, training and supervision to our people to drive safe operations at all levels. • We have a risk-based audit and assurance program, which reviews facilities and critical activities against the HSSE Management System, legislative requirements and industry best practice in order to identify continuous improvement opportunities. • Significant and high potential events are investigated to identify root causes, with corrective actions put in place and learnings shared across our operations. • HSSE performance is one of our key performance indicators that is actively measured and reported to the Board. 28 Viva Energy Group Limited Annual Report 2019 Strategic risk Our response Key strategic relationships and third party branding We have a number of key business and operational relationships, including with Coles Express, Shell, Vitol and Viva Energy REIT. A material deterioration in the nature of Viva Energy’s arrangements with these parties or a material decline in the performance of these parties or their reputation or brand has the potential to negatively impact our brand and reputations as well as TSR. Climate change Climate change Climate change risk has both transitional and physical elements. Transitional risk is the risk flowing from a transition to a lower-carbon economy that may require action to address mitigation and adaption requirements related to climate change. Physical risk is the risk flowing from acute events or chronic longer-term shifts in climate patterns resulting from climate change that may affect the Group’s business model in the foreseeable future. The risk to our business includes: • decline in demand for our products due to government policy, technology or market changes in response to climate change; • increased operating costs arising from regulatory responses to reduce greenhouse gas emissions (such as a price on carbon); and • physical impacts on our assets. Liquidity and financing Viva Energy has substantial working capital requirements due to the need to purchase large shipments of crude oil and refined products. We rely on banks and supply and trade financing arrangements to provide working capital funding. Adverse changes in our relationship with providers of funding or in financial markets, which reduce our access to, or increase the cost of, funding, could adversely impact our financial position. fi n a n c i a l r e v i e w O p e r a t i n g a n d • We manage this risk through our contractual rights, including through board representation on the Viva Energy REIT. • We carry out assurance activities at Coles sites, which address key operational performance. • We have established a crisis management team and we undertake an annual crisis management training exercise jointly with Shell. • We have regular engagement with representatives of all third parties. • We seek to understand our performance in a range of future demand scenarios, including by assessing the potential impacts of transitional risks on the performance of our business units. In 2020 we intend to expand this work in alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). • We actively monitor industry forecasts and technological developments to understand where the industry and energy markets are heading. • Our strategy focuses on our core business as well as identifying new adjacent areas for growth and new opportunities in the energy sector that we see developing from the transition to a lower-carbon economy. • We also conduct physical impact assessments on our assets to understand the potential impacts of changing weather and climate events. • We are a member of the Australian Industry Greenhouse Network (AIGN). AIGN is a network of industry associations and individual businesses which contribute to the climate change policy debate and see value in joint industry action on climate change in order to promote sustainable industry development. • We also monitor potential regulatory change and participate in consultation processes either directly or through industry associations to shape policy in the area of climate change, and we maintain a policy dialogue with all levels of government on climate change issues. • Our treasury function operates within a fit for purpose Board- approved Treasury Policy. The Policy requires maintenance of sufficient cash reserves and ensures robust reporting of our cash position to management and the Board. • We have access to working capital funding sources through a syndicated financing facility and a range of trade finance facilities. • Our credit risk management function ensures credit is provided within our desired risk parameters. • We actively monitor cash flow through the proactive management of accounts receivable and accounts payable, and we have insurance cover in the event of a major incident to supplement loss of income (cash receipts). 29 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Operating and financial review continued Strategic risk Refining margin exposure Our response The Geelong Refining Margin (GRM) is based on the difference between the value of the refined products that the Geelong Refinery produces and the cost of the crude oil and feedstock it consumes to do so. Refining margins are affected by a range of factors including a decline in regional demand for refined products, increased refining capacity, international freight costs and exchange rate fluctuations. A low GRM can materially impact earnings of the Geelong Refinery. Exchange rate Viva Energy purchases crude oil, feedstock and finished products in US dollars and sells its products predominantly in Australian dollars. Fluctuations in the AUD/USD exchange rate may negatively impact our earnings and cash flow. Credit risk • We utilise dynamic inventory planning to optimise refining margin performance. • We have programs to improve operational availability and reliability. • We have in place a fit for purpose refinery margin hedging policy. • Refining margin movements as a result of regional market forces are inherent in the refining business and the activities outlined above are not designed to completely eliminate this exposure. • We operate a hedging program that is designed to manage the impact of exchange rate fluctuations. Credit risk is the risk that a customer or counterparty fails to meet its contractual payment obligations. Such a default could impact our revenue and cash flow. • We undertake credit risk assessments on customers. • We establish credit limits. • We manage exposure to individual entities. Material decline in demand for our products A number of external factors, including a decline in economic activity, the entry of new competitors into the business segments in which we operate, a change in government policies/regulation and changes in technology, have the potential to negatively impact demand for our products. The current coronavirus diseases (COVID-19) situation highlights the risk that an outbreak could have an impact on demand for our product, particularly if there is a significant and prolonged period of reduced travel. If there is a significant decline in demand for our products, this could materially impact TSR. Labour costs and industrial disputes Viva Energy’s operations are affected by availability and costs of labour and the health of our working relationships with employees and labour unions. A major dispute with one or more unions representing our (or our major contractors’) employees could disrupt operations at one or more of our facilities and materially impact TSR. Similarly, a material increase in the cost of labour could impact production costs and profit margin. • We operate in a range of business segments and with a range of product offerings. • We seek to understand our performance in a range of future demand scenarios. • We actively monitor industry forecasts and technological developments to understand where the industry and energy markets are heading. • Our strategy is to optimise performance of our core business as well as to identify new adjacent areas for growth and new opportunities in the energy sector. • We proactively manage the relationship with our employees. • We have in place employee agreements. • We conduct regular benchmarking to ensure that wages and other benefits offered to employees remain competitive. • In the event that a risk of employee or third party industrial activity is heightened, we develop contingency plans to mitigate potential impacts on our operations. 30 Viva Energy Group Limited Annual Report 2019 fi n a n c i a l r e v i e w O p e r a t i n g a n d Viva Energy Group Limited Annual Report 2019 31 About usChairman and Chief Executive Officer’s reportSustainabilityDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership Team Sustainability 2019 Highlights Total Recordable Injury Frequency Rate (TRIF) Lost Time Injury Frequency Rate (LTIF) 4.55 FY2018: 5.77 1.41 FY2018: 1.12 Process Safety Events $5.52B Total tax contribution 0 API Tier 1 Events 2 API Tier 2 Events 40% Female new hires FY2018: 32% FY2018: 0 FY2018: 4 24% Overall female representation in the Company FY2018: 22% Inaugural Reconciliation Action Plan launched 1,320 Employees with 35% based in regional areas 2 Significant spills >1,000kg FY2018: 3 Aligning our risk management and disclosure approach on climate risks with the TCFD 70% Employee participation in 1,018 Good Deeds (volunteering) Manufacture of a new Very Low Sulphur Fuel Oil (VLSFO) at Geelong Refinery 32 Viva Energy Group Limited Annual Report 2019 Sustainability at Viva Energy Our sustainability governance structure We are pleased to present our second in-depth report on sustainability at Viva Energy. Whilst sustainability is not new to us, we consider our sustainability program to be one of continuous improvement and evolution. After our 2018 report (which reported on our first period as a listed company), we took a number of learnings from engagement with our employees, stakeholders and customers, to continue to improve our program and how we report on our progress. Further detail about our approach is provided below, and we welcome engagement on our sustainability agenda, and any feedback on our program and this report. The objective of our sustainability program is to maintain and grow a resilient and sustainable company that is aligned to our values, strategy and the expectations of our employees, the communities in which we operate, and our external stakeholders. Our values are the guiding principles which define the way we conduct ourselves. They are reflected in our approach to safety, our responsibility towards the environment and our communities, and our integrity and respect for people. They shape the future of our business through learning and encourage us to be open to new opportunities and ways of doing things. Our sustainability governance framework is designed to provide effective direction and oversight for our sustainability program. To further support the program and the work of the Board’s Sustainability Committee, we have also established a cross- departmental management working group, to coordinate and direct our priorities in this area. Board Provides strategic guidance and oversight of management performance in implementing our business strategies, plans and values Audit and Risk Committee Assists the Board for oversight in relation to the effectiveness of the Company’s Risk Management Framework Sustainability Committee Assists the Board in fulfilling its responsibilities for oversight in relation to health, safety, environment and sustainability matters Executive Leadership Team Provides strategic direction on business plans and Company values Sustainability Working Group Management committee of key stakeholders across our business to coordinate priorities in sustainability matters Our approach to sustainability About this report Our Values Integrity The right thing always Responsibility Safety, environment, our communities Curiosity Be open, learn, shape our future Commitment Accountable and results focused Respect Inclusiveness, diversity, people Our Code of Conduct and Group Policies Our Focus Areas • Health and safety • Environment • Climate change and energy • Products and innovation • Our people • Our community • Ethical conduct and transparency • Economic contribution Enterprise Risk Management Framework Materiality Process Identifies our sustainability focus areas that matter to our business and stakeholders Our Management Systems Reporting on Performance S u s t a n a b i i l i t y This is our second sustainability report, it outlines our sustainability focus areas and performance. This report covers assets owned and operated by the Viva Energy Group for the period 1 January to 31 December 2019 (unless otherwise stated) with the exception of the Liberty Oil Holdings business as the full acquisition of the business completed in December 2019. A summary of our sustainability performance data is included on pages 51 to 52 of this Annual Report. In 2019, we have sought to improve our program by more closely aligning and reporting with reference to the Global Reporting Initiative Standards (GRI Standards) and a reference index to GRI Standards content can be found at the end of this section on pages 53 to 55. In addition, we have aligned our key focus areas with the UN Sustainable Development Goals (UNSDGs) (see page 35) – to provide a wider context to the activities we undertake. This year, in order to further address specific climate risks and opportunities, we have begun to integrate the recommendations of the Task Force on Climate- related Financial Disclosures (TCFD) into our business, and our approach to this is outlined on pages 41 to 43 of this Annual Report. 33 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Our focus areas Determining our focus areas In 2019, we completed a materiality assessment to identify and understand sustainability matters that are significant to our key stakeholders and to our on-going business strategy. Our key stakeholders are our shareholders and the wider investment community, our business partners, our customers, our employees and contractors, suppliers, government and regulatory authorities, non-government organisations, and the communities in which we operate. We maintain an open dialogue with our stakeholders through a wide range of formal and informal channels. The focus areas identified through this assessment are set out in the table opposite and addressed further in this report. We maintain an open dialogue with our stakeholders through a wide range of formal and informal channels. 1. Identify Issues of Significance We identified our internal and external stakeholders and the sustainability matters of concern. 2. Identify Sustainability Matters We compiled a list of sustainability matters based on: • economic, environmental and social positive and negative impacts and the risks associated along our value chain; • current and emerging global trends in sustainability; and • future challenges for our sector. 3. Prioritise the Sustainability Matters We then prioritised the sustainability matters based on how they: • substantively influence the assessments and decisions of stakeholders; and • reflect the Group's significant economic, environmental, and social impacts. 4. Define Focus Areas We defined the key sustainability matters and mapped these to the GRI Standards and UN SDGs. We then clustered these priority topics into focus areas, which we use in our sustainability approach and reporting. 34 Viva Energy Group Limited Annual Report 2019 Focus areas Key matters Stakeholders UN SDGs Health and safety Personal safety Process safety Emergency preparedness Health and wellness Environment Spill prevention Waste and water management Land management Air emissions Biodiversity Climate change and energy Climate risks and opportunities Greenhouse gas emissions Energy efficiency Renewable energy Products and innovation Product quality and performance Fuel standards Alternative fuels and mobility Employees Contractors Customers Communities Business partners Governments Communities Shareholders Customers Employees Governments NGOs Communities Employees Governments Shareholders Customers NGOs Employees Communities Customers Suppliers Business partners Industry associations Shareholders Our people Our community Ethical conduct and transparency Economic contribution Diversity and inclusion Development and retention Flexible working Compensation and benefits Local community engagement Licence to operate Community investment Indigenous participation Socio-economic contribution Employees Governments Communities Shareholders Communities Employees Governments Customers Compliance Ethics and transparency Anti-corruption and bribery Governance Risk management Responsible procurement Human rights Modern slavery risks Tax transparency Local wages and contracts Energy security Employees Customers Contractors Shareholders Governments Communities Business partners Shareholders Employees Contractors Government Communities S u s t a n a b i i l i t y 35 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Health and safety Safety is fundamental to our business and operating safely is at the heart of everything we do. We believe every incident is preventable and we are committed to pursuing the goal of no harm to people and protecting the environment. We call this ‘Goal Zero’. We strive to achieve this through effective management of both process and personal safety exposures, including proactive health and wellness initiatives. The foundation principle that drives our safety strategy is the belief that our people are the solution and hold the knowledge and expertise to address anything that impacts the safety of our operations. In support of this, our HSSE strategy focuses on leadership, learning and the capability of our people. To ensure we maintain full visibility of our potential safety risks and our safety performance, we have a structured approach to monitoring a range of health and safety metrics and outcomes. We include our contractors and other key stakeholders in our safety and reporting programs, including transport contractors who deliver product on our behalf. For more information on how we work with contractors to manage safety, visit www.vivaenergy.com.au/about-us/safety. To strengthen our safety performance, we investigate incidents and near misses, implement corrective actions and verify effectiveness of controls. We continually aim to improve our performance by sharing lessons amongst our employees and contractors. Our senior executives and managers empower our employees and contractors to maintain safe, responsible and sustainable working environments and to perform their work without harm to ourselves, the environment, or others at all times. We measure our performance using a range of industry specific indicators, which are defined in our Sustainability performance data (pages 51 to 52). Our objectives and expectations are set out in our Health, Safety, Security and Environment Policy (HSSE Policy), which is implemented through our HSSE Management System. To view our HSSE Policy, visit our website www.vivaenergy.com.au/about-us/safety. 2019 employee engagement results 94% of participating employees feel empowered to intervene on unsafe acts 95% of participating employees agree their team is committed to always operating safely 97% of participating employees understand the health and safety risks relevant to their roles 36 Our HSSE Management System Our Health, Safety, Security, and Environment Management System (HSSE MS) sets out our approach, expectations and key controls for managing HSSE risks across all of our business operations. It applies to all employees and contractors (including transport contractors), and sets out how we report and track our performance across a range of leading and lagging indicators which are regularly published so that all employees are aware of our performance in these areas. This HSSE MS and supporting assurance programs are maintained by a dedicated team which is independent from business operations to ensure the highest levels of integrity and transparency. We review the effectiveness of our HSSE MS annually by engaging with our people, reviewing our performance through regular internal and external audit, and learning from our assurance activities. Personal safety Our personal safety programs focus on preventing injuries to our employees, contractors, and other people who could be impacted by our operations. The main exposures are associated with manual handling, construction, maintenance and transportation activities, so our programs are mostly aimed at ensuring we provide safe workplaces, robust operating procedures, and a strong safety culture. We were disappointed with our safety performance in 2018. In order to drive continuous improvement in personal safety in 2019, and to supplement our existing programs, we worked closely with our employees to introduce new personal safety initiatives at our refinery in Geelong and in our Supply Chain operations. The Advanced Error Reduction Organisation (AERO) program at Geelong Refinery (refer to case study on page 38) places people first, appreciates their diversity and realises their potential through effective ways of working and application of lessons learned. The Goal Zero and Beyond principles that have been applied in our Supply Chain operations also focus on people being the solution and seeking out positives (when things go right), rather than focusing on the negatives (when things go wrong). To support this positive safety philosophy the focus on safety measures has shifted to tracking and communicating more leading indicators. As a result of these programs, and more general continuous improvement, our personal safety performance has improved during 2019 with work-related recordable injuries reducing by 20% over the year prior, and reducing by more than 50% in our refining operations. There was also a marked reduction in the number of contractor injuries experienced in 2019, with our road transport contractors achieving more than 12 months free of recordable injuries in their operations. This milestone was Viva Energy Group Limited Annual Report 2019 reached in August, marking the longest injury-free period ever experienced in this part of our operations; a testament to the strong shared focus on safety that we have been driving with our transport contractors. An increase was observed in our Lost Time Injury Frequency Rate during 2019. This highlights the importance of the ongoing focussed efforts required on these improvement initiatives through 2020 and beyond. Personal safety performance Total exposure hours (million) Total Recordable Injuries Employee Contractor 2019 6.376 2018 6.239 29 13 16 36 14 22 Total Recordable Injury Frequency Rate (per million hours) 4.55 5.77 Total Lost Time Injuries Employee Contractor 9 5 4 7 4 3 Total Lost Time Injury Frequency Rate (per million hours) 1.41 1.12 Process safety Process safety is all about safely storing, processing and transporting hydrocarbon products to minimise the risk of leaks, spills and flammable conditions which can lead to asset damage and harm people. Given that we operate significant and complex infrastructure, including designated Major Hazard Facilities, our asset integrity programs and operating procedures are critical to reducing the potential for loss of containment incidents that can lead to larger scale Process Safety Events. To manage process safety we apply the Hazards and Effects Management Process (HEMP) across all of our operations. HEMP risk assessments identify Safety Critical Equipment (SCE), including equipment or infrastructure that acts as a barrier (or part of) to prevent the uncontrolled release of a hazard, which may lead to high consequence incident scenarios with the potential to harm assets, people or the environment. Monthly management review of leading and lagging SCE performance indicators allows for the assessment of the effectiveness of SCE performance and completion of maintenance and inspection plans. A number of our facilities are classified by relevant regulators as Major Hazard Facilities (MHF) and, as such, are subject to operating licences which set out the parameters and conditions under which we are required to operate these facilities. Renewal of these licences typically follows a comprehensive review of the site’s safety case by the relevant regulator and also considers past performance and overall safety commitment by the company. During 2019, we successfully renewed our MHF licence at our fuel storage terminal in Brisbane for a period of five years, free of any licence conditions. In 2020, we will undertake the review, update and submission of our safety case for our fuel storage terminal in Sydney in advance of the Clyde MHF licence renewal in 2021. Life Saving Rules Our 12 Life-Saving Rules are not new; in fact they have been part of our organisation since 2009. They were developed in response to the types of incidents experienced across the industry that were most likely to result in serious injury or fatality. The Life Saving Rules set out clear and simple rules for our people and are a critical part of our Goal Zero journey. In 2019, we surveyed our people on how they feel about the Life Saving Rules, and used their feedback to help shape a refreshed communications campaign. All breaches are investigated with our employees and contractors and are tracked to identify performance trends. In 2019 we had 37 recorded breaches. As part of our commitment to the Life Saving Rules and to provide a safe workplace, random drug and alcohol tests are conducted across our operations. In 2019, over 1400 random drug and alcohol tests of employees and contractors were performed. 1 WORK WITH A PERMIT Work with a valid work permit when required 2 CONDUCT GAS TESTS Conduct gas tests when required 3 VERIFY ISOLATION Verify isolation before work begins and use the specified life-protecting equipment 4 CONFINED SPACE AUTHORISATION 5 DISABLING EQUIPMENT Obtain authorisation before entering a confined space Obtain authorisation before overriding or disabling safety equipment 1.8m 6 WORKING AT HEIGHTS Protect yourself against a fall when working at heights S u s t a n a b i i l i t y 7 SUSPENDED LOADS Do not walk under a suspended load 8 DO NOT SMOKE Do not smoke outside designated smoking areas 9 NO ALCOHOL OR DRUGS No alcohol or drugs while working or driving 10 NO PHONES OR SPEEDING 11 WEAR YOUR SEATBELT 12 JOURNEY MANAGEMENT While driving, do not use your phone and do not exceed speed limits Wear your seatbelt Follow prescribed Journey Management Plan 37 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued In 2019 we experienced our third consecutive year free of any serious Process Safety Events, which are classified as Tier 1 incidents by the American Petroleum Institute (API Tier 1 incidents). In addition, the number of less serious API Tier 2 events reduced by 50% compared to the previous year’s performance. Improvements in the asset inspection programs in both the Retail and Refining businesses have afforded greater oversight and identified opportunities for proactive integrity management. For example, in the Retail business we undertook proactive inspections of Safety Critical Equipment at over 400 retail service stations in order to test critical risk mitigation barriers such as tank overfill protection devices. This is part of an ongoing program for regular scheduled maintenance. Process safety performance Tier 1 Process Safety Events Tier 2 Process Safety Events 2019 2018 0 2 0 4 Emergency preparedness A timely and effective response to an incident, based on robust emergency planning, is the most important factor in limiting injury, potential impact to the environment, our assets, and our licence to operate. We regularly engage and consult with the emergency services organisations, local community and other stakeholders with respect to our emergency response planning, including by running practical exercises with their involvement. Our facilities have emergency response plans and resources in place and all personnel are trained in dealing with an emergency. Our transport contractors have emergency response capability in place to cover any incident that occurs when transporting our products. In 2019, we completed 390 emergency response exercises and abnormal scenario drills across our facilities in support of this proactive approach to emergency preparedness. Health and wellness We believe that keeping our employees and contractors in the workplace fit, healthy and safe, reduces injuries and helps us to be mentally and physically fit for life. We provide programs to improve health and wellbeing, with a focus on optimal performance, both at and outside of work. In 2019 these programs included: • Move 4 Life program: Following the success of the Move 4 Life program across our Aviation business, we extended the program to the rest of our Supply Chain operations, with over 350 participants undertaking the program in 2019. The program aims to dramatically reduce the risk, incidence and severity of sprain and strain injuries in any manual handling environment, as well as building physical resilience into active, ageing or sedentary workforces. • Health Risk Assessments: In 2019, we improved our approach to completing Health Risk Assessments, including greater transparency regarding risks associated with people working on our sites during pre-pregnancy, pregnancy and for the period they are breast feeding. • Pre-employment and return to work processes: To ensure workers are fit to safely complete their normal duties we complete periodic fitness to work assessments. During 2019, over 600 fitness to work assessments were conducted across our operations. Geelong Refinery AERO program During 2019, Geelong Refinery launched the AERO program to drive improved safety performance, greater reliability and operational effectiveness. AERO is an advanced error reduction system that helps workers identify their personality tendencies that shape their ways of working and the way they interact with their work environment. AERO training was provided to over 900 people at the refinery, including our onsite contractors, introducing them to a range of mechanisms in support of personal intervention, stepping through tasks in a measured way and seeking further information to clarify complex processes. This training was provided by our own Viva Energy operators and safety leads, which we believe has helped embed and drive engagement. The AERO principles are now being integrated into refinery management systems, such as procedure writing, training and guidance checklists, with a focus on updating critical operational procedures to provide clearer instruction and the implementation of AERO discussions at all pre-start meetings. Geelong Refinery will continue to progress as a proud AERO site in 2020. 38 Viva Energy Group Limited Annual Report 2019 Environment We are committed to protecting the environment and minimising any potential environmental impacts arising from our operations or our products. Our operations are governed by environmental regulations, which are managed in accordance with our HSSE MS. For our major facilities, including Geelong Refinery and the Clyde and Gore Bay Terminals, we publicly report on our environmental licence compliance and performance monitoring results. For further information visit www.vivaenergy.com.au/ about-us/environment-and-sustainability. Similar to health and safety, all environmental incidents are recorded and investigated, and where incidents involve breaches of environmental regulations, we also notify the regulators. For 2019, we did not receive any environmental non-compliance sanctions. For a further overview on our 2019 environmental performance, refer to page 77 of the Directors’ Report. Spill prevention As with safety, our aim is to ensure that we do not have any uncontrolled release of hydrocarbon products to the environment. We call this ‘No Product to Ground’. To meet this objective we implement spill prevention and control measures across all of our operations, including operational procedures, routine surveillance, risk-based inspection programs, and utilising leak detection technology. For marine spills, we work with the Australia Maritime Safety Authority to maintain a national spill contingency plan. We are also a participating member of Australian Marine Oil Spill Centre, for which we have responsibilities to contribute trained personnel and equipment under mutual aid arrangements and in accordance with the National Plan for Maritime Environmental Emergencies. In 2019, we conducted training for our key personnel in various oil spill response strategies to ensure an effective and timely response to the unlikely event of an oil spill occurring. We measure our performance by tracking loss of primary containment (LOPC) incidents that occur within the operational boundary of our facilities and road transport operations. An LOPC means that hydrocarbon products have leaked or been spilled from the primary containment (tanks or pipes) that are designed to safely hold the products. In many cases we have secondary containment measures (such as tank bunds) to provide additional protection to the products entering the environment. The number of LOPC incidents reduced in our road transport operations in 2019 and larger LOPCs at our facilities also reduced. We had two significant spills (greater than 1,000kg) in 2019 following a truck rollover while it was transporting fuel in Darwin and a loss of fuel from an underground storage tank at one of our retail sites in South Australia. Both of these incidents have been investigated and remedial measures put in place. Water and waste management All of our operations are guided by a waste management program, which sets out our approach to avoiding and minimising the generation of waste and ensuring waste is managed appropriately in accordance with regulations (including waste tracking obligations for hazardous waste). We continue to seek out opportunities for waste recovery and recycling opportunities within our own operations and other industries. Our efforts in 2019 focused on our Lubricants business and the Geelong Refinery. For further information visit www.vivaenergy.com.au/about-us/environment-and- sustainability. S u s t a n a b i i l i t y Australian Packaging Covenant In 2019, we have continued our commitments with the Australian Packaging Covenant (APC) to optimise our resource recovery of consumer packaging and minimise our packaging throughout our lubricants supply chain. Our current action plan has a duration of three years (2018–2020) and we report on our progress annually. For further information visit www.vivaenergy.com.au/ about-us/environment-and-sustainability. One of our key projects for 2019 included a project for closed loop collaboration with Cleanaway and one of our commercial customers. The project included the trial of collecting and recycling empty oil containers (both the bottle and residual oil) which are not typically accepted for routine recycling programs. The successful trial will enable further collaboration with our retail and trade customers on promoting closed loop solutions for oily containers. 39 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Geelong Refinery waste recovery efforts in 2019* Water Recycling 100% of waste water is sent to the Northern Water Plant for recycling and returned for re-use as recycled water. Sludge Waste 1,250 T Converted to compost and used on site. Used Caustic 1,270T Reused at Clyde Terminal and the Northern Water Plant operated by Barwon Water. Scrap Metal 410T Recovered and recycled. Used Catalyst 1,600 T Reused by the cement industry. Timber 65T Recycled through our onsite waste transfer station and chipped for mulch. Sulphur 3,170T Reused in industries including fertiliser manufacture. * This data relates to 1 July 2018 – 30 June 2019. Land management Across our portfolio, we adopt a risk-based approach to contaminated land remediation which is consistent with national standards and undertaken in consultation with environmental regulators where required. In 2019, we progressed the planning and approvals process for the remediation of the former Clyde Refinery land in Sydney, which is now surplus to ongoing operational requirements. This project has been declared a State Significant Development and an Environmental Impact Statement was submitted to the NSW Department of Planning, Industry and Environment (DPIE) for public exhibition in 2019. We plan to commence remediation of this site in 2020. 40 Firefighting foam transition Per- and poly-fluoroalkyl substances (PFAS) are manufactured chemicals that have been used for more than 50 years in a range of products including firefighting foams, pesticides, waterproofing and stain repellents. Like all industries responsible for flammable fuel storage, we have a history of storing and using PFAS-containing firefighting foams as these have been the recommended best practice for effectively combatting flammable fuel fires. While the health and ecological effects of PFAS compounds are the subject of ongoing research, we acknowledge the potential risk they pose and the precautionary approach to PFAS management adopted by environmental regulators in Australia. We continue to assess the suitability of transitioning our facilities to C6 and Fluorene-free foams, with focus in 2019 on meeting recent regulatory requirements in both Queensland and South Australia. We also continue to assess for PFAS soil and groundwater contamination across our facilities, using a risk-based approach consistent with national regulatory guidance. Viva Energy Group Limited Annual Report 2019 Air emissions The manufacturing, storage, supply and use of our fuels causes air emissions such as volatile organic compounds, greenhouse gases (GHG), sulphur oxides (SOx) and nitrogen oxides (NOx). We monitor and report on the air emissions for our facilities according to each site’s licence conditions and annually to the National Pollutant Inventory (NPI). Refer to the NPI website for the latest data: npi.gov.au/npi-data. In 2019, the Geelong Refinery experienced challenges with the reliability of the site’s sulphur treatment processing units which resulted in elevated sulphur dioxide (SO2) emissions compared to previous years. Extensive repairs and maintenance were undertaken which returned the sulphur treatment units to reliable service. During this period sulphur dioxide emissions were higher than typical (which can be seen in our reported numbers on page 51), but were closely monitored under a temporary approval issued by EPA Victoria. Unfortunately, during the repair works we experienced an incident where unfavourable conditions meant that members of the immediate community were temporarily impacted by our emissions. We spent time engaging with the community to ensure minimal impact and any immediate concerns were addressed. There were no other environmental or health impacts associated with this disruption. For information on our GHG emissions, refer to the Climate change and energy section on page 42. Habitat restoration at Clyde As part of our Clyde Terminal conversion project, we completed an ecological risk assessment across the site and confirmed potential areas that presented a suitable habitat for the Green and Golden Bell Frog, which is classified as vulnerable under the Environment Protection and Biodiversity Act (EPBC Act). Infectious diseases, habitat loss and invasive species are key threats to the frog populations. As part of our ongoing efforts to protect the frogs and restore their habitat at our Clyde facility and surrounding wetland areas, we have an action plan which in 2019 included monthly targeted pest control campaigns, regular frog surveys to monitor population and habitat conditions, a wetland improvement plan (including weed removal and planting) and constructing purpose- designed breeding ponds. Monthly surveys of the frog breeding season started in September 2019 with very encouraging results, including the identification of a few frogs and male calling activity. We will continue to implement our action plan into 2020 with further habitat restoration, maintenance and monitoring planned. Climate change and energy Climate change position Viva Energy recognises the scientific consensus that anthropogenic impacts have contributed to climate change and we support policies and action that will help Australia meet its carbon reduction commitments in a sustainable way. As a manufacturer and supplier of hydrocarbon derived products, we also recognise that we have an important role to play in supporting the transition to lower carbon energies while at the same time maintaining safe and reliable supply of traditional hydrocarbon fuels that our customers will continue to use. It is therefore critical for the sustainability of our business to understand the opportunities and risks associated with climate change and how to incorporate those into our business strategy. Climate risks and opportunities (TCFD) The Taskforce for Climate-related Financial Disclosure (TCFD) is a voluntary framework for climate-related financial disclosures released in June 2017. It recommends that companies disclose governance and risk-management elements and, where climate- related risks and opportunities are assessed to be material, implications for their strategy as well as metrics and targets. We support the recommendations of the TCFD and intend to thoughtfully transition our reporting consistent with the TCFD framework. In 2019 we reviewed the TCFD guidance for opportunities to integrate relevant aspects into our risk management and disclosure approach. We worked with external experts to collate initial information across the key elements of the TCFD framework and identified priority actions to progress alignment with the recommendations more fully. We will progress these during 2020. Governance The Board of Directors holds primary responsibility for reviewing and assessing the strategic risks of the business, including climate-related risks. In supporting the Board, the Sustainability Committee specifically considers and manages climate-related matters, as part of its broader HSSE and sustainability oversight, and the Audit and Risk Committee oversees the Group-wide Enterprise Risk Management Framework. At the executive level, the Chief Operating Officer oversees the activities of the central Environment and Sustainability and HSSE Management and Assurance teams. These teams are both led by national managers and cover environmental (including climate change) related compliance, operational support, systems management and assurance. The Executive General Manager of Legal and External Affairs oversees the governance function of the organisation, including the impacts of climate-related regulatory and policy changes. At the operational level, environmental and sustainability matters are included in the accountabilities of asset managers across the business, including the Executive General Manager Refining, Supply Chain Operations Manager and other key operational staff. 41 S u s t a n a b i i l i t y About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Strategy Although Viva Energy is predominantly engaged in refining, distributing and marketing hydrocarbon products, our business is diversified across many industry sectors and products, with risks and opportunities varying across segments and product lines. The industry sectors we operate in include retail fuels, resources, marine, aviation, transport, industrial and construction markets, and our products include various categories of liquid fuels, bitumen, lubricants and chemicals. We assess the potential risks and opportunities to each business and our overall strategy by considering the key drivers of supply and demand across sectors and products, including population and economic growth, developments in energies and technology, mobility changes, trends in customer behaviours, and potential impacts of policy and regulatory change. We take account of our core capabilities, assets and partnerships that allow us to leverage opportunities and mitigate risks associated with likely energy transition scenarios. As discussed in our Operating and Financial Review (page 29), climate change is identified as one of the material business risks that could adversely affect the achievement of Viva Energy’s financial prospects in the longer term. Based on our initial climate-specific risk review undertaken in 2019, climate change- related risks include a potential decline in demand for Viva Energy’s current range of products due to regulatory, market or technology changes in response to climate change, increased operating costs arising from regulatory responses to reduce GHG emissions (such as a price on carbon), the potential for physical impacts on our assets, and the potential impacts on the profitability of various products and market segments. In 2020, we will deepen our understanding of the transition paths through the assessment of plausible scenarios, and we will specifically consider the risks, opportunities and mitigation strategies that we expect to arise in the transition of the energy sector. Our 2020 reporting will benefit from this necessary analysis and we will disclose further assessment of risks and opportunities relevant to Viva Energy’s business segments, as recommended by the TCFD guidelines. Risk management Our Enterprise Risk Management (ERM) Framework and related risk management policies and procedures are discussed in our Operating and Financial Review. Several climate-related risks are included in the strategic risk register which is communicated to the Audit and Risk Committee, Sustainability Committee and the Board. Climate change risks are broadly divided into two categories, being: • Transition risks: risks associated with an expected shift to a lower-carbon economy; and • Physical risks: risks to our assets or to the operation of our supply chains or assets. These may include acute risks, such as intense weather events or fire risk increased by the change in climate, or chronic risks arising from longer terms shifts in climate and its effects, such as changes in sea levels. 42 Based on the preliminary risk assessment undertaken in 2019 we do not consider these present material short-term risks to our business. Given the systemic nature of such risks, however, we consider that these should be prudently monitored and assessed, consistent with the strategy outlined above, so that we can best prepare our business for the medium to long term. Metrics and targets We report annually on our greenhouse gas (GHG) emissions, and energy consumption and production under the Australian Government’s National Greenhouse and Energy Reporting (NGER) Scheme. The data we report is published each year on the Clean Energy Regulator website: www.cleanenergyregulator. gov.au/NGER. Net greenhouse gas emissions 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2015–16 2016–17 2017–18 2018–19 Scope 1 Emissions (t CO2-e) Scope 2 Emissions (t CO2-e) For GHG emissions, we report: • Scope 1 (direct) emissions arising from our activities such as from fuel combustion, fugitive emissions and other minor emission sources; and • Scope 2 (indirect) emissions associated with the generation of electricity we purchase for our operations. NGER reporting includes the facilities and activities of all Viva Energy Group subsidiaries and contractors within our operational control, and is reported on a financial year basis. For the 2018–19 financial year reporting period, we reported Scope 1 emissions of 1,113,911 tonnes CO2-e and Scope 2 emissions of 317,082 tonnes CO2-e. Emissions from the Geelong Refinery account for 96% of our total greenhouse gas emissions, and for 2018-19 were below the statutory Safeguard Mechanism emission baseline set for the facility by the Clean Energy Regulator. Our GHG emissions over the last four reporting periods have remained relatively stable with some minor variation reflecting variable production levels. For example in 2018–19, our Scope 1 emissions increased by around 5% compared with the previous year’s data, attributed to a similar relative increase in production and energy consumption at the Geelong Refinery. Viva Energy Group Limited Annual Report 2019 Energy and emissions improvement initiatives Petroleum refining is inherently an energy and GHG emission intensive activity. Notwithstanding this, we are focussed on improving and addressing the performance of the Geelong Refinery, and in 2019 a multi-disciplinary team at our Geelong Refinery completed a comprehensive energy study which has identified a number of energy efficiency opportunities, including operational improvements and capital projects. These have been prioritised into an Energy Masterplan for the refinery for more detailed feasibility assessment in 2020, and will be incorporated in our capital plans in future years. Products and innovation As the fuel and energy sector develops with the potential for the transition of fuels and technologies across the economy, we consider it important to our future, and a key opportunity, to participate in the development of emerging technologies, fuels and standards. We do this by being involved in key developments across the industry, understanding the key technological, economic and social diversity of new technologies, participating in industry and governmental forums, and by developing and participating in trials. In 2019, we also initiated an energy efficiency review for our Supply Chain facilities, including our fuel terminals and depots. Our major facilities in Sydney, being the terminals at Clyde and Gore Bay (which are connected by pipeline), are the largest consumers of energy in our Supply Chain network. The energy consumption of the Clyde and Gore Bay facilities has reduced markedly in recent years, as we converted them from refining operations into import terminal facilities. One of the early learnings from the current energy efficiency review is that opportunities exist to further increase efficiency through the sub-metering of energy intensive equipment such as the operation of pumps. Accordingly, in 2019 we entered into a joint funding contract with the NSW Department of Planning, Industry and Environment for the implementation of a sub- metering and optimisation project at Clyde and Gore Bay, which will be carried out in 2020. From this project we expect to identify improvement opportunities for Clyde and Gore Bay and to leverage similar opportunities across the rest of our Supply Chain facilities. Mt Gellibrand Wind Farm, located in Winchelsea, Victoria Renewable energy for Geelong Refinery In January 2019, Viva Energy commenced a long-term Power Purchasing Agreement (PPA) with Acciona, the operator of the Mt Gellibrand Wind Farm, one of Victoria’s newest wind farms near Colac, 65km west of Geelong. The PPA is a financial arrangement that guarantees pricing of electricity representing approximately a third of the Geelong Refinery’s annual electricity needs. We are proud to support a renewable electricity source local to Geelong, with the financial agreement providing a level of certainty on energy pricing to the refinery and Acciona over the long term. Alternative fuels and mobility Biofuels Biofuels are derived from biomass, including waste and residues of biological origin, as well as from industrial and municipal waste. The two main biofuels currently used in transport in Australia include blends of biofuels containing either biodiesel or ethanol. Biodiesel is a renewable fuel produced using trans-esterification of fats and oils. In 2019, we supported the restart of Just Biodiesel plant in Barnawartha, located in northern Victoria, by assisting with technical support to ensure robust and sustainable quality standards were met, as well as entering into a three-year domestic offtake agreement to procure biodiesel. A maximum 5% biodiesel blend was supplied to our retail service station network in Victoria and southern NSW during the second half of 2019. With a challenging feedstock environment, we continue to work with Just Biodiesel on supply arrangements. In Queensland, we continue to investigate options for the delivery of biodiesel into the market and in late 2019, we commissioned the biodiesel infrastructure at our Pinkenba Terminal. We plan to offer distribution of a biodiesel blend once market conditions enable a sustainable operation. Ethanol is a renewable fuel that is blended with unleaded petrol (ULP) to produce E10. Ethanol is derived from plant feedstocks, with most of our ethanol supply sourced from production involving Australian-grown wheat starch and sugar. We currently blend up to 10% ethanol with ULP91 to make E10 and distribute this across our retail service station network in NSW (86% of retail sites) and Queensland (65% of retail sites). Aside from trials, biojet is not regularly supplied into the Australian aviation fuel market. While the technologies exist to manufacture biojet, the supply of biojet in Australia is not currently commercially or sustainably viable. We continue to work with industry groups, airlines and technology providers to explore opportunities on developing a solution for supplying biojet into the market in the medium to long term. Battery and hydrogen electric vehicles While uptake of electric vehicles in Australia remains low, we are actively seeking opportunities to implement electric vehicle recharging facilities in our retail service station network to support the development of infrastructure and understand customer uptake and behaviour. In 2019, we explored potential partners and suppliers, and have progressed with one partner to pilot a program to install and trial charging facilities at our retail sites. With the first installations planned to roll out in 2020, we will review the program as the market continues to evolve. As the use of electric vehicles increases and charging technology matures, we see particular opportunities for the provision of top-up recharging capability. 43 S u s t a n a b i i l i t y About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued We have been members of the Australian Hydrogen Council since its inception in 2017 (formerly known as Hydrogen Mobility Australia), an industry body focused on developing a hydrogen economy in Australia, and as of June 2019, we are also represented on the Board of Directors. The development of hydrogen as a transport fuel is in its early stages. We see opportunities for hydrogen in Australia, and also a natural alignment with our core assets, network and capabilities. In November 2019, the Australian government launched its National Hydrogen Strategy, which we provided input into as an industry, and we will continue to be active in the hydrogen sector going forward. Fuel standards Very Low Sulphur Fuel Oil 2020 Ahead of the January 2020 mandate, we worked with our customers and partners to prepare for the introduction of a global marine fuel sulphur limit of 0.50% by the International Maritime Organization (IMO), which globally sets the standards for international shipping. The new standard represents a significant reduction from the 3.5% sulphur limit previously in place and demonstrates a clear commitment by the IMO to reduce SOx emissions from the global shipping industry. In 2019, we introduced a new, Very Low Sulphur Fuel Oil (VLSFO), manufactured at our Geelong Refinery. The new fuel was developed in close consultation with key local customers. We consider VLSFO gives us a product with a competitive advantage following the IMO changes, as it can deliver substantial reductions in SOx emissions and increased fuel efficiency compared to marine diesel while being compatible with ship engines designed to operate on high-sulphur fuel oil. We will also continue to offer high sulphur (3.5%) in key bunker ports for ships with exhaust gas cleaning systems, which extract the sulphur after use, consistent with IMO regulations. Ultra-low sulphur gasoline 2027 We continue to support the improvement in fuels standards in Australia, which now includes the introduction of the 10ppm sulphur level in gasoline. There is significant capital investment required to achieve these standards, which come into force from mid-2027. We have commenced our planning to assess the capability and viability of manufacturing these fuels at Geelong Refinery. 44 Driving innovation We continue to look for ways that innovation can solve challenges and improve outcomes for our customers and within our business. Innovation can extend from improvements in the activities that we do every day, to looking at new opportunities and technologies such as renewable and alternative fuels. In 2019, we made the Financial Review BOSS list of Australia’s Most Innovative Companies for the third consecutive year, being awarded 5th in the Most Innovative Company in the ‘Manufacturing and Consumer Goods’ category. For more on innovation visit www.vivaenergy.com.au/driven/innovation. 91 Low Aromatic Supply zone Low Aromatic Fuel Viva Energy is proud to have supplied around 40 million litres per annum of Low Aromatic Fuel (LAF) to the northern half of Australia (targeting regions across the Northern Territory, East Kimberley, Cape York, the Gulf of Carpentaria and Central Australia). LAF has been specially designed to contain lower levels of the aromatic compounds such as benzene, toluene and xylene. Replacing regular unleaded fuel with LAF is helping to reduce petrol sniffing in communities where it has been identified as a problem. The rollout of LAF is benefiting these communities through better health, safer communities, helping adults become more job ready and helping more children get to school and learn. Recent research conducted by the University of Queensland found that petrol sniffing has reduced by up to 95 per cent in communities with Low Aromatic Fuel that have been surveyed since 2005. As part of our community program, we also support indigenous programs that are targeted at addressing issues of substance misuse (including petrol sniffing). Viva Energy Group Limited Annual Report 2019 Our people Female representation in the Senior Leadership Group Our ability to attract, motivate and develop high calibre people enables us to deliver outstanding business results today and into the future. 2019 2018 39% 41% Culture and engagement We regularly seek feedback from our employees as to what we are doing well and what can be improved. This is done through both structured surveys and informal engagement, where employees are encouraged to contribute their thoughts and insights at all levels of the organisation and provide honest feedback on how we are performing across a range of key areas. We work hard to address the valuable feedback we receive, to help drive a culture where people can be their best. Development and retention Our success in delivery of our strategic goals depends on our employees having the necessary skills, experiences, capabilities and opportunities to undertake their roles. We support people and their development in many ways to ensure we have the right people in the right roles with the right skills. Our employees are required to complete mandatory training to ensure their competency for their roles, and we provide a range of personal development opportunities. We measure our progress in our people development and retention through regular individual development plans and annual performance reviews. We continue to use external globally recognised frameworks to measure and improve our collective leadership effectiveness. We support the development of leaders through our Melbourne Business School and Female Leaders program, with 75 leaders participating in these programs during 2019. Our programs focus on developing outstanding leaders who are equipped to coach and build highly engaged teams. Diversity and inclusion We are committed to ensuring we provide an inclusive and diverse workplace where our people can thrive, develop and contribute to their full potential. In our experience, diversity and inclusion promotes different views and ways of doing things, improved safety outcomes, increased productivity and better wellbeing. Our strategy is to achieve a more diverse and inclusive workplace, which includes a strong focus on gender diversity, Indigenous employment and offering flexible work practices. To view our Diversity Policy, visit investor.vivaenergy.com.au/ investor-centre. 2019-20 Employer of Choice for Gender Equality for the third consecutive year. Target (by end 2020) 50% Female new hires 2019 2018 Target 40% 32%1 50% Female representation on the Board 2019 2018 29% 29% Target (longer-term succession planning) 40% Overall female representation 2019 2018 24% 22% Female promotions 2019 2018 26% 24% 1. In our 2018 Annual Report we reported this figure as 42%. Due to a revised approach in calculating this data, the 2018 figure has since been corrected to include new hires based on the hire date only (excluding contracts awarded but not necessarily started) for the full year. This is also reflected in our sustainability performance data table on page 51. S u s t a n a b i i l i t y Gender diversity Our objective is to improve the representation of women in all roles and levels in our business and to ensure that they are paid equally with their male counterparts, as measured by total remuneration. We measure, track and report progress against gender diversity targets. This supports our ability to attract and retain the best possible talent and to continue to build a high-performance culture. Our commitment to gender equality has been nationally recognised, with Viva Energy cited by the Workplace Gender Equality Agency as a 2019-20 Employer of Choice for Gender Equality for the third consecutive year. Refer to www.wgea.gov.au for our latest reported results. On 1 December 2019 Viva Energy completed its acquisition of Liberty Oil Holdings which included 155 staff (129 male and 26 female). All data, percentages and targets for 2019 excludes Liberty Oil Holdings. 45 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Indigenous participation Our vision for reconciliation is strongly aligned with our overarching purpose, which is to help people reach their destination. We were proud to launch our inaugural Reconciliation Action Plan (RAP) in 2019. Our RAP builds on the existing work of our Indigenous Participation Plan over the last four years and increases our focus on Indigenous employment and celebration of Indigenous culture and events. We aim to provide employment opportunities that contribute to sustainable social and economic benefits for Indigenous peoples. Through our continued involvement in the Career Trackers Internship Program we provided development and job opportunities for five Indigenous students in 2019. Flexible working We continue to embed flexibility in the ways we work by offering a broad range of working options and benefits to suit our people. These include part-time, virtual working, job-share, time-in-lieu, carer’s leave, domestic violence leave and unpaid leave. In 2019, we provided additional training to help team managers promote flexible working and embed a flexible working culture within their team. We regularly seek feedback from our people on flexible working and continue to embed our flexible working policy. We offer the Grace Papers program for our employees during pregnancy, parental leave and return to work. Our paid ‘Keeping in Touch’ program ensures that employees who are on extended parental leave can maintain their connection with the business. In 2019, we also introduced the option for employees to purchase additional annual leave. In 2017, we were proud to be the first company in Australia to introduce a full-time 12% superannuation payment for employees (male and female) on parental leave and during part-time work periods, for up to five years from the child’s birth – this is a program we maintain and continue to promote in our business and externally. We continue to embed flexibility in the ways we work by offering a broad range of working options and benefits to suit our people. 46 Supporting part-time operators Driven by our aspiration to increase the number of women in traditionally male dominated areas, we recently recruited 14 part-time female operators at the Geelong Refinery. Our advertising campaign and recruitment processes highlighted the ability that people would have to manage commitments outside of work as well as our leading parental leave and above market superannuation. The first group of part-time Geelong Refinery operators graduated from their training program in October 2019 and are now qualified operators juggling the demands of their role and managing their job-share arrangements. The role and the ability to work part-time enables these operators to have a fulfilling career and meet their commitments outside of work. By successfully challenging the assumption that operational roles must be performed full-time, we have been able to bring in a diverse mix of people with new and different perspectives and ideas as well as improving the diversity of thought and exposing the existing workforce to new ways of working. Viva Energy Group Limited Annual Report 2019 Our community We are committed to building strong relationships and making a positive difference in local communities across our national operating footprint. We believe this is important for employee attraction and engagement, and also meets the expectation of the broader community, our stakeholders, customers and investors. Local community engagement We strive to be a good neighbour and member of the local communities where we operate. We recognise our operations within local communities have the potential to impact on them. Regular dialogue and engagement with our community stakeholders is essential to maintaining our social licence to operate. To minimise our impacts, we maintain active and regular community engagements for our larger facilities, with specific community engagement activities and information on our website for Geelong Refinery, and our terminals at Clyde, Parramatta, Gore Bay, Newport and Pinkenba. For more information on our local community engagement refer to our website www.vivaenergy.com.au/operations. Our Geelong community Our Geelong Refinery is our largest operation, employing more than 700 people. Our refinery and associated operations have been part of the local Geelong community since 1954 and proudly supplies more than half of Victoria’s fuel needs and injects more than $200M each year into the local economy through wages and services. National Aboriginal Sporting Chance Academy (NASCA) NASCA operates a program in partnership with Airds High School in Campbelltown. The program, which opened for enrolment in August 2018, provides valuable support via a Resilience Program for 80–100 young Indigenous students aged 12–18. In partnership with Viva Energy, NASCA is committed to bringing positive social change for young people in Airds over the three-year partnership. S u s t a n a b i i l i t y We have partnerships with a range of local community organisations in Geelong including Northern Futures and the Geelong Football Club – sponsoring their inaugural AFL Womens team and their NextGeneration Academy. We also engage social enterprise Gen U to run the refinery cafeteria and provide gardening services. As sport plays a big role in the Geelong region with AFL, soccer, netball and cricket being the highest participation sports, we support 10 local clubs to assist people (particularly children) participate. We further support the local sporting community through our Club Legends Award, which rewards and celebrates unsung sporting volunteers in the Geelong region. 47 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Community program Our community goal is to be valued by our people, local communities and customers for our genuine efforts towards positive social impact. We are committed to giving back to our local communities and in doing so, helping them reach their destination. Our community program 2016–2019 focused on community projects that support mental health, Indigenous participation and substance misuse. We do this with the support of our people, our communities, and our business practices. In 2020 we will continue to evolve our community program in line with our business strategy and leverage our existing partnerships. Highlights for 2019 1,018 Good Deeds by 843 employees (representing 70% of our workforce), raising $22,000. Our employees raised $382,448 through Double My Donation and Team Fundraising (includes Viva Energy matching). Geelong Football Club Premier partner of the inaugural Geelong Football Club’s AFLW team. 1,132 young people supported by Viva Energy programs. Reconciliation Action Plan Launched our inaugural Reconciliation Action Plan, aiming to foster reconciliation with Indigenous peoples through our activities, services and programs. $60,000+ donated to support a series of natural disasters. Our people Our communities Our business We use our business capabilities to help create long-term positive change Indigenous community projects As part of our contract to supply Low Aromatic Fuel into northern Australia, we are committed to supporting Indigenous community projects. Member of Supply Nation Our membership provides options to support Indigenous businesses. Customers Working collaboratively with our customers to support local communities where we both operate. We create simple and inspiring ways for our employees to contribute to positive change Double My Donation to community partners 217 employees have donated $210,613 including Viva Energy’s contribution. Employee led Our Community Ambassadors have organised events offering 1,979 participation opportunities for employees. Team Fundraising $171,835 raised through 28 team fundraising activities, including Viva Energy’s contribution. Indigenous activities Around 700 employees were involved in activities to deepen our cultural awareness and competency. Role Model Grants Grants to the value of $115,207 were issued to 12 local community organisations. 48 We support local projects that foster positive role models to address significant community challenges Cathy Freeman Foundation (CFF) Viva Energy has a four year partnership with CFF. This year, the partnership has supported 77 young Indigenous people from four communities to attend Horizons camps designed to increase confidence and goal setting skills. 233 of our people have participated in CFF activities. National Aboriginal Sporting Chance Academy (NASCA) NASCA delivered 1,106 hours of activities, supporting 98 students in Western Sydney with the support of Viva Energy’s partnership. headspace Annual funding of $200,000 allowed this partnership to provide 253 training and upskilling opportunities for 924 young people across participating centres and headspace Youth National Reference Group; as well as 134 community events. CAAPS The Council for Aboriginal Alcohol Program Services (CAAPS) numeracy and literacy program has supported 28 school aged residents recovering from substance misuse issues. This involved over 932 hours of numeracy and literacy support. Koorie Heritage Trust Viva Energy’s funding supported the recording of five oral histories, delivery of 10 school holiday programs and annual events including the Koorie Art Show and Koorie Krismas. Northern Futures Annual funding of $40,000 has supported 83 people to move directly into employment and achieved an 87% skilled training completion rate. Support for grass roots sports 10 local Geelong sports clubs were sponsored. More than $50,000 in prize money awarded for our Club Legends Award. Viva Energy Group Limited Annual Report 2019 Inaugural Reconciliation Action Plan As a major Australian energy company, we feel a deep commitment to working with Indigenous Australians and respecting their cultural and spiritual connections to the land and waters where we operate. In 2019 we launched our inaugural Reconciliation Action Plan (RAP) 2019-2021, which builds on our Company’s Indigenous participation program, which has been operating for the last three years. Our vision for reconciliation is a nation where Indigenous peoples have equal and equitable opportunities, and where business and society are enriched by their cultural diversity. This is aligned with our Company’s broader purpose of ‘helping people reach their destinations’. Our RAP outlines the Company’s commitments towards reconciliation over the next two years. It will guide our approach to Indigenous peoples and will be overseen by a RAP advisory group, with representation by senior members of our organisation. The key outputs as outlined in our RAP include an increased focus on Indigenous employment, acknowledgement and celebration of Indigenous events, staff engagement and increased cultural awareness activities. View and download our RAP at vivaenergy.com.au/RAP. Our RAP includes the use of artwork titled ‘Wa-ngal yalinguth, yalingbu, yirramboi’ (Woi-wurrung language), created by artist Dixon Patten, a proud Yorta Yorta and Gunnai man who was born and raised in Melbourne. Ethical conduct and transparency We are committed to observing the highest standard of corporate practice. In 2019, the Board approved a refreshed statement of Company Values. Led by a working group of senior leaders, we developed our Values by inviting over 120 employees across the business to participate in our employee focus groups. The working group listened to and captured insights into who we are and what’s important to us. The key themes and insights were then used in the development and articulation of our Values: Integrity, Responsibility, Curiosity, Commitment and Respect. These Values reflect what Viva Energy stands for and underpin our business principles and behaviours. Viva Energy has long-standing Business Principles that reflect our core values and guide the conduct and operations of our Company. We also have a Code of Conduct, which outlines how we expect our employees, officers and Directors to behave and conduct themselves in the workplace. The Board has also adopted the following policies: • Anti-Bribery and Corruption Policy; • Whistleblower Policy; • Securities Trading Policy; • Diversity Policy; • Disclosure Policy; and • Shareholder Communications Policy. All employees are required to complete awareness training on these policies, with more advanced training provided depending on their role within the organisation. You can find more information on the above at investor.vivaenergy.com.au/ investor-centre. Modern Slavery Act Modern slavery is a common umbrella term used to describe a range of extreme labour rights abuses, including slavery, servitude, human trafficking and forced or compulsory labour. Procuring goods ethically is not only a socially responsible business practice, it is now a regulatory requirement in Australia, following the enacting of the Commonwealth’s Modern Slavery Act 2018. In 2019 we reviewed our own labour practices and initiated a review of our supply chain. We will be providing a Modern Slavery Statement in accordance with our obligations to report under the legislation in 2021. S u s t a n a b i i l i t y 49 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Economic contribution Tax contributions We support the Australian economy through the national scope of our operations, the products we supply, the employment we generate, the local suppliers we support, the returns we provide to investors and the taxes we pay. We aim to maximise the benefits and minimise any negative impacts of our business operations. We own and operate the Geelong Refinery, one of only four refineries in Australia. It supplies over 10% of Australia’s fuel, and more than 50% of all the fuel used in Victoria. Employing over 700 people and injecting more than $200M into the local economy through wages and services, the Geelong Refinery is a vital part of Australia’s energy solution. The critical investments and improvements we continue to make in major maintenance, reliability and safety improvements and increasing storage capacity will ensure it will continue to be an important part of local manufacturing for years to come. With the significant scope of our operations, including the breadth of our infrastructure (including the Refinery, our terminals and pipelines, and our supply business), we are a key contributor to the energy security position of Australia, and particularly in liquid fuels and lubricants. This security underpins every sector of the Australian economy, and we take our role in delivering a reliable supply seriously. Supporting Australia’s economy We are committed to delivering transparency and providing communities with a clear understanding of the tax contributions we make and collect for the Australian economy. In 2016, Viva Energy adopted the Voluntary Tax Transparency Code, under which it makes public disclosures of its tax position, in addition to the requirements under its financial statements. For further information, refer to our 2019 Taxes Paid Report. Total tax contribution Income tax Fuel excise Customs duties Payroll tax Fringe benefits tax Land tax GST PAYG withholding Total tax contribution A$M 26.2 4,296.9 14.2 9.0 0.8 14.2 1,090.8 67.3 5,519.4 Annually invests $1B+ in local wages and services. $5.52B Total tax contribution. Over 1,320 strong Australian workforce 35% based in regional areas. On average, we re-fuel 1.74M trucks, buses, cars and motorcycles every week across the Alliance network 50 Network of 23 terminals and 52 airports and airfields across Australia. 1.1B litres of storage capacity. Leading supplier for lubricants and diesel in the resource market. Viva Energy supplies: Approximately 25% of Australia’s fuel needs. National network of nearly 1,300 retail service stations Approximately 40% of the marine fuel oil market. Approximately 37% of jet fuel nationally. The Geelong Refinery Proudly supporting local manufacturing at the Geelong Refinery – 1 of 4 refineries in Australia. Only manufacturer in Australia of avgas solvents bitumen Manufactures Low Aromatic Fuel for supply into NT, QLD and WA. 700+ people (employees and contractors) work at the Refinery. Supplies 90% of marine fuels for Victorian commercial shipping and Spirit of Tasmania. 50%+ of the Port of Geelong’s trade. Viva Energy Group Limited Annual Report 2019 Sustainability performance data* Health and safety1 Personal safety2 Total Exposure Hours (million) Total Fatalities and Permanent Disability FY17 FY18 FY19 FY18/19 Δ# 5.55 0 6.24 1 6.38 0 +0.14 -1 Total Lost Time Injuries / Frequency Rate (per million hours) 5 / 0.9 7 / 1.12 9 / 1.41 +2 / +0.29 Employees Contractor 4 1 4 3 5 4 +1 +1 Total Recordable Injuries3 / Frequency Rate (per million hours) 25 / 4.51 36 / 5.77 29 / 4.55 -7 / -1.22 Employee Contractor Total High Potential Near Miss Incidents4 Reported Total Life Saving Rule Breaches Process safety 12 13 69 28 14 22 87 32 13 16 89 37 -1 -6 +2 +5 Total Tier 1 / Tier 2 Process Safety Events5 0 / 3 0 / 4 0 / 2 0 / -2 Environment Environmental Non-compliance Sanctions6 Spills Loss of Primary Containment (LOPC) > 100kg7 Spills to Environment >100kg8 Significant Spills9 Significant air emissions – Geelong Refinery10 Volatile Organic Compounds (kg) NOx (kg) SOx (kg) Water consumption – Geelong Refinery10 Potable water consumption (ML) Sea water consumption (ML) Recycled water consumption (ML) Waste – Geelong Refinery10 Total Hazardous Waste generated (Tonnes) Hazardous Waste diverted from landfill (Tonnes) Total Non-hazardous Waste generated (Tonnes) Non-hazardous Waste diverted from landfill (Tonnes) Climate change and energy Greenhouse gas (GHG) emissions11 Total GHG emissions (tCO2-e) Total Scope 1 (tCO2-e) Refining (tCO2-e) Other (tCO2-e) 2 26 4 4 0 29 3 3 0 29 3 2 - - - -1 679,438 546,251 632,076 542,949 565,700 472,172 1,685,843 1,702,719 3,164,355 -10.5% +13.0% +85.8% S u s t a n a b i i l i t y 592 366 241 100,076 118,192 107,299 1,191 1,179 1,197 463,817 463,331 1,693 1,504 589,439 588,576 2,495 2,232 550,969 550,066 1,911 1,683 -34.2% -9.2% +1.5% -6.5% -6.5% -23.4% -20.6% 1,328,985 1,392,568 1,430,837 1,032,422 1,061,632 1,113,911 1,020,905 1,050,846 1,101,920 +2.7% +4.9% +4.9% 11,517 10,786 11,991 +11.2% 51 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued Total Scope 2 (tCO2-e) Refining (tCO2-e) Other (tCO2-e) Energy Total energy consumed (GJ) Refining Other Our people Total Employees Gender Split (Male / Female) (%) Total Employees in permanent full-time roles Employees in permanent full-time roles (Male / Female) (%) Total Employees in permanent part-time roles Employees in permanent part-time roles (Male / Female) (%) Total Employees in full-time fixed term contracts Employees in full-time fixed term contracts (Male / Female) (%) Total Employees in part-time fixed term contracts Employees in part-time fixed term contracts (Male / Female) (%) Total Employees as casuals Employees as casuals (Male / Female) (%) Voluntary Employee turnover (%) Voluntary Employee turnover (Male / Female) (%) Board of Directors (Male / Female) (%) Senior Leadership Group (Male / Female) (%) New Hires (Male / Female) (%) Internal Promotions (Male / Female) (%) Total Employees (Liberty Oil Holdings) Gender Split (Liberty Oil Holdings) (Male / Female) (%) Our community Good Deeds completed FY17 FY18 FY19 FY18/19 Δ# 296,563 330,936 317,082 258,586 37,977 290,158 276,423 40,778 40,659 252,921,300 257,597,649 273,422,163 252,546,619 257,229,974 273,059,170 374,681 367,675 362,993 -4.2% -4.7% -0.3% +6.1% +6.2% -1.3% +47 -2 / +2 +13 - +11 NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR NR 1273 78 / 22 1126 81 / 19 100 1320 76 / 24 1139 81 /19 111 35 / 65 38 / 62 +3 / -3 22 35 +13 86 /14 69 / 31 -17 / +17 1 13 +12 0 / 100 0 / 100 24 22 100 / 0 100 / 0 5 74 / 26 71 / 29 59 / 41 68 /3212 76 /24 NR NR 6 67 / 33 71 / 29 61 / 39 60 /40 74 / 26 155 83 / 17 - -2 - +1 -7 / +7 - +2 / -2 -8 / +8 -2 / +2 - - 1054 1018 -36 All data reported is for the FY2019 unless otherwise stated. All data excludes Liberty Oil Holdings (unless otherwise stated) as the full acquisition of the business completed in December 2019. For selected Environment and Climate Change & Energy parameters, variation in performance between 2018 and 2019 is expressed as a percentage to facilitate the comparison of data. Totals used include both employees and contractors Personal Safety Criteria definitions used are in line with US OSHA guidelines. Totals include Refining, Commercial, Retail Fuels and Marketing, Supply, Corporate Functions and Overheads. Incidents that include Medical Treatment Case, Restricted Work Case, Lost Time Injuries and Fatalities. Incidents that can result in injury, illness, damage to Assets, the environment or Company reputation, or it can be a Near Miss. This can also include Life Saving Rules breaches where the potential consequence of major injury or greater was highly likely, or First Aid Cases that could have been Total Recordable Injury in slightly different conditions. Tier 1 and Tier 2 Process Safety Event is defined as per API RP 754. Number of environmental non-compliance sanctions, which occurred in the reporting year and resulted in the issue of a fine, prosecution, enforceable undertaking or impact on licence to operate. This number does not include any pending proceedings. 7. 8. 9. Incidents resulting in the uncontrolled or unplanned release of material from a process or storage that serves as primary containment. This number also includes Spills to the environment >100kg; and Significant Spills. Number of incidents resulting in the release of material to the environment without secondary containment. All spills are also counted as LOPC incidents. Number of incidents for the uncontrolled or unplanned release of material greater than 1,000kg to the natural environment without secondary containment. 10. Geelong Refinery accounts for the majority of our significant environmental emissions for the Group. The data is aligned with the NPI reporting period 1 July – 30 June for the reported year. All emission data for the Group is submitted to the National Pollutant Inventory and available at npi.gov.au/npi-data. 11. Scope 1 and Scope 2 GHG emission estimates are prepared in accordance with the National Greenhouse and Energy Reporting Act (NGER) for the reporting period 1 July – 30 June. Other includes data for Commercial, Retail Fuels and Marketing, Supply, Corporate Functions and Overheads). 12. In our 2018 Annual Report we reported this figure as 42%. Due to a revised approach in calculating this data, the 2018 figure has since been corrected to include new hires based on the hire date only (excluding contracts awarded but not necessarily started) for the FY. * # 1. 2. 3. 4. 5. 6. 52 Viva Energy Group Limited Annual Report 2019 GRI Content Index GRI Standard Disclosure title General disclosures Organisational profile Reference 102-1 102-2 102-3 102-4 102-5 102-6 102-7 102-8 102-9 102-10 Name of the organisation Viva Energy Group Limited Activities, brands, products, and services About us – Annual Report (page 4) Location of headquarters Location of operations Ownership and legal form Markets served Level 16, 720 Bourke Street, Docklands Vic 3008 About us – Annual Report (page 4) About this Annual Report – Annual Report (page 2) About this Annual Report – Annual Report (page 2) Scale of the organisation About this Annual Report – Annual Report (page 2) Information on employees and other workers Our people – Annual Report (page 45) Sustainability performance data – Annual Report (page 52) Supply chain About us – Annual Report (page 4) Significant changes to the organisation and its supply chain Operating and financial review – Annual Report (page 14) 102-11 Precautionary Principle or approach 102-12 External initiatives 102-13 Membership of associations 2019 Corporate Governance Statement – investor.vivaenergy.com.au/ investor-centre Viva Energy has used the Global Reporting Initiative Reporting framework for sustainability reporting guidance Viva Energy participates in and engages with a number of local, national and global organisations including Reconciliation Australia, Workplace Gender Equality Agency, Australian Hydrogen Council, Australian Industry Greenhouse Network, Australian Institute of Petroleum, Cooperative Research Centre CARE, LastFire, Maritime Industry Australia Limited Strategy 102-14 Statement from senior decision-maker Chairman and Chief Executive Officer’s report – Annual Report (page 6) Governance 102-16 Values, principles, standards, and norms of behaviour Ethical conduct and transparency – Annual Report (page 49) 2019 Corporate Governance Statement – investor.vivaenergy.com.au/ investor-centre 102-18 Governance structure Sustainability at Viva Energy – Annual Report (pages 33 to 35) Stakeholder engagement 102-40 102-42 102-43 102-44 List of stakeholder groups Sustainability at Viva Energy – Annual Report (pages 33 to 35) Identifying and selecting stakeholders Sustainability at Viva Energy – Annual Report (pages 33 to 35) Approach to stakeholder engagement Sustainability at Viva Energy – Annual Report (pages 33 to 35) Key topics and concerns raised Sustainability at Viva Energy – Annual Report (pages 33 to 35) S u s t a n a b i i l i t y 53 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Sustainability continued GRI Standard Disclosure title Reporting practice Reference 102-45 Entities included in the consolidated financial statements About this Annual Report – Annual Report (page 2) 102-46 Defining report content and topic boundaries Sustainability at Viva Energy – Annual Report (pages 33 to 35) 102-47 List of material topics Sustainability at Viva Energy – Annual Report (pages 33 to 35) 102-48 Restatements of information This is Viva Energy’s first report referencing the GRI Standards 102-49 Changes in reporting 102-50 Reporting period This is Viva Energy’s first report referencing the GRI Standards Unless otherwise indicated, all disclosures are for 1 January 2019 to 31 December 2019 102-51 Date of most recent report This is Viva Energy’s first report using the GRI Standards 102-52 Reporting cycle Annual 102-53 Contact point for questions regarding the report Corporate directory – Annual Report (page 149) 102-54 Claims of reporting in accordance with the GRI Standards Sustainability at Viva Energy – Annual Report (page 33) 102-55 GRI content index 102-56 External assurance Standard disclosures Economic contribution Annual Report (pages 53 to 55) We have not sought external assurance over GRI Standard disclosures in this report 201-1 201-2 Direct economic value generated and distributed Operating and financial review – Annual Report (pages 13 to 31) Financial implications and other risks and opportunities due to climate change Climate change and energy – Annual Report (page 41) 204-1 Proportion of spending on local suppliers Economic contribution – Annual Report (page 50) Ethical conduct and transparency 205-2 Communication and training about anti- corruption policies and procedures Environment Ethical conduct and transparency – Annual Report (page 49) 2019 Corporate Governance Statement – investor.vivaenergy.com.au/ investor-centre 303-1 Interactions with water as a shared resource Environment – Annual Report (page 39); Sustainability performance data – Annual Report (pages 51 to 52) 303-2 303-3 304-4 Management of water discharge-related impacts Environment – Annual Report (page 39) Water withdrawal IUCN Red List species and national conservation list species with habitats in areas affected by operations Environment – Annual Report (page 39); Sustainability performance data – Annual Report (pages 51 to 52) Environment – Annual Report (page 41) 305-7 Nitrogen oxides (NOX), sulphur oxides (SOX), and other significant air emissions Environment – Annual Report (page 41); Sustainability performance data – Annual Report (pages 51 to 52) 306-2 Waste by type and disposal method 306-3 Significant spills 307-1 Non-compliance with environmental laws and regulations Environment – Annual Report (page 41); Sustainability performance data – Annual Report (pages 51 to 52) Environment – Annual Report (page 41); Sustainability performance data – Annual Report (pages 51 to 52) Environment – Annual Report (page 39); Sustainability performance data – Annual Report (pages 51 to 52); Directors’ report – Annual Report (page 77) 54 Viva Energy Group Limited Annual Report 2019 GRI Standard Disclosure title Climate change and energy Reference 302-1 Energy consumption within the organisation 305-1 Direct (Scope 1) GHG emissions 305-2 Energy indirect (Scope 2) GHG emissions Climate change and energy – Annual Report (pages 41 to 43); Sustainability performance data – Annual Report (pages 51 to 52) Climate change and energy – Annual Report (pages 41 to 43); Sustainability performance data – Annual Report (pages 51 to 52) Climate change and energy – Annual Report (pages 41 to 43); Sustainability performance data – Annual Report (pages 51 to 52) Our people 401-1 New employee hires and employee turnover 404-2 Programs for upgrading employee skills and transition assistance programs 405-1 Diversity of governance bodies and employees Health and safety Our people – Annual Report (pages 45 to 46); Sustainability performance data – Annual Report (pages 51 to 52) Our people – Annual Report (pages 45 to 46) Our people – Annual Report (pages 45 to 46); Sustainability performance data – Annual Report (pages 51 to 52) 403-1 403-2 403-3 403-4 403-5 403-7 403-8 Occupational health and safety management system Hazard identification, risk assessment, and incident investigation Health and safety – Annual Report (pages 36 to 38) Health and safety – Annual Report (pages 36 to 38) Occupational health services Health and safety – Annual Report (page 38) Worker participation, consultation, and communication on occupational health and safety Health and safety – Annual Report (page 36) Worker training on occupational health and safety Health and safety – Annual Report (page 36) Prevention and mitigation of occupational health and safety impacts directly linked by business relationships Workers covered by an occupational health and safety management system Health and safety – Annual Report (pages 36 to 38) Health and safety – Annual Report (page 36) 403-9 Work-related injuries Health and safety – Annual Report (pages 36 to 37); Sustainability performance data – Annual Report (pages 51 to 52) GRI G4- OG13 GRI G4- DMA Number of Process Safety Events by business activity Health and safety – Annual Report (page 38); Sustainability performance data – Annual Report (pages 51 to 52) Emergency preparedness Health and safety – Annual Report (page 38) Our community 413-1 Operations with local community engagement, impact assessments, and development programs Our community – Annual Report (pages 47 to 48) S u s t a n a b i i l i t y 55 About usChairman and Chief Executive Officer’s reportOperating and financial reviewDirectors’ reportRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report Letter from the Remuneration and Nomination Committee Chair – Robert Hill Dear Shareholders, On behalf of the Board, I am pleased to present Viva Energy’s 2019 Remuneration report. This report outlines the Group’s Director and executive remuneration frameworks, and how they contribute to the execution of our business strategy. This report also describes the legacy remuneration arrangements that were put in place under previous ownership, and explains the Board’s approach to ensuring continuity of management as the legacy arrangements expire. Our executive remuneration framework is designed to facilitate long-term sustainable growth of your Company. This means we need to ensure levels of remuneration are sufficient to attract and retain suitably qualified individuals focused on Board priorities. Our performance conditions and measurement timeframes are consistent with the objective of long-term sustainable growth. Our variable remuneration has vesting periods and a deferred equity component designed to align the interests of our executives with shareholders and promote appropriate risk management aligned with the longer-term nature of the Company’s capital investment. The Company delivered strong top line sales volumes in the year ended 31 December 2019 (FY2019), up approximately 4.6% on 2018. This was largely driven by restoration of growth in the retail Alliance channel, continued growth in the Liberty and wholesale businesses, and solid sales performance in commercial segments. Refining operating performance was also strong, with periods of record production. Earnings were heavily impacted by weak regional refining margins, lower retail market margins as a result of oil price volatility and heightened competition, and increased supply chain costs which could not be immediately recovered under commercial contracts. For FY2019, the Company reported an Underlying EBITDA (RC) of $387.1M1, which is down $141.8M on the prior year. Notwithstanding these financial outcomes, good progress has been made on our strategic priorities, including the renegotiation of the retail Alliance agreement with Coles, subsequent sales recovery through this retail channel in the second half of FY2019, the full acquisition of the Liberty Wholesale business, retention and acquisition of key commercial contracts and improvements in refining production capability. These initiatives provide a strong platform for future growth as market conditions improve. There is a gateway condition that applied to our executive Short Term Incentive (STI) Plan for 1H2019, as set out in our Initial Public Offering (IPO) Prospectus (Prospectus), which required achievement EBITDA (RC) of $322.9M in 1H2019. Our actual EBITDA (RC) in 1H2019 was $171.6M. Given that we did not meet the gateway condition in 1H2019 and in light of the overall financial performance of the Company in FY2019, it has been agreed that no reward will be provided to the Key Management Personnel (KMP) in respect of the 2019 STI Plan. In response to feedback received from shareholders on our 2018 Remuneration Report, we have provided additional disclosures in this year’s report on performance against the FY2019 STI Plan performance conditions, notwithstanding that the gateway obligations were not met and no reward will be provided under that Plan. The Legacy LTI arrangements were put in place by the previous owner, before the Company listed on ASX. These arrangements provided significant value for executives to ensure a continuity of management post-IPO. While these arrangements remained on foot, the total annual remuneration of our KMP was set at levels considerably below market median in recognition of the value of the Legacy LTI arrangements for our executives. The last tranche of Legacy LTI options held by the CEO and COO vested in January 2020. The CFO continues to hold vested and unvested Legacy LTI options that will expire in January 2022. As the Legacy LTI arrangements expire, the Board considers that competitiveness of our remuneration is at the low end of the spectrum. The Board keeps executive remuneration under constant review to ensure this remains appropriate, that we set remuneration levels and have in place an appropriate structure and mix of remuneration elements to maintain management continuity and focus executives on the long-term sustainable growth of your Company. The Board approved an adjustment to the Chief Financial Officer’s remuneration arrangements, which was effective 1 March 2019. The Board approved other changes that will take effect in 2020 – these changes to remuneration levels and to the remuneration framework are outlined in this report. Our continued intention is to encourage open dialogue with shareholders and other stakeholders, particularly around our remuneration practices and disclosures, and accordingly I welcome your feedback. Yours faithfully, Robert Hill 1. Financial results discussed in this letter are reported based on AASB 117 Leases, the superseded accounting standard so performance with prior periods can be compared on a like-for-like basis 56 Viva Energy Group Limited Annual Report 2019 1. Overview 1.1 Introduction This report has been prepared in accordance with the Corporations Act 2001 and the Corporations Regulations 2001. The content in this report has been audited by PricewaterhouseCoopers, the Company’s external auditor. The Company is required to prepare a remuneration report in respect of KMP, being those people that have responsibility and authority for planning, directing and controlling the activities of Viva Energy, either directly or indirectly. In FY2019, the KMP were the Non-Executive Directors of the Company, the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the Chief Operating Officer (COO). The Company was incorporated on 7 June 2018 and it listed on the ASX on 13 July 2018. This report describes the Company’s remuneration arrangements for FY2019. To provide shareholders with a complete overview of those remuneration arrangements, information on the Legacy LTI arrangements that impacted KMP remuneration during FY2019 are also disclosed. 1.2 Details of KMP The following individuals were KMP of the Company in 2019. Non-Executive Directors Name Robert Hill Title Commencement as KMP Chairman and Independent Non-Executive Director Arnoud De Meyer Independent Non-Executive Director Dat Duong Hui Meng Kho Jane McAloon Sarah Ryan Executives Name Scott Wyatt Jevan Bouzo Non-Executive Director Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Title Chief Executive Officer Chief Financial Officer Daniel Ridgway Chief Operating Officer 2. Remuneration governance 2.1 Role of the Board 18 June 2018 18 June 2018 7 June 2018 18 June 2018 18 June 2018 18 June 2018 Commencement as KMP 7 June 2018 7 June 2018 1 January 2019 The Board, with the guidance of the Remuneration and Nomination Committee, is responsible for: • approving the remuneration of the Non-Executive Directors and executive KMP; • ensuring the Company’s remuneration framework is aligned with the Company’s purpose, values, strategic objectives and risk appetite; • evaluating the performance of the CEO and other members of the Executive Leadership Team (ELT); and • approving incentive plans and engaging external remuneration consultants as appropriate. R e m u n e r a t i o n r e p o r t 57 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 2. Remuneration governance continued 2.2 Role of the Remuneration and Nomination Committee The Board has established a Remuneration and Nomination Committee to assist the Board in fulfilling its responsibilities for governance and oversight of remuneration related matters. The Remuneration and Nomination Committee is comprised of three Non-Executive Directors, being Robert Hill (Chair), Hui Meng Kho and Arnoud De Meyer, the majority of whom are Independent Directors. The Remuneration and Nomination Committee’s responsibilities include nomination and governance-related matters as well as making recommendations to the Board in relation to: • remuneration policies that will be designed to support the execution of the Company’s strategy and plans, and set remuneration and rewards at levels to attract and retain the best people; • the remuneration of the Non-Executive Directors; • the remuneration packages (including Fixed Annual Remuneration, incentive plans and any other benefits or arrangements) of the CEO and other members of the ELT; and • the administration and operation of equity and incentive plans and assessing the effectiveness and implementation of such plans. A copy of our Remuneration and Nomination Committee Charter is available on our website at www.vivaenergy.com.au. 2.3 Use of remuneration consultants The Remuneration and Nomination Committee seeks external remuneration advice to ensure that it is fully informed when making decisions, including on recent market trends and practices and other remuneration-related matters. Remuneration consultants are engaged directly by the Remuneration and Nomination Committee. In 2019, no remuneration recommendations were received from remuneration consultants as defined under the Corporations Act 2001. 3. Executive remuneration overview 3.1 Executive remuneration objectives The overall objectives for executive remuneration at Viva Energy are to: 1. Drive sustainable value creation for our shareholders. 2. Drive appropriate behaviours and culture. 3. Attract and retain high-calibre talent. 4. Ensure remuneration is well understood and transparent. To achieve these objectives, the Board seeks to set executive remuneration at levels that are competitive in the market (for ASX- listed companies comparable in terms of size, complexity and industry to the Company), and also to provide incentives that focus the leadership team on achieving long-term sustainable growth. The Board reviews the executive remuneration objectives and levels on an annual basis. Recognising the value and retentive impact of the Legacy LTI arrangements in place for some executives, the Board has set Fixed Annual Remuneration, STI and Long Term Incentive (LTI) opportunities for executives subject to those arrangements, including all KMP, at levels that are lower than the median of companies that are comparable in terms of size, complexity and industry to the Company. As the Legacy LTI arrangements expire, the Board will continue to review the overall remuneration mix to ensure management continuity, motivation and engagement beyond the expiration or vesting of the Legacy LTI arrangements. An adjustment was made to the CFO’s fixed remuneration during FY2019 as part of the Board’s ongoing review and further changes will be made in respect of 2020 remuneration arrangements as discussed later in this report. 58 Viva Energy Group Limited Annual Report 2019 The 2019 executive remuneration framework is summarised below. 2019 Executive remuneration framework Component Delivery vehicle Performance measures Link to strategy Fixed Annual Remuneration (FAR) Base salary and superannuation FAR that is appropriate in order to enable Viva Energy to motivate, engage and retain the calibre of executives that can execute the Company’s strategy and continue to deliver value to shareholders. As the final tranches of the Legacy LTI awards either vest or expire, the Board intends to set FAR at a market competitive level with regard for the size, complexity and accountabilities associated with a particular role, and the level of skills and experience required to perform the role. Short Term Incentive (STI) – reward for performance against annual objectives 50% paid in cash 50% deferred into Share Rights For any reward to be granted, a gateway condition requiring the Company’s 1H2019 underlying EBITDA (RC) to be $322.9M2 needed to be satisfied. If that gateway condition is satisfied, the reward received would have been based on performance against a scorecard of performance measures focused on group financial (50%), strategic and operational excellence (30%), safety and environment (10%), and people (10%) outcomes. Vesting of the Performance Rights is based on performance against a scorecard of performance conditions achieved over a three- year performance period, focused on relative Total Shareholder Return (50%), free cash flow (25%) and return on capital employed (25%). Long Term Incentive (LTI) – reward long- term performance and value creation for shareholders Performance Rights, allocated at face value with vesting tested after a three year performance period. Rewards execution on annual performance objectives. A balanced scorecard of measures ensures targets are achieved in a sustainable manner with a strong emphasis on the delivery of financial outcomes. STI deferral creates further alignment with shareholders and acts as a retention instrument. Drives the delivery of Viva Energy’s long-term objectives in a sustainable manner, provides alignment with the interests of shareholders, and encourages long-term value creation. Legacy LTI (historic plan) – reward for long-term value creation Options vested on 1 January 2020. Additional tranches held by the CFO only, due to vest on 1 January 2021 and 1 January 2022. The Legacy LTI previously acted to motivate executives to transform and grow the value of the Company through to a potential exit event (such as listing on the ASX). The program continues to provide retention value for the CFO as any unvested tranches of options will be forfeited on resignation. No further grants will be made under this plan. R e m u n e r a t i o n r e p o r t Minimum shareholding policy – The Board has adopted a minimum shareholding policy which requires each member of KMP (other than Non-Independent, Non-Executive Directors) to accumulate a minimum shareholding of equivalent to 100% of their Fixed Annual Remuneration within five years of the date on which they become KMP, and to maintain such minimum shareholding for so long as they remain KMP. Our KMP either already meet or are on track to meet this requirement. 2. Unless stated otherwise, financial results discussed in this section are reported based on AASB 117 Leases, the superseded lease accounting standard so performance with prior periods can be compared on a like-for-like basis. 59 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 3. Executive remuneration overview continued 3.2 Executive remuneration mix in FY2019 The weighting of each remuneration component of an executive’s total remuneration opportunity in FY2019 was aligned to the objectives of the executive remuneration framework outlined in section 3.1, in particular driving sustainable value for the Company. The following diagram sets out the weighting of each remuneration component for the CEO, CFO and COO based on their maximum potential STI and LTI opportunity and does not represent actual remuneration received for FY2019. CEO (Scott Wyatt) FAR – 28% STI – 18% (cash) STI – 18% (Share Rights) LTI – 36% (Performance Rights) 72% at risk CFO (Jevan Bouzo) FAR – 33% STI – 17% (cash) STI – 17% (Share Rights) LTI – 33% (Performance Rights) 67% at risk COO (Daniel Ridgway) FAR – 32% STI – 17% (cash) STI – 17% (Share Rights) LTI – 34% (Performance Rights) 68% at risk 3.3 Executive remuneration delivery timeline – 2019 awards FAR Base salary + superannuation STI 12-month performance period 50% of any award granted in cash 25% of any award granted in Share Rights that are eligible to vest after 12 months 25% of any award granted in Share Rights that are eligible to vest after 24 months LTI 3-year performance period Performance conditions tested Year 0 Year 1 Year 2 Year 3 Year 4 60 Viva Energy Group Limited Annual Report 2019 4. Remuneration framework The components of the executive remuneration framework are explained in detail below. 4.1 Fixed Annual Remuneration (FAR) FAR is comprised of base salary and superannuation. 4.2 Short Term Incentive (STI) Viva Energy established an STI Plan to reward executive KMP and other members of the executive team for strong performance levels and contributions to the Company over a 12-month performance period. STI performance is assessed against a balanced scorecard comprised of a robust set of performance conditions, which drive the Company’s short-term financial, strategic and operational objectives and set the platform for long-term success. The Board retains overall discretion to adjust outcomes as appropriate. Further information about the 2019 STI Plan is set out below. No award was provided under the 2019 STI Plan as the gateway condition was not met. Opportunity CEO CFO COO • Target: 67% of FAR • Target: 50% of FAR • Target 54% of FAR • Maximum: 134% of FAR • Maximum: 100% of FAR • Maximum 107% of FAR Performance period Performance was assessed over a 12-month period from 1 January 2019 to 31 December 2019. Performance gateway Prospectus forecast Underlying EBITDA (RC) for 1H2019 of $322.9M was required to be met before any STI payment would be made. Performance conditions Category Weighting Measures Objective Safety and environment 10% • LTIF (Lost Time Injury Frequency) Build a generative safety culture. • Spills > 100kg • API Tier 1 and 2 incidents1 People 10% • Employee engagement • Voluntary attrition • Women in management and leadership Financial 50% • Underlying EBITDA • Net Profit After Tax • Free cash flow (pre finance/ tax/dividends) Strategic and operational excellence 10% Retail • Sales volume • Net new sites • Underlying EBITDA (divisional) 10% Commercial • EBITDA from new accounts • Sales volume • Underlying EBITDA (commercial) 10% Refining • Intake • Availability • Underlying EBITDA (Geelong Refinery) R e m u n e r a t i o n r e p o r t Build a highly engaged workforce focused on delivering high quality results. Deliver sustainable shareholder returns and consistent operating cash flows. Expand retail network, grow the Alliance, and increase premium penetration. Retain and grow quality accounts and sustained earnings through focus on value-led proposition. Increase intake towards nameplate, sustained reliability, and improved productivity. 1. LTIF and API Tier 1 and 2 measures are industry standard safety performance metrics that reflect personal safety and process safety performance (respectively). 61 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 4. Remuneration framework continued 4.2 Short Term Incentive (STI) continued Delivery If any award was provided, it would have been provided: • 50% in cash; and Voting and dividends entitlements Restrictions on dealing • 50% in Share Rights, with 50% of those Share Rights eligible to vest 12 months after the cash component is paid and the other 50% eligible to vest 24 months after that date. A Share Right entitles the participant to receive one ordinary share for nil consideration if the Share Rights vest. Share Rights do not carry dividend or voting rights prior to vesting. Holders of Share Rights must not sell, transfer, encumber or otherwise deal with Share Rights unless the Board allows it or the dealing is required by law. Additionally, in no circumstances will a holder of Share Rights be able to hedge or otherwise affect their economic exposure to the Share Rights before they vest. Holders of Share Rights will be free to deal with the ordinary shares allocated on exercise of Share Rights, subject to the requirements of Viva Energy’s Securities Trading Policy. Cessation of employment If a participant ceases employment due to special circumstances (including death, terminal illness or disablement), any unvested Share Rights held by such participants will remain on foot and subject to the original vesting conditions (other than any vesting condition relating to continued employment with Viva Energy), unless the Board exercises a discretion to treat them otherwise. In all other circumstances (including due to a participant’s resignation or termination), unless the Board exercises its discretion to treat them otherwise and subject to applicable law, unvested Share Rights will automatically lapse. Change of control The Board may determine in its absolute discretion that all or a specified number of a participant’s Share Rights will vest on a change of control. 62 Viva Energy Group Limited Annual Report 2019 4.3 Long Term Incentive (LTI) Viva Energy has established a LTI Plan to assist in the attraction, motivation, retention and reward of eligible employees. The LTI Plan is designed to reward long-term performance, provide alignment with the interests of shareholders, and encourage long-term value creation. We use a combination of performance conditions, which reflect our long-term financial, strategic and operational objectives and focus on sustainable, long term performance. The CEO, CFO and COO were granted Performance Rights under the LTI Plan in 2019 details of which are set out below. Opportunity CEO CFO COO • Maximum: 134% of FAR • Maximum: 100% of FAR • Maximum 107% of FAR Instrument Performance Rights. A Performance Right entitles the participant to acquire one ordinary share for nil consideration at the end of the performance period, subject to the satisfaction of the performance conditions. The Board retains discretion to make a cash payment to participants on vesting of Performance Rights in lieu of an allocation of shares. Grant value Performance Rights were granted on 31 May 2019 using face value methodology. The number of Performance Rights awarded to each participant in 2019 was calculated by dividing the dollar value of their maximum LTI opportunity by $2.2173, being the volume weighted average price of the Company’s shares on the ASX over the period from 13 July 2018 (date of ASX listing) to 31 December 2018. This amounted to: • Scott Wyatt: 541,198 Performance Rights • Jevan Bouzo: 270,599 Performance Rights • Daniel Ridgway: 270,599 Performance Rights Performance conditions Performance condition Weighting Measures Objective 50% 25% Total Shareholder Return (TSR) Free Cash Flow (RC) (FCF) 25% Return on Capital Employed (RC) (ROCE) Total Shareholder Return over the period, relative to the ASX100 (Comparator Group). To create strong alignment between LTI outcomes and the experience of shareholders. FCF is calculated based on Underlying EBITDA (RC), normalised for market movements in AUD refining margins and adding / subtracting (as appropriate) maintenance capital expenditure, realised FX and derivative movements, dividends received from associated entities, interest and taxes paid. Underlying EBIT (RC) divided by average capital employed (total shareholder’s equity plus net debt) for each year. This measure directly encourages strong cost and capital management with positive conversion of underlying earnings to cash flow to maximise cash that the Company has available to fund growth opportunities, pay dividends and repay debts. This measure incentivises executives to undertake prudent management of capital to maintain positive returns on capital employed over the performance period. Replacement cost (RC) methodology is used in calculating both the FCF and ROCE outcomes, in order to provide a truer reflection of underlying performance. As explained in the Operating and financial review section of the Directors’ Report, this approach removes the impact of net inventory gain/(loss) caused by fluctuations in crude oil prices and foreign currency exchange rates. The Board considers that the use of RC methodology in setting FCF and ROCE targets within the LTI is appropriate, and provides a suitable balance with the relative TSR measure. R e m u n e r a t i o n r e p o r t Performance period and exercise Performance will be assessed over a 36-month period from 1 January 2019 to 31 December 2021. Vested Performance Rights will be automatically exercised. There will be no re-testing of any of the performance conditions, and Performance Rights that do not vest will lapse (and expire). 63 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 4. Remuneration framework continued 4.3 Long Term Incentive (LTI) continued Components Performance Rights which have not lapsed will vest following the end of the Performance Period, this being post 31 December 2021. TSR component The percentage of Performance Rights comprising the TSR component that vest, if any, will be based on the Company’s TSR ranking relative to the Comparator Group over the performance period, as set out in the following vesting schedule: Viva Energy’s TSR ranking relative to the Comparator Group Less than 50th percentile At 50th percentile % of Performance Rights that vest Nil 50% Between 50th and 75th percentile Straight-line pro rata vesting between 50% and 100% At 75th percentile or above 100% FCF component The percentage of Performance Rights comprising the FCF component that vest, if any, will be determined over the performance period by reference to the following vesting schedule: Viva Energy’s cumulative FCF over the performance period Less than target FCF performance Equal to target FCF performance % of Performance Rights that vest Nil 50% Between target and stretch FCF performance Straight-line pro rata vesting between 50% and 100% At or above stretch FCF performance 100% ROCE component The percentage of Performance Rights comprising the ROCE component that vest, if any, will be determined over the performance period by reference to the following vesting schedule: Viva Energy’s average ROCE over each year of the performance period Less than target ROCE Equal to target ROCE % of Performance Rights that vest Nil 50% Between target and stretch ROCE Straight-line pro rata vesting between 50% and 100% At or above stretch ROCE 100% Disclosure of FCF and ROCE targets The Board considers that the FCF and ROCE targets are commercially sensitive as disclosure of those targets can potentially indicate the Group’s margins and, as such, jeopardise Viva Energy’s competitive position. Therefore, those targets will not be disclosed during the performance period. However, the Board will provide full details of the vesting outcomes in connection with each component of the LTI, including the levels at which the targets were set at the beginning of the performance period, following completion of the performance period. The targets and the vesting outcomes will be detailed in the Remuneration report for the year in which the LTI will be tested. Other features Performance Rights have the same voting and dividend entitlements, restrictions on dealing, treatment on cessation of employment, and change of control provisions as the Share Rights described in section 4.2 above. 64 Viva Energy Group Limited Annual Report 2019 4.4 Claw back and preventing inappropriate benefits Under the rules governing the STI and LTI Plans, the Board has power to ‘claw back’ that it may exercise if, among other things: • a participant has acted fraudulently or dishonestly, is in material breach of their obligations to the Viva Energy Group, has engaged in negligence or gross misconduct, brought a member of the Viva Energy Group into disrepute, been convicted of an offence, or has a judgment entered against them in connection with the affairs of the Viva Energy Group; • Viva Energy is required by or entitled under law or under the principal’s employment contract to reclaim remuneration from the participant; • a participant has made a material misstatement on behalf of a member of the Viva Energy Group or there is a material misstatement or omission in the financial statements of the Viva Energy Group; or • a participant’s entitlements vest or may vest as a result of the fraud, dishonesty, negligence or breach of obligations of any other person and the Board is of the opinion that the entitlement would not have otherwise vested. The claw back regime applies to cash STI, Share Rights granted under the STI Plan and Performance Rights granted under the LTI Plan. 4.5 Legacy LTI Section 10.4.3 of the Prospectus issued in connection with the Company’s Initial Public Offer (Prospectus) described the Legacy LTI arrangements introduced by Viva Energy Holding Pty Limited (VEH) in 2015, which involved an issue of options. The Legacy LTI was introduced in order to assist in the motivation and retention of key executives, and to provide alignment with the interests of the previous shareholders. This was a key component of VEH’s remuneration framework. All offers under the Legacy LTI were made in the years prior to the Company’s listing on ASX and no further offers will be made under this plan. The Board recognises that the value delivered under the Legacy LTI is significant, and draws shareholders’ attention to the following matters that are relevant: • the Board imposed a mandatory escrow period to shares received on exercise of the Legacy LTI to ensure management’s continued alignment with shareholder interests; and • executives will forfeit unvested Legacy LTI Options they hold if they leave the Company before vesting. This condition was included to minimise the risk of leadership turnover in the important period following IPO. The table below sets out the outstanding options issued under the Legacy LTI held by the KMP as well as the key terms. Legacy LTI options Scott Wyatt Jevan Bouzo Number held as at 31 December 2019 Grant date Exercise price Vesting schedule and expiry 2,883,928 options 1,538,095 options 26 April 2016 25 October 2017 A$0.82 per option A$1.21 per option 2,883,928 options vested on 1 January 2020 and were exercised. • 384,523 options vested on 1 January 2019 and remain unexercised. • 384,524 options vested on 1 January 2020 and remain unexercised. • 384,524 options are scheduled to vest on 1 January 2021 with the remaining 384,524 scheduled to vest on 1 January 2022, subject to continued employment with Viva Energy and the terms of the Legacy LTI. Each of the Legacy LTI options will expire at 5.00pm on 1 January 2022 unless exercised earlier. Dan Ridgway 1,345,834 options 26 April 2016 A$0.82 per option 1,345,834 options vested on 1 January 2020 and were exercised. R e m u n e r a t i o n r e p o r t Voting and dividend entitlements Restrictions on dealing Cessation of employment, change of control and claw back Legacy LTI options do not carry dividend or voting right entitlements. Legacy LTI option holders must not sell, transfer, encumber or otherwise deal with their options unless the Board allows it or the dealing is required by law. Additionally, in no circumstances will Legacy LTI holders be able to hedge or otherwise affect their economic exposure to the options before they vest. Legacy LTI option holders will be free to deal with the ordinary shares allocated on exercise of their options, subject to the requirements of Viva Energy’s Securities Trading Policy. Legacy LTI options have the same treatment on cessation of employment, and change of control provisions as the Share Rights described in section 4.2 above, and the same claw back provisions as described in section 4.4. 65 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 4. Remuneration framework continued 4.6 Other legacy arrangements Jevan Bouzo also participated in a Legacy LTI arrangement in his capacity as Head of Finance and Treasury (the role he occupied prior to taking on the role as CFO). This was a retention arrangement awarded in 2016 and assessed performance on both a Company and individual level over the three-year period from 1 January 2016 to 31 December 2018. The face value of the award was $50,000, and the maximum potential award under this plan was $150,000. Each year, both a business performance factor and an individual performance factor were awarded. Receipt of a final award was subject to both continued employment, and achievement of a threshold set at an above-target performance level across the three years, to reward sustainable long-term performance. Following assessment of performance over the period, Jevan Bouzo was awarded $81,000 gross (54% of the maximum potential award), which was paid in April 2019 (one third of this award was recorded in the 2018 Remuneration report). 4.7 Executive service agreements The CEO, CFO and COO have open-ended employment contracts. The key terms of the contracts are as follows: • Employment may be terminated by either the Company or the executive upon providing 12 months’ written notice. • Viva Energy may elect to pay the executive in lieu of all or part of such notice period with any such payment to be based on the executive’s FAR over the relevant period. The executive may also be required to serve out the whole or part of the notice period on an active or passive basis at the Board’s discretion. • Any payments made to the executive upon termination of employment will be limited to the maximum amount permitted by the Corporations Act. • The executive’s employment may be terminated by Viva Energy without notice in certain circumstances such as un-remediated material breach of their contract, serious misconduct (including dishonesty, fraud or wilful breach of duty), bankruptcy, failure to comply with a reasonable direction from the Board, and if a personal profit is made at the expense of the Viva Energy Group to which they are not entitled. 5. Performance outcomes 5.1 Short-term incentive outcomes – link to performance As noted above, no payments were made under the 2019 STI Plan to executive KMP as the Underlying EBITDA (RC) gateway condition was not achieved (refer section 4.2). Nevertheless, the table below provides a summary of performance against the performance measures set out in the scorecard: Measure Performance and reward alignment Weighting (at target) 2019 Outcome Below threshold Threshold Target Stretch Outcome commentary Safety and environment People Financial Rewards a continuous focus on building a generative safety culture Rewards for building a highly engaged workforce focused on delivery of high quality results Deliver sustainable shareholder returns and consistent operating cash flows 10% 10% 50% Strong process safety performance, and while personal safety performance improved over the prior year, the level of personal safety incidents remains higher than the Company’s aspirations. Continued improvements in employee engagement with good progress on improving gender diversity and broader organisational capability. Financial outcomes were impacted by weak regional refining, lower retail market margins, and increased supply costs which could not be immediately recovered from commercial contracts. 66 Viva Energy Group Limited Annual Report 2019 Measure Performance and reward alignment Weighting (at target) 2019 Outcome Below threshold Threshold Target Stretch Outcome commentary Retail Commercial Refining Expand retail network, grow the Alliance business, and increase premium penetration. Retain and grow quality accounts and sustained earnings through focus on value-led proposition Increase intake towards nameplate, sustained reliability, and improved productivity 10% 10% 10% 5.2 Overview of business performance – two-year comparison The table below outlines the Company’s financial performance for 2018 and 2019. Renegotiated the Alliance agreement and improved retail price competitiveness which has restored growth in 2H2019. Acquired Liberty Wholesale and established Liberty Retail channel. Retained and acquired key contracts, with solid sales performance despite slower economic conditions. Strong operational and production performance, with periods of record production levels achieved. Revenue Underlying profit after tax (RC) Underlying EBITDA (RC) Issue price of IPO Closing share price at 31 December Dividend per share (fully franked) 2018 Actual1 $16,395.1M Pro Forma2 $16,395.1M $293.0M $528.9M $2.50 $1.80 $231.5M $774.6M $2.50 $1.80 2019 Actual3 $16,541.6M $135.8M $644.5M $2.50 $1.92 4.8 cents 4.8 cents4 4.7 cents Statutory earnings per share basic/diluted 29.8/29.4 cents 26.6 / 26.2 cents 5.8 / 5.7 cents Underlying earnings per share 15.1 cents 11.9 cents 7.0 cents 1. Actual results achieved – reported based on AASB 117, the old lease accounting standard. 2. This shows the historical period as if accounting standard AASB 16 (the new lease accounting standard) was in effect for the 2018 financial year. 3. Actual results achieved – reported based on AASB 16. 4. This is the final dividend for the six months ended 31 December 2018. No interim dividend was paid in 2018. R e m u n e r a t i o n r e p o r t 67 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 6. Statutory remuneration disclosures The table below has been prepared in accordance with the requirements on the Corporations Act 2001 and the relevant Australian Accounting Standards. The amounts provided under the ‘LTI’ and ‘Legacy LTI – share-based payment’ columns are based on accounting values and do not reflect actual payments received in 2019. Short-term benefits Post- employ- ment Long-term benefits Salary and fees $ 2019 STI $ Non- monetary benefits $ Other (legacy discret- ionary) $ 1 2 Annual leave $ Super- annu- ation $ Long service leave $ 3 Legacy LTI cash payment6 $ Legacy LTI – share- based payment $ Other (long term) $ 5 6 7 LTI $ 4 Total $ Scott Wyatt Jevan Bouzo Dan Ridgway 2019 875,228 2018 622,3968 2019 545,5859 2018 361,69110 2019 539,228 - - - - - 6,826 5,383 2,297 - 47,114 20,772 (83,012) 459,248 - 170,451 - 1,496,627 - 16,836 35,152 (15,715) 247,400 4,447,832 480,868 - 11,134 29,082 9,649 220,832 - 90,907 - - 5,840,152 909,486 2,941 400,000 (9,441) 38,619 - 98,960 264,610 41,515 27,000 1,225,895 3,320 - 11,069 20,772 (22,113) 241,614 - 79,544 - 873,434 2018 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A Total 2019 1,960,041 2018 984,087 - - 12,443 - 69,317 70,626 (95,476) 921,694 - 340,902 - 3,279,547 8,324 400,000 7,395 73,771 (15,715) 346,360 4,712,442 522,383 27,000 7,066,047 1. 2. 3. 4. 5. 6. 7. 8. 9. Non-monetary benefits represent the Viva Energy fuel discount benefit received, the payment of premiums for death and total and permanent disability insurance cover, the payment of plan management fees for the Viva Energy Superannuation Plan, and payments made with respect to mobile phone use. Other (Legacy discretionary) represents a discretionary bonus paid for contribution to the Company’s listing on the ASX. There is no intention to offer further discretionary bonuses as a listed company. The bonus relates to 2018 services provided pre-listing and was funded by the previous shareholder Vitol Investment Partnership (VIPL). Scott Wyatt and Dan Ridgway’s long service leave was negative in 2019 due to the leave taken being greater than the leave accrued in 2019. 2019 LTI represents the fair value of Performance Rights granted under the 2019 and 2018 LTI, calculated in accordance with accounting standards. Legacy LTI Cash Payment made in 2018 represents the cash payment made to option holders upon completion of the IPO, calculated by reference to shareholder distributions over the vesting period. Legacy LTI – share-based payment, represents the statutory expense recorded in the income statement for (i) the value of Legacy LTI options vesting across the period, calculated in accordance with accounting standards; and (ii) with respect to Legacy LTI Options that were cancelled or exercised at or around the IPO date, the associated employee expenses recognised on an accelerated basis. Other (long term) represents an accrual under a long-term incentive arrangement recognising performance for the period 2016–2018. This relates to Jevan Bouzo’s previous role of Head of Finance and Treasury. As further described in section 4.6, Jevan Bouzo received a total payment of $81,000 in April 2019 in relation to this incentive. Scott’s Wyatt’s total fixed remuneration (inclusive of base salary and superannuation) was increased from $448,000 to $896,000 from 13 July 2018. Actual base salary received was adjusted as required to account for changes to the maximum superannuation contributions base Jevan Bouzo’s total fixed annual remuneration (inclusive of base salary and superannuation) was increased from $448,000 to $600,000 from 1 March 2019. Actual base salary received was adjusted as required to account for changes to the maximum superannuation contributions base. 10. Amended to rectify a change to base salary received by Jevan Bouzo from 1 January 2018 where base salary was increased to $320,000 providing a total fixed remuneration (inclusive of base salary and superannuation) of $358,400. Total fixed remuneration was further increased to $448,000 from 13 July 2018. 68 Viva Energy Group Limited Annual Report 2019 7. Non-Executive Director remuneration 7.1 Non-Executive Director fees Non-Executive Directors are paid annual fees. With the exception of the Chairman, each Non-Executive Director who is a chair or a member of a Board Committee receives Committee fees in recognition of the additional responsibilities, time and commitment required. Non-Executive Directors do not receive any performance-related remuneration. Under the ASX Listing Rules and Viva Energy’s Constitution, the total amount paid to all Non-Executive Directors must not exceed in aggregate in any year the amount fixed by Viva Energy in a general meeting for that purpose. As disclosed in the Prospectus, this amount has been fixed by the Company at $1.9M per annum. Non-Executive Director fees paid in 2019 were within this cap. 7.2 Fee structure The table below sets out Non-Executive Director remuneration, inclusive of statutory superannuation. Board Committee fees2 Description Chair Director Chair Member Fees $400,0001 $165,000 $35,000 $17,500 1. The Board Chair does not receive any additional fees for being the Chair or member of any Board Committees. 2. Board Committees comprise: Audit and Risk; Remuneration and Nomination; Sustainability; and Investment. The fees paid to the Non-Executive Directors in 2019 are set out in the table below: Non-Executive Directors Robert Hill (Chairman) Hui Meng Kho* Dat Duong* Jane McAloon Arnoud De Meyer Sarah Ryan Total 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Short-term benefits Salary and fees $ Non-monetary benefits $ 379,228 574,070 - - - - 214,612 263,960 217,500 295,863 214,612 263,960 1,025,952 1,397,853 - - - - - - - - - - - - - - Post- employment benefits Other long- term benefits Super- annuation $ 20,772 10,266 - - - - 20,406 10,874 - - 20,424 10,874 61,602 32,014 Other $ - - - - - - - - - - - - - - * Hui Meng Kho and Dat Duong have agreed to not receive any remuneration for their positions as Non-Executive Directors. R e m u n e r a t i o n r e p o r t Total $ 400,000 584,336 - - - - 235,018 274,834 217,500 295,863 235,036 274,834 1,087,554 1,429,867 69 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 8 Equity movements 8.1 Performance Rights and Legacy LTI option holdings - - Nil 480,000 Nil 541,198 N/A 384,523 1,153,572 - - Nil 192,000 Nil 270,599 - - Nil 240,000 Nil 270,599 2018 LTI Performance Rights 2019 LTI Performance Rights - - 2018 LTI Performance Rights 2019 LTI Performance Rights - - 2018 LTI Performance Rights 2019 LTI Performance Rights - - Plan Scott Wyatt Legacy LTI options Balance as at 1 January 2019 Granted as remuneration3 Lapsed Exercised4 Balance as at 31 December 2019 Exercise price2 $ Vested $ Unvested $ 0.82 Nil 5,767,854 No. Nil Value No. No. $ Vested Unvested Nil 2,883,926 4,902,674 Nil 2,883,928 Value $ - - Nil 480,000 Nil Nil Nil Nil Nil 541,198 887,565 Nil Nil Jevan Bouzo Legacy LTI options 1.21 Nil 1,538,095 Nil 192,000 Nil Nil - - Nil Nil Nil Nil Nil Nil 270,599 535,786 Nil Nil Dan Ridgway Legacy LTI options 0.82 Nil 2,691,667 Nil 240,000 Nil Nil Nil Nil - - Nil 1,345,833 2,287,916 Nil 1,345,834 Nil Nil 270,599 535,786 Nil Nil 1. No other members of KMP held Performance Rights or Options during the year. 2. Each of the Legacy LTI options were granted in 2018 (for more information on the options reorganisation at the time of the IPO, please refer to the Prospectus or the 2018 Remuneration Report). 3. Each of the 2019 LTI Performance Rights were awarded on 31 May 2019. The values of the Performance Rights granted in 2019 is based on the total grant date fair value. 4. The value of each exercised Legacy LTI option was calculated by subtracting the exercise price for the option ($0.82 for Scott Wyatt and Dan Ridgway, from the closing share price on the date of exercise (i.e. $2.52), and multiplying by the number of shares. One share was provided for each Legacy LTI option that was exercised. Jevan Bouzo’s vested options were not exercised. 70 Viva Energy Group Limited Annual Report 2019 9. Shareholdings The number of shares in the capital of the Company held by each KMP are set out below: Balance as at 1 January 2019 Purchased in 2019 Acquired through exercise of options Shares disposed Balance at 31 December 2019 Robert Hill Hui Meng Kho Dat Duong Jane McAloon Arnoud De Meyer Sarah Ryan Scott Wyatt Jevan Bouzo Dan Ridgway 40,000 Nil Nil 20,000 20,000 24,291 5,191,0661 154,2103 2,422,4974 Nil Nil Nil 27,692 48,900 49,000 Nil Nil Nil Nil Nil Nil Nil Nil Nil 2,883,9262 Nil 1,345,8335 Nil Nil Nil Nil Nil Nil Nil Nil 400,000 40,000 Nil Nil 47,692 68,900 73,291 8,074,992 154,210 3,368,330 1. 2,595,533 of these are escrowed until 30 June 2020. 2. Shares acquired by Scott Wyatt on 19 March 2019. 3. 76,905 of these are escrowed until 30 June 2020 and 400 restricted until 18 July 2021. 4. 1,211,248 of these are escrowed until 30 June 2020. 5. Shares acquired by Dan Ridgway on 19 March 2019. 10. FY2020 – Summary of changes to executive KMP remuneration arrangements Remuneration A review of the fixed and variable remuneration arrangements for our executive KMP was concluded in early 2020. In light of the performance of the Group in 2019, the Board agreed that no change will be made to Scott Wyatt’s remuneration in 2020. Both his FAR and total remuneration remain considerably below the median level of the Company’s Comparator Group assessed by the Board (ASX-listed companies comparable in terms of size, complexity and industry to the Company). Jevan Bouzo’s FAR was increased to $650,000 (previously $600,000) effective 1 March 2020. No adjustment was made to his short-term and long-term incentive maximum opportunities – each will remain at 100% of his total fixed remuneration in 2020. Jevan Bouzo’s fixed remuneration is now placed at the 25th percentile of the Comparator Group assessed by the Board, with his total remuneration placed between the 25th and 50th percentiles. As the Legacy LTI arrangements expire, the Board considers that competitiveness of our executive remuneration is at the lower end of the spectrum. The Board will keep executive remuneration under constant review to ensure that remuneration levels and remuneration structure remain appropriate. No change was made to Dan Ridgway’s remuneration arrangements. R e m u n e r a t i o n r e p o r t 71 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Remuneration report continued 10. FY2020 – Summary of changes to executive KMP remuneration arrangements continued Short and long-term incentive arrangements The Board intends to maintain consistency in the executive remuneration framework where it is appropriate to do so and accordingly, for the most part, STI and LTI structures and performance measures will remain unchanged in 2020. However, the following adjustments will apply in 2020: STI – Underlying EBITDA (RC) gateway condition: The gateway condition was introduced in connection with the IPO and applied for the duration of the Prospectus, which ended 30 June 2019. In 2020 and going forward, there will be no financial gateway but performance will continue to be assessed against a balanced scorecard of metrics, including financial metrics. Overriding discretion is retained with the Board to adjust STI outcomes where appropriate. Strong financial performance remains a key priority for management and the Board and, as such, a 60% weighting to financial performance will apply for STI arrangements in 2020. STI – normalisation of Underlying EBITDA (RC) for refining movements outside of management’s control: The principle for normalisation is to ensure that positive and negative factors outside of management’s control are taken into account when considering STI outcomes for executives. With respect to normalising underlying EBITDA (RC) for refining movements, factors outside of management’s control include: • available margin resulting from crude oil prices as determined and set by oil producers; and • foreign exchange impacts given crude oil prices are set in US$ dollars. When underlying EBITDA (RC) STI performance targets are set at the start of the year, assumptions are made for available margin and the US$/AUD$ exchange rate which are held constant for the year. Normalisation requires that following the performance year, actual performance is restated applying available margin and exchange rate assumption used to set the targets at the beginning of the performance period. The normalised Company performance can then be fairly and reasonably assessed against the restated targets. This restatement ensures that management are neither advantaged nor disadvantaged by factors which are outside of their control when assessing performance for the year. STI – entitlement to a dividend on the deferred equity component: In line with market practice and to provide greater alignment between the interests of executives and shareholders, changes will be made to the STI such that executives will be entitled to dividend payments made throughout the deferral periods. This is appropriate as the performance conditions will have been satisfied before the equity component is granted. 72 Viva Energy Group Limited Annual Report 2019 Directors’ report The Directors present this report, together with the financial report of Viva Energy Group Limited (the Company) and the entities it controlled (collectively, the Group), for the financial year ended 31 December 2019. This Directors’ Report has been prepared in accordance with the requirements of the Corporations Act 2001 (Cth). The following information forms part of this report: • Director biographies on pages 8 to 9; • Executive Leadership Team on pages 10 to11; • Operating and financial review on pages 13 to 30; • Risk management disclosures which form part of the Operating and financial review on pages 27 to 30; • Remuneration report on pages 56 to 72; • External auditor’s independence declaration on page 78; and • Note 35 Auditor’s remuneration on pages 133 to 134. Directors, Secretaries and meetings The Directors of the Company as at the date of this report are: • Robert Hill – Appointed 18 June 2018 • Scott Wyatt – Appointed 7 June 2018 • Dat Duong – Appointed 7 June 2018 • Arnoud De Meyer – Appointed 18 June 2018 • Hui Meng Kho – Appointed 18 June 2018 • Jane McAloon – Appointed 18 June 2018 • Sarah Ryan – Appointed 18 June 2018 Information on the qualifications, experience, special responsibilities and other directorships of our Directors is set out on pages 8 to 9. Company Secretaries Lachlan Pfeiffer BCom, LLB (Hons), MAICD Lachlan Pfeiffer is the Executive General Manager, Legal and External Affairs. Lachlan was appointed Company Secretary on 7 June 2018. Prior to joining Viva Energy in October 2014, Lachlan Pfeiffer worked as a corporate lawyer for Skadden, Arps, Slate, Meagher and Flom (UK) LLP, based in London for seven years. Lachlan started his career in Melbourne working for Norton Rose Fulbright (Australia). Lachlan is currently a Non-Executive Director of Viva Energy REIT. Lachlan is a legal practitioner and holds a Bachelor of Commerce from Melbourne University and a Bachelor of Laws (with Hons) from Monash University. He is also a member of the Australian Institute of Company Directors. Julia Kagan BBus (Banking and Finance), LLB (Hons), FGIA Julia Kagan was appointed Company Secretary on 26 July 2019. Julia joined Viva Energy in August 2018. Prior to this, Julia held governance roles at BHP and at ASX as part of the Listings Compliance team. Julia is a legal practitioner and holds a Bachelor of Business and a Bachelor of Laws (Honours) from Monash University. She is a Fellow of the Governance Institute of Australia. R e m u n e r a t i o n r e p o r t D i r e c t o r s ’ r e p o r t 73 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Directors’ report continued Directors, Secretaries and meetings continued Directors’ meetings Details regarding Board and Board Committee meetings held during the year and each Director’s attendance at these meetings are set out below. Directors have a standing invitation to attend all Board Committee meetings. Attendance by Directors at meetings of committees of which they are not a member is not reflected in the table below. All Directors receive copies of the agendas, minutes and papers of each Board Committee meeting, save to the extent they are subject to a relevant conflict. Board meetings Scheduled Unscheduled Audit and Risk Committee Sustainability Committee Remuneration and Nomination Committee Investment Committee A B A B A B Non-Executive Directors Robert Hill Arnoud De Meyer Dat Duong Hui Meng Kho Jane McAloon Sarah Ryan Executive Director Scott Wyatt 9 9 9 9 9 9 9 9 8 9 7 9 8 9 7 7 7 7 7 7 7 7 6 7 5 5 7 7 8 8 8 8 8 8 A Number of meetings held during the period which the Director was eligible to attend. B Number of meetings attended by the Director. A 6 6 6 B 6 6 5 A 5 5 5 B 4 5 5 A B 4 4 4 4 4 4 4 3 4 4 3 4 3 4 Principal activities and review of operations Principal activities During the year, the principal activities of the Group included the following: • sales of fuel and specialty products through Retail and Commercial channels across Australia; • management of a national supply, distribution and terminal network; and • manufacturing activities at the Group’s Geelong oil refinery. State of affairs There were no significant changes in the Group’s state of affairs during the year other than as set out in the Operating and financial review, which is set out on pages 13 to 30 and in the Notes to the consolidated financial statements. Review of operations The Operating and financial review of the Group for the 2019 financial year is set out on pages 13 to 30 of this report. Dividends We paid the following dividends during the financial year ended 31 December 2019: Dividend Inaugural dividend of 4.8 cents per share (fully franked) for the six months ended 31 December 2018 Interim dividend of 2.1 cents per share (fully franked) for the half year ended 30 June 2019 Total dividend $93.3M Payment date 15 April 2019 $40.9M 14 October 2019 74 Viva Energy Group Limited Annual Report 2019 Matters subsequent to the end of financial year On 24 February 2020, the Board determined a fully franked final dividend of 2.6 cents per share ($50.6M total amount) in respect of the 2019 financial year. Payment is scheduled for 15 April 2020. The dividend has not been provided for in the consolidated financial statements and will be recognised in the consolidated financial statements in the 2020 financial year. Divestment of Viva Energy REIT investment and use of proceeds On 21 February 2020, the Group confirmed that it had sold its 35.5% security holding in Viva Energy REIT (VVR) by way of a fully underwritten block trade, and a sale to each of the Charter Hall Group (ASX: CHC) and the Charter Hall Long WALE REIT (ASX: CLW). A 25.5% interest in VVR was sold through the underwritten trade, and a 5% interest was sold to each of CHC and CLW. Following completion of those transactions, the Company will receive $2.66 per VVR security, being a total of $734.3M, and an estimated $112.9M pre-tax profit on the sales. Following receipt of proceeds, the Group intends to return capital to shareholders through a potential buy-back of shares in the Company, subject to all necessary approvals. No other matters or circumstances have arisen since the end of the financial year that have significantly affected, or may significantly affect, the operations, results of operations or state of affairs of the Group in subsequent financial years. Remuneration and share interests Remuneration Report The Remuneration Report is set out on pages 56 to 72. Directors’ interests in share capital The relevant interests of each Director in the share capital of the Company as at the date of this Directors’ Report is set out below Director Robert Hill Scott Wyatt Dat Duong Arnoud De Meyer Hui Meng Kho Jane McAloon Sarah Ryan Number of ordinary shares in which the Director has a relevant interest 40,000 10,958,920 - 68,900 - 47,692 73,291 Our Managing Director and CEO, Scott Wyatt, holds 1,021,198 Performance Rights issued under the Company’s Long Term Incentive Plan. Non-Executive Directors do not hold any rights or options over shares in the Company or any Group entity. D i r e c t o r s ’ r e p o r t 75 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Directors’ report continued Remuneration and share interests continued Rights and Options over shares in the Company The table below details the number of options and Performance Rights the Company had on issue as at the date of this report. Further information is available in the Remuneration Report. Number on issue as at 31 December 2018 Changes during the 2019 financial year Number on issue as at 31 December 2019 Change since the end of 2019 financial year Number on issue as at the date of this report 16,534,520 7,882,734 Options exercised 8,651,786 Options 7,113,691 Options exercised*** Options* (at various exercise prices and expiry dates) Performance Rights issued under the LTIP 1,600,000 Deferred Share Rights issued under the STIP - 3,524,041 Performance Rights 2,052,041** Performance Rights issued 128,000 Performance Rights cancelled 213,903 deferred Share Rights issued 213,903 deferred Share Rights - - 1,538,095 Options exercisable at $1.21 expiring 1 January 2022 3,524,041 Performance Rights 213,903 deferred Share Rights * These Options were held by employees, including Lachlan Pfeiffer (Company Secretary) and Key Management Personnel (as set out in the Remuneration Report). As at the date of this report, there is only one holder of outstanding options as set out in the Remuneration Report. ** Of these, 541,198 Performance Rights were granted to the CEO on 31 May 2019 as approved by shareholders at the 2019 AGM. *** Each holder received one share for each Option that was exercised. The shares were acquired on market and transferred to the holder. Corporate governance As at the date of this report, our corporate governance arrangements and practices complied with the 3rd Edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations. Our 2019 Corporate Governance Statement is available on the Investor Centre section of our website at www.vivaenergy.com.au. Auditor Our external auditor, PricewaterhouseCoopers (PwC), has provided an independence declaration in accordance with the Corporations Act. This is set out at page 78. Non-audit services Details of non-audit services provided by, and amounts paid to, our external auditor are set out in Note 35 Auditor’s remuneration to the financial statements. The Directors have formed the view, based on advice from the Risk and Audit Committee, that the provision of non-audit services during the 2019 financial year was compatible with, and did not compromise, the general standard of independence for auditors imposed by the Corporations Act 2001. The non-audit services provided did not involve the external auditor reviewing or auditing its own work or acting in a management or decision making capacity for the Company, or otherwise could reasonably be expected to compromise its independence. No officer of the Company was a partner or director of PricewaterhouseCoopers during the financial year. 76 Viva Energy Group Limited Annual Report 2019 Environmental performance Performance in relation to environmental regulation In 2019, the Geelong Refinery experienced challenges with its sulphur treatment processing unit reliability. This resulted in elevated sulphur dioxide air emissions, at times above the refinery EPA licence emissions limit. These elevated sulphur dioxide emissions were authorised under a Section 30a temporary approval issued by EPA Victoria. Extensive repairs and maintenance were undertaken in 2019 returning the sulphur treatment units to reliable service. Fines and prosecutions On 15 March 2019, the Group was convicted in the NSW Land and Environment Court for two offences arising from a single incident, water pollution and licence contravention (failure to maintain equipment) under the Protection of Environment Operations Act 1997 (NSW). These offences relate to a fuel oil pipeline leak at Gore Bay Terminal in December 2016. The Court ordered the Group to pay $100,000 to the Environmental Trust for general environmental purposes and pay NSW EPA’s legal and investigation costs. Following the incident, we took measures to prevent a re-occurrence of a similar incident at the site in the future. These measures include an additional program of inspection, testing and maintenance on pipelines, works to seal the concrete deck and kerb along the terminal’s water frontage and improvements to maintenance procedures at the site. Indemnities and insurance The Company maintains a deed of access, insurance and indemnity with each Director and each Company Secretary of the Group. Under those deeds, the Company indemnifies, to the extent permitted by law, each Director and each Company Secretary against any loss that may arise from, or in connection with, any act or omission by that Director/Company Secretary in the performance of, or relating to or in connection with, their position as an officer of the Company or the execution or discharge of duties as such an officer, to the full extent permitted by law. Each deed provides that the Company must meet the full amount of any such loss, including legal costs (calculated on a full indemnity basis) that are reasonably incurred, charges and expenses. Under the deeds, the Company must arrange and maintain a directors’ and officers’ insurance policy for the Directors and the Company Secretaries to the extent permitted by law, and must use reasonable endeavours to maintain such insurance for the period from the date of the deed until seven years after the Director/Company Secretary ceases to hold office. This seven-year period can be extended where certain actions or proceedings commence before the period expires. The Group has entered into insurance policies to insure the Directors and Company Secretaries. The Group has paid the premiums for those policies. In accordance with common commercial practice, the insurance policies prohibits disclosure of the nature of the liabilities insured against and the amount of the premiums. Rounding of amounts In accordance with ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, all amounts in this Directors’ Report have been rounded to the nearest one hundred thousand dollars ($100,000), or in certain cases, to the nearest one thousand dollars ($1,000). This Directors’ Report is made in accordance with a resolution of the Board. Robert Hill Chairman Scott Wyatt Chief Executive Officer Date: 24 February 2020 D i r e c t o r s ’ r e p o r t 77 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityRemuneration reportAuditor’s independence declarationBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Auditor’s independence declaration Auditor’s Independence Declaration As lead auditor for the audit of Viva Energy Group Limited for the year ended 31 December 2019, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Viva Energy Group Limited and the entities it controlled during the period. Chris Dodd Partner PricewaterhouseCoopers Melbourne 24 February 2020 PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 78 Viva Energy Group Limited Annual Report 2019 Financial report Contents Consolidated statement of profit or loss Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements General information Results for the year 1. Revenue 2. Other profit or loss items 3. Segment information 4. Earnings per share Working capital and cash flow 5. Inventories 6. Cash and cash equivalents 7. Reconciliation of profit to net cash flows from operating activities 8. Trade and other receivables 9. Prepayments 10. Trade and other payables 11. Short-term borrowings 80 81 82 83 84 85 85 86 86 87 88 90 91 91 91 92 93 94 94 95 Long-term assets and liabilities 12. Property, plant and equipment 13. Leases 14. Long-term receivables 15. Long-term payables 16. Goodwill and other intangible assets 17. Provisions 18. Commitments and contingencies Capital funding and financial risk management 19. Financial assets and liabilities 20. Derivative assets and liabilities 21. Long-term borrowings 22. Consolidated net debt 23. Contributed equity and reserves 24. Dividends declared and paid 25. Fair value of financial assets and liabilities 26. Financial risk management Taxation 27. Income tax and deferred tax Group structure 28. Group information 29. Business combinations 30. Interests in associates and joint operations 31. Parent company financial information 32. Deed of Cross Guarantee Other disclosures 33. Post-employment benefits 34. Related party disclosures 35. Auditor’s remuneration 36. Events occurring after the reporting period Directors’ declaration Independent auditor’s report 95 95 97 100 100 101 103 104 105 105 107 107 108 108 109 110 111 114 114 117 117 119 121 124 124 127 127 130 133 134 135 136 l d e c a r a t i o n A u d i t o r ’ s i n d e p e n d e n c e 79 About usChairman and Chief Executive Officer’s reportOperating and financial reviewSustainabilityDirectors’ reportRemuneration reportBoard of DirectorsExecutive Leadership TeamViva Energy Group Limited Annual Report 2019 Consolidated statement of profit or loss For the year ended 31 December 2019 Revenue Replacement cost of goods sold Net inventory loss Sales duties, taxes and commissions Import freight expenses Historical cost of goods sold Gross profit Gain on step acquisition Net (loss)/gain on other disposal of property, plant and equipment Other (loss)/income Transportation expenses Salaries and wages General and administration expenses Maintenance expenses Lease related expenses Sales and marketing expenses Impairment of receivables Interest income Share of profit of associates Realised/unrealised gain on derivatives Net foreign exchanges gain/(loss) Depreciation and amortisation expenses Finance costs Profit before income tax expense Income tax (expense)/benefit Profit after tax Earnings per share Basic earnings per share Diluted earnings per share Notes 2019 $M 2018 $M 1 16,541.6 16,395.1 (10,085.1) (10,328.8) (49.5) (93.6) (4,607.5) (4,135.3) (333.2) (286.0) (15,075.3) (14,843.7) 1,466.3 1,551.4 29 13 2 30 2 2 2 2 27 4 4 1.3 (1.9) (0.6) (253.3) (258.3) (113.1) (118.2) (19.4) (105.4) (1.3) 596.7 2.8 60.2 7.9 37.3 (355.7) (191.0) 158.2 (44.9) 113.3 - 10.2 10.2 (278.6) (249.7) (128.0) (100.4) (286.3) (114.2) (1.4) 403.0 2.7 63.5 39.7 (29.6) (129.7) (41.9) 307.7 271.9 579.6 Cents Cents 5.8 5.7 29.8 29.4 The above consolidated statement of profit or loss should be read in conjunction with the accompanying notes. 80 Viva Energy Group Limited Annual Report 2019 Consolidated statement of comprehensive income For the year ended 31 December 2019 s t a t e m e n t s C o n s o l i d a t e d fi n a n c i a l Profit for the year Other comprehensive income Other comprehensive income that may be reclassified to profit or loss in subsequent years (net of tax) Notes 2019 $M 113.3 2018 $M 579.6 Effective portion of changes in fair value of cash flow hedges – Unrealised losses on cash flow hedges recognised by Viva Energy REIT 30 (4.7) (3.2) Other comprehensive income not to be reclassified to profit or loss in subsequent years (net of tax) Remeasurement of retirement benefit obligations 33 Net other comprehensive income/(loss) Total comprehensive income for the year (net of tax) (1.7) (6.4) (1.4) (4.6) 106.9 575.0 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 81 Viva Energy Group Limited Annual Report 2019Notes to the consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Consolidated statement of financial position As at 31 December 2019 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Assets classified as held for sale Derivative assets Prepayments Current tax assets Total current assets Non-current assets Long-term receivables Property, plant and equipment Right-of-use assets Goodwill and other intangible assets Post-employment benefits Investments accounted for using the equity method Net deferred tax assets Other non-current assets Total non-current assets Total assets Liabilities and equity Current liabilities Trade and other payables Provisions Short-term lease liabilities Short-term borrowings Derivative liabilities Total current liabilities Non-current liabilities Provisions Long-term borrowings Long-term lease liabilities Long-term payables Total non-current liabilities Total liabilities Net assets Equity Contributed equity Treasury shares Reserves Retained earnings Total equity Notes 2019 $M 2018 $M 6 8 5 12 20 9 14 12 13 16 33 30 27 10 17 13, 22 11 20 17 21 13, 22 15 127.2 1,247.8 1,195.6 6.7 0.2 20.9 31.2 108.6 1,138.7 1,011.3 4.1 15.5 71.0 78.4 2,629.6 2,427.6 38.4 1,468.1 2,328.1 657.0 6.9 641.8 166.0 2.1 17.5 1,467.2 - 432.5 11.4 664.9 136.6 1.6 5,308.4 2,731.7 7,938.0 5,159.3 2,165.5 127.8 128.0 7.7 19.0 1,922.8 123.2 7.2 - 0.9 2,448.0 2,054.1 95.7 256.9 2,320.3 93.2 2,766.1 174.1 108.4 43.6 - 326.1 5,214.1 2,380.2 2,723.9 2,779.1 23 23 23 4,861.3 4,861.3 (14.2) (4,246.5) 2,123.3 2,723.9 - (4,226.4) 2,144.2 2,779.1 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 82 Viva Energy Group Limited Annual Report 2019 Consolidated statement of changes in equity For the year ended 31 December 2019 s t a t e m e n t s C o n s o l i d a t e d fi n a n c i a l Balance at 1 January 2018 Profit for the year Unrealised losses on cash flow hedges recognised by Viva Energy REIT Remeasurement of retirement benefit obligations Total comprehensive income for the year Dividends paid Capital return Disposal of share by prior owner Capital contribution from IPO Reserve arising from IPO Share-based payment reserve Balance at 31 December 2018 Balance at 1 January 2019 Profit for the year Unrealised losses on cash flow hedges recognised by Viva Energy REIT Remeasurement of retirement benefit obligations Total comprehensive income for the year Dividends paid Reserve arising from IPO Share-based payment reserve Treasury shares Notes Contributed equity $M 645.2 - - - - - (45.1) (600.1) 4,861.3 - - 4,861.3 4,861.3 - - - - - - - - 33 24 33 24 23c 23b Balance at 31 December 2019 4,861.3 Treasury shares $M Reserves $M Retained earnings $M Total equity $M - - - - - - - - - - - - - - - - - - (14.2) (14.2) 11.5 1,578.1 2,234.8 - (3.2) (1.4) 579.6 - - 579.6 (3.2) (1.4) (4.6) 579.6 575.0 - - - - (4,235.2) 1.9 (13.5) - - - - - (13.5) (45.1) (600.1) 4,861.3 (4,235.2) 1.9 (4,226.4) 2,144.2 2,779.1 (4,226.4) 2,144.2 2,779.1 - (4.7) (1.7) 113.3 - - 113.3 (4.7) (1.7) (6.4) 113.3 106.9 - (134.2) (134.2) (3.5) (10.2) - - - - (3.5) (10.2) (14.2) (4,246.5) 2,123.3 2,723.9 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 83 Viva Energy Group Limited Annual Report 2019Notes to the consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Consolidated statement of cash flows For the year ended 31 December 2019 Operating activities Receipt from trade and other debtors Payments to suppliers and employees Interest received Interest paid on loans Interest paid on lease liabilities Net income tax paid Net cash flows from operating activities Investing activities Purchases of property, plant and equipment Net cash consideration paid for step acquisition of Liberty Wholesale Net cash consideration paid for the acquisition of Shell Aviation Proceeds from sale of property, plant and equipment Coles Express Alliance payment Net purchase of employee share options Dividends received from associates Purchase of intangible asset Loan to associate Loan repayment from associate Investment in associate Net cash flows used in investing activities Financing activities Drawdown of borrowings Repayments of borrowings Dividend paid Upfront financing cost paid and capitalised Repayment of lease liability Net cash flows used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year Notes 2019 $M 2018 $M 19,050.3 19,006.8 (18,448.3) (18,419.2) 2.8 (13.4) (162.5) (26.2) 402.7 (161.7) (24.8) - 0.3 (137.0) (20.0) 40.8 (0.1) (15.9) 20.0 - 2.7 (15.3) (7.7) (280.1) 287.2 (241.3) - (4.0) 17.5 - - 37.5 (2.1) (3.5) - (14.9) (298.4) (210.8) 4,320.0 (4,170.0) 3,720.0 (3,850.0) (134.2) (3.0) (106.2) (93.4) 10.9 108.6 119.5 - (2.5) - (132.5) (56.1) 164.7 108.6 7 29 16 34 24 6(a) The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 84 Viva Energy Group Limited Annual Report 2019 C o n s o l i d a t e d fi n a n c i a l N o t e s t o t h e c o n s o l i d a t e d s t a t e m e n t s fi n a n c i a l s t a t e m e n t s Notes to the consolidated financial statements General information Reporting entity The consolidated financial statements of Viva Energy Group Limited (Company) and the entities it controlled (collectively, ‘Group’) for the year ended 31 December 2019 were authorised for issue in accordance with a resolution of the Directors on 24 February 2020. The Company is a for-profit Company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX: VEA). The Group is principally engaged in refining, marketing, sale, supply and distribution of fuel and related specialty products. The Group’s principal place of business is 720 Bourke Street, Docklands, Australia. Significant changes in the current reporting period The financial position and performance of the Group was particularly affected by the following events and transactions during the reporting period: • the adoption of the new leasing standard AASB 16 Leases (see Note 13); • the recognition of a $137.0M intangible asset arising from a one-off payment to assume responsibility for the provision of the fuel offering, including retail fuel pricing and marketing across the Alliance network (see Note 16); • the renegotiation of the Group’s core borrowing facility to extend the facility for a three-year term with a one-year extension option (see Note 21); and • on 27 February 2019, the Group announced the intention to acquire the remaining 50% interest in Liberty Oil Holding Pty Ltd’s wholesale business. The acquisition was finalised on 1 December 2019 (see Note 29). Basis of preparation Statement of compliance The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has been prepared on a historical cost basis, except for financial assets and liabilities (including derivative instruments) which have been measured at fair value. The Group’s consolidated financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The financial report is presented in Australian dollars. In accordance with ASIC Legislative Instrument 2016/191, all values are rounded to the nearest one hundred thousand ($100,000), or in certain cases, to the nearest one thousand ($1,000). Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The consolidated financial statements are presented in Australian dollars, which is the Group’s functional and presentation currency. Use of estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. • Information about the assumptions and the risk factors relating to impairment are described in Note 8 Trade and other receivables and Note 16 Goodwill and other intangible assets. • Note 12 Property, plant and equipment describes the policy and estimation of minimum operating stock and also the process of assessing for impairment of property, plant and equipment. • Note 13 Leases provides an explanation of the key assumptions used to determine the lease related right-of-use assets and lease liabilities. • Note 17 Provisions provides key sources of estimation, uncertainty and assumptions used in regards to estimation of provisions. • Note 19 Financial assets and liabilities and Note 25 Fair value of financial assets and liabilities provides an explanation of the key assumptions used to determine the fair value of financial assets and liabilities. • Information about the assumptions and the risk factors relating to income tax expense and deferred tax balances are described in Note 27 Income tax and deferred tax. 85 Viva Energy Group Limited Annual Report 2019Directors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued General information continued New and revised accounting standards In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board that are relevant to its operations and effective for the current annual reporting period. The Group has reviewed and where relevant adopted the following standard in line with the AASB. • AASB 16 Leases (effective 1 January 2019) discussed in Note 13 Leases The adoption of AASB 16 Leases and the new related accounting policies are disclosed in the notes referenced above. Several other amendments and interpretations listed below apply for the first time in 2019, but do not have a significant impact on the consolidated financial statements of the Group in the current or future periods. • AASB 2017-6 Amendments to Australian Accounting Standards – Prepayment Features with Negative Compensation • AASB 2017-7 Amendments to Australian Accounting Standards – Long term interests in Associates and Joint Ventures • AASB 2018-1 Amendments to Australian Accounting Standards – Annual Improvements 2015-2017 Cycle • AASB 2018-2 Amendments to Australian Accounting Standards – Plan Amendment, Curtailment or Settlement • Interpretation 23 Uncertainty over Income Tax Treatments Standards issued but not yet effective as at 31 December 2019 A number of new accounting Standards and Interpretations have been published that are not yet effective for periods beginning 1 January 2019 and have not been early adopted by the Group. These standards and interpretations applicable from periods beginning 1 January 2020 or beyond as noted by the effective date, are not expected to have a material effect on the consolidated financial statements. Reclassification and changes in financial presentation Where presentation and classification of items in the consolidated financial statements changes, the comparative amounts are also reclassified unless it is impractical to do so. The nature, amounts and reason for the reclassification are also disclosed. If the reclassification affects an item on the balance sheet, a third consolidated statement of financial position is also presented. Results for the year 1. Revenue Set out below is the disaggregation of the Group’s revenue from contracts with customers: Revenue from contracts from customers Revenue from sale of goods Non-fuels income Other revenue Total revenue 2019 $M 2018 $M 16,375.0 16,194.0 157.5 151.2 16,532.5 16,345.2 9.1 49.9 16,541.6 16,395.1 Revenue from sale of goods The Group primarily generates revenue from the sale of refined products in Australia directly to motor vehicle users via the Shell Coles Express Alliance network, directly or indirectly to service stations for sale to motor vehicle users, and to commercial businesses such as road transport, shipping companies, government bodies and airlines. The products that the Group sells are either refined at its own Geelong Refinery or imported into Australia as refined products. Revenue from sale of goods is recognised at the point in time when control of the asset is transferred to the customer, generally on delivery. 86 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d On 1 March 2019 the Group assumed responsibility of retail fuel pricing and marketing across the Alliance network and from this date commenced recognising revenue upon sale of fuel to the motor vehicle user. Prior to this date the Group recognised revenue upon delivery of fuel to the Alliance retail site. Commercial customers have full discretion over the channel and price to sell the products, and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. No element of financing is deemed present as the sales are made with a credit term of typically 15 to 45 days, which is consistent with market practice. Revenue is recognised based on the price specified in the contract, net of expected returns, trade allowances, rebates and GST collected on behalf of third parties. Total revenue includes the recovery of excise paid. fi n a n c i a l s t a t e m e n t s Non-fuels income Non-fuel income is principally from the site licence payments that the Group receives under a long-term alliance with Coles Express. Other non-fuel income is from the use of Shell Card, the payment of royalties on convenience sales at alliance retail sites and commissions paid by the operators of retail agent sites. (i) Shell Card fees The Group offers Shell Cards that provide customers a secure and efficient way to buy quality fuels, access to an extensive national service stations network and the option to use online tools to manage fuel spending. The Group charges a monthly card fee to its customers for the use of the card. Revenue from Shell Card is recognised over a period of time. No element of financing is deemed present as the sales are made with a credit term of typically 15 to 45 days, which is consistent with market practice. (ii) Royalties The Group receives royalties on convenience store sales in excess of agreed sales thresholds. The amount payable to the Group is calculated on an annual basis as a percentage of any excess over a threshold amount of gross sales of certain kinds of goods and services made on certain sites. Revenue from royalties is recognised over a period of time. (iii) Brand licence fees Licence fees relate to the right to access and to market fuel under the Shell brand. The Group (i.e. licensor) holds the licence to Shell brand and therefore retains the control over the brand. Revenue from licence fees is recognised over time over the licence period. (iv) Site licence The Group has granted to Coles Express a licence of the premises for the conduct of its business from that site. Calculation of the site licence fee payable by Coles Express is detailed in each Site Agreement and on commercial terms that are bespoke to the Alliance arrangements. Revenue from licence fees is recognised over the licence period. Other revenue Other income includes rental recoveries, income from sub-leases and management fees earned through the Aviation business. Assets and liabilities related to contracts with customers There were no assets or liabilities recognised in the balance sheet related to revenue from contracts with customers because the period of amortisation is less than one year. Disaggregation of revenue from contracts with customers No one customer accounts for more than 10% of revenue. 2. Other profit or loss items Realised/unrealised gains on derivatives Derivative contracts 2019 $M 7.9 2018 $M 39.7 The Group is exposed to the effect of changes in foreign exchange and commodity price movements. During the year the Group entered into derivative contracts, being principally foreign exchange currency contracts (forwards and swaps) and commodity derivative instruments for the purpose of managing the market risks arising from the Group’s operations and to hedge market exposure. Derivatives are recognised at fair value. The gain or loss on subsequent remeasurement is recognised immediately in the consolidated statement of profit or loss. For the year ended 31 December 2019 and including any open positions at balance date, gains of $7.9M were made (2018: $39.7M gain). The gains in the current period were the result of various commodity price movements and a weakening AUD through the year. 87 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Results for the year continued 2. Other profit or loss items continued Foreign exchange gain/(loss) Foreign exchange gains Foreign exchange losses Net foreign exchange gain/(loss) 2019 $M 107.7 (70.4) 37.3 2018 $M 123.5 (153.1) (29.6) Foreign currency transactions are translated into Australian dollars using the exchange rate at the date of transactions. Gains and losses resulting from the settlement of such transactions and from the translation of foreign exchange denominated monetary assets and liabilities at year-end exchange rates are recognised in profit or loss. The net foreign exchange gain/(loss) primarily relates to the foreign currency movements arising from the Group’s trade and other payables. Depreciation and amortisation expense Depreciation of property, plant and equipment Depreciation charge of right-of-use assets Amortisation of intangible assets Total depreciation and amortisation expense 2019 $M (128.1) (199.1) (28.5) (355.7) 2018 $M (114.7) - (15.0) (129.7) The FY19 depreciation and amortisation expenses includes $199.1M of depreciation relating to right-of-use assets under AASB 16 Leases and amortisation of $11.4M relating to the one-off $137M payment made to Coles Express in relation to the renegotiated and extended Alliance agreement. Finance costs Interest on borrowings, trade finance and commitment fees Interest on lease liabilities Unwinding of discount on provisions Unwinding of discount on long-term payables Total finance costs 2019 $M (22.1) (162.5) (4.3) (2.1) (191.0) 2018 $M (24.5) (8.0) (9.4) - (41.9) The FY19 finance costs includes $162.5M of additional costs relating to AASB 16 Leases. As at 31 December 2019 the Group had $3.1M in net borrowing costs capitalised (2018: $1.6M) amortising over the current terms of the borrowings facility. Refer to Note 21 for further information. Impairment Impairment of receivables Total impairment 3. Segment information 2019 $M (1.3) (1.3) 2018 $M (1.4) (1.4) The Group has identified its operating segments on the basis of how the Chief Operating Decision Maker reviews internal reports about components of the Group to assess performance and determine the allocation of resources. The Group is organised into business units based on operational activities and has three reportable segments: Retail, Fuels and Marketing The Retail, Fuels and Marketing segment consists of both retail and commercial sales and marketing of fuel and specialty products in Australia under the Shell and Viva Energy brands as well as generation of substantial non-fuel income. All sales and marketing focused activities are included in this segment. Refining The Group’s Geelong Refinery in Corio, Victoria, refines crude oil into petrol, diesel and jet fuel. The refinery also manufactures and produces specialty products such as liquid petroleum gas, bitumen, oils, and chemical products. 88 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Supply, Corporate and Overheads The Group owns and manages an integrated supply chain of terminals, storage facilities, depots, pipelines and distribution assets throughout Australia in order to facilitate product distribution and delivery through wholesale and retail sites. This segment also includes property expenses and corporate functions that facilitate business activity. These activities have been grouped as a segment as they largely represent the overhead base of the business and undertake all the non-sales and non-manufacturing activities within the Group. fi n a n c i a l s t a t e m e n t s Management monitors the operating results of its business segments separately for the purpose of making decisions about resource allocation and performance assessment. The performance of operating segments is evaluated based on segment profit and loss, and is measured consistently with profit or loss in the consolidated financial statements in accordance with the Group’s accounting policies. Transfer prices between operating segments are on an arm’s length basis similar to transactions with third parties. Information about reportable segments Retail, Fuels and Marketing $M Supply, Corporate and Overheads $M Refining $M Total segments $M 31 December 2019 Segment revenue: Total segment revenue Inter-segment revenue External segment revenue Gross profit Net inventory gain/(loss) Gross profit Profit before interest, tax, depreciation and amortisation Interest income Depreciation and amortisation expenses Finance costs Segment profit before tax expense Other material items: Share of profit of associates Capital expenditure 31 December 2018 Segment revenue: Total segment revenue Inter-segment revenue External segment revenue Gross profit Net inventory gain/(loss) Gross profit Profit before interest, tax, depreciation and amortisation Interest income Depreciation and amortisation expenses Finance costs Segment profit before tax expense Other material items: Share of profit of associates Capital expenditure 16,339.3 - 16,339.3 1,234.3 - 1,234.3 860.8 - (65.9) (11.3) 783.6 - 18.4 16,046.4 - 16,046.4 1,304.4 - 1,304.4 932.6 - (45.6) (9.9) 877.1 - 45.9 4,688.5 (4,688.5) - 15,307.3 (15,105.0) 202.3 36,335.1 (19,793.5) 16,541.6 299.8 - 299.8 117.0 - (59.4) - 57.6 - 88.5 (18.3) (49.5) (67.8) (275.7) 2.8 (230.4) (179.7) (683.0) 1,515.8 (49.5) 1,466.3 702.1 2.8 (355.7) (191.0) 158.2 60.2 54.8 60.2 161.7 4,495.2 (4,495.2) - 15,090.7 (14,742.0) 348.7 301.5 - 301.5 124.5 - (52.0) - 72.5 - 84.5 39.1 (93.6) (54.5) (580.5) 2.7 (32.1) (32.0) (641.9) 63.5 110.9 35,632.3 (19,237.2) 16,395.1 1,645.0 (93.6) 1,551.4 476.6 2.7 (129.7) (41.9) 307.7 63.5 241.3 Geographical information The Group’s country of domicile is Australia. The Group has operations in Australia, Singapore and Papua New Guinea; however, all revenues are generated in Australia. All of the Group’s non-financial non-current assets are located in Australia. 89 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Results for the year continued 4. Earnings per share Basic EPS is calculated by dividing the profit for the year attributable to ordinary equity holders of the Group by the weighted average number of ordinary shares outstanding during the year. Diluted EPS is calculated by dividing the profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive options into ordinary shares. In line with the requirements of AASB 133 Earnings per Share adjustments to the weighted average number of ordinary and diluted shares are made for events, other than the conversion of potential ordinary shares, that have changed the number of shares outstanding without a corresponding change in resources. The following tables reflect the earnings and share data used in the basic and diluted EPS computations: (a) Basic earnings per share Total basic earnings per share attributable to the ordinary equity holders of the Group (b) Diluted earnings per share Total diluted earnings per share attributable to the ordinary equity holders of the Group (c) Weighted average number of shares used as the denominator Weighted number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of weighted diluted earnings per share: Options Weighted number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share (d) Information concerning the classification of securities 2019 Cents 5.8 2019 Cents 5.7 2018 Cents 29.8 2018 Cents 29.4 2019 Number 2018 Number 1,944,535,168 1,944,535,168 34,034,504 29,211,925 1,978,569,672 1,973,747,093 Ordinary shares Ordinary shares at 31 December 2019 represent the 1,944,535,168 shares listed on the ASX as part of the IPO on 13 July 2018. There has been no change in the amount of ordinary shares on issue since the IPO. Per the requirements of AASB 133, the 1,944,535,168 ordinary shares upon listing represents the denominator in calculating the weighted average earnings per share in 2018 after adjusting for the change in ownership profile that ultimately did not change the resources of the Group. As applicable, this approach was also used for the adjustment to calculate diluted earnings per share in the prior period. Any profit is available for distribution to the holders of Viva Energy Group Limited ordinary shares in equal amounts per share, subject to the Group’s approved dividend strategy. Options and rights Options and rights granted to employees are considered to be potential ordinary shares. They have been included in the determination of diluted earnings per share if the exercise price of the options is lower than the listed share price of Group shares as at 31 December 2019 or if it is considered likely that performance conditions in relation to the rights will be achieved. The options and rights have not been included in the determination of basic earnings per share. Details relating to the options and rights are set out in Note 34(g) Related party disclosures. 90 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Working capital and cash flow 5. Inventories Crude for processing Hydrocarbon finished products Stores and spare parts Total inventories fi n a n c i a l s t a t e m e n t s 2019 $M 311.3 858.1 1,169.4 26.2 2018 $M 198.8 793.6 992.4 18.9 1,195.6 1,011.3 Inventories are stated at the lower of cost and net realisable value. Cost is based on the First In, First Out (FIFO) principle and includes the direct cost of acquisition or manufacture plus a proportionate share of appropriate functional overheads. The inventory management system used by the Group is based on replacement cost methodology. Certain management estimates are required to adjust replacement cost to the FIFO method in order to comply with accounting standard requirements. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Net realisable value is determined based on market selling price under existing contracts. Impairment of inventories is recognised when net realisable value falls below carrying cost. This primarily occurs as a result of movements in crude oil and refined product prices between the date of purchase and balance date, and is recorded in net inventory gain/(loss) in the consolidated statement of profit or loss. No inventory impairment was recognised during the year (2018: $27.7M). During the year, a net inventory loss of $49.5M (2018: $93.6M loss) was recorded in net inventory gain/(loss) which accounts for the net impact of movement in oil prices on inventory. Net inventory gains and losses within costs of goods sold represent the difference between the cost of goods sold calculated using the replacement cost of inventory and the cost of goods sold calculated on the FIFO method. Under the FIFO method, which is used to comply with accounting standard requirements, the cost of inventory charged to the statement of profit and loss is based on its historical cost of purchase or manufacture, rather than its replacement cost at the time of sale. Fluctuations in foreign exchange and commodity prices (which are impacted by both the USD oil price and the foreign exchange rate) can have a distorting effect on the Group’s underlying results, and the replacement cost of goods sold quantifies this impact. Replacement cost of goods sold is a non-International Financial Reporting Standards measure, and is used by management to present a clearer picture of the Group’s underlying business performance before impacts from movements in oil price and foreign exchange. The Group’s replacement cost methodology is consistent with the methods used by other companies in comparable industries. 6. Cash and cash equivalents Cash at bank 2019 $M 127.2 2018 $M 108.6 Cash and cash equivalents include cash deposits held at call with financial institutions. Cash at bank earns interest at floating rates based on daily bank deposit rates during the year, and at the end of the reporting year there were no restrictions on cash (2018: nil). (a) Reconciliation to cash flow statement Cash at bank as per above Bank overdraft (Note 11) Balances per statement of cash flows 2019 $M 127.2 (7.7) 119.5 2018 $M 108.6 - 108.6 91 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Working capital and cash flow continued 7. Reconciliation of profit to net cash flows from operating activities Profit Adjustments for: Net loss/(gain) on disposal of property, plant and equipment Depreciation and amortisation Depreciation of right-of-use assets Non-cash interest and amortisation on long-term loans Non-cash gain on remeasurement of investment Unrealised loss/(gain) on derivatives Unrealised foreign exchange movements Share of associate’s profit not received as dividends or distributions Non-cash employee share option taken up in reserves Non-cash tax expense relating to IPO transaction cost offset against IPO reserve 2019 $M 113.3 1.9 156.6 199.1 1.4 (1.3) 33.4 (31.6) (60.2) 2.2 (3.4) 2018 $M 579.6 (10.2) 130.0 - 1.6 - (23.9) 24.4 (63.5) 1.9 0.1 Net cash flows from operating activities before movements in assets/liabilities 411.4 640.0 Movements in assets and liabilities: Working capital balances (Increase)/decrease in receivables (Decrease) in other receivables arising from land sales (Increase) in inventories Increase in payables Other Decrease/(increase) in other assets Increase in deferred tax assets Decrease in post-employment benefits Decrease/(Increase) in tax asset Decrease in provisions Net cash flows from operating activities (8.1) - (172.9) 162.3 5.9 (25.3) 2.1 47.2 (19.9) 402.7 31.0 (53.2) (46.2) 299.6 (9.2) (343.2) 1.9 (209.1) (24.4) 287.2 Movements in the assets and liabilities for the year ended 31 December 2019 have been adjusted for the assets and liabilities transferred from Liberty Oil Holdings Pty Ltd which was acquired on 1 December 2019, as well as elimination of intercompany balances due to the acquisition. Refer to Note 29 Business combinations for further details. 92 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d 8. Trade and other receivables Trade receivables Trade receivables Allowance for impairment of receivables Total trade receivables Other receivables Receivables from related parties Receivables from associates Loan to associates Other debtors Total other receivables Total receivables fi n a n c i a l s t a t e m e n t s 2019 $M 1,008.5 (4.2) 1,004.3 90.4 35.9 6.9 110.3 243.5 2018 $M 914.0 (4.3) 909.7 82.1 87.9 - 59.0 229.0 1,247.8 1,138.7 Trade receivables Trade receivables are non-interest-bearing and are generally on terms of 15 to 45 days. Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. Trade receivables are recognised initially at fair value and are held with the objective to collect the contractual cash flows, and therefore subsequently measured at amortised cost using the effective interest method. Due to the short-term maturity, the carrying amount approximates the fair value. Periodically, the Group enters into factoring arrangements on specific trade receivable balances as part of their overall collections strategy. At 31 December 2019 there were no outstanding trade receivables subject to factoring (2018: nil). The Group applies the AASB 9 Financial instruments simplified approach to measuring trade receivable expected credit losses which uses a lifetime expected loss allowance for expected credit losses for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over past periods using historical data and also using forward looking projections of customer payment expectations. Trade receivables are often insured for events of non-payment, through third party insurance, which has also been factored into the expected loss rate calculations. The loss allowance as at 31 December 2019 was determined as follows for trade receivables: Not more than 30 days past due $M More than 30 days but not more than 60 days past due $M More than 60 days but not more than 90 days past due $M More than 90 days but not more than 120 days past due $M More than 120 days past due $M Total $M Current $M 0.3% 1,008.5 962.5 1.0% 36.9 2.0% 1.4 5.0% 0.6 10.0% 1.0 15.0% 6.1 31 December 2019 Expected loss rate Gross carrying amount – trade receivables Loss allowance (4.2) (2.7) (0.4) (0.1) (0.0) (0.1) (0.9) 31 December 2018 Expected loss rate Gross carrying amount – trade receivables 0.4% 874.0 914.0 1.0% 28.6 2.0% 2.7 5.0% 3.1 10.0% 1.9 15.0% 3.7 Loss allowance (4.3) (3.0) (0.3) (0.1) (0.2) (0.2) (0.5) 93 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Working capital and cash flow continued 8. Trade and other receivables continued Trade receivables continued Movements in the allowance for impairment of receivables were as follows: Opening loss allowance as at 1 January Increase in loss allowance recognised in profit or loss during the year Receivables written off as uncollectable Amount recognised as a result of Liberty Oil Holdings acquisition Closing loss allowance at 31 December 2019 $M (4.3) (1.3) 2.1 (0.7) (4.2) 2018 $M (5.6) (1.4) 2.7 - (4.3) The creation and release of loss allowances for trade receivables has been included within impairment expense in the consolidated statement of profit or loss. Amounts charged to the allowance account are generally written off when there is no reasonable expectation of recovering additional cash. Other receivables Other receivables include receivables from related parties and other debtors of which the majority relates to GST receivable balances and other specific receivable balances. Other receivables are measured at amortised cost as they are held with the objective to collect contractual cash flows of principal and interest payments. Given the nature of the other receivable balances and based on both previous history of collections and future expectations of receipts, management believe that other receivables are fully collectable and have not applied a credit loss allowance to these balances. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included within trade and other receivables or trade and other payables in the consolidated statement of financial position. 9. Prepayments Head leases Other prepayments Total prepayments 2019 $M - 20.9 20.9 2018 $M 50.1 20.9 71.0 As a result of the mandatory adoption of AASB 16 Leases, head lease advanced payments are no longer recognised under the prepayments classification on the balance sheet. Refer to Note 13 Leases for further information. Other prepayments primarily relate to prepaid council rates, insurance and shipping related costs. 10. Trade and other payables Trade payables Amounts due to related parties Amounts due to associates Total trade and other payables 2019 $M 744.6 2018 $M 619.7 1,407.7 1,290.3 13.2 12.8 2,165.5 1,922.8 Trade payables and amounts due to related parties and associates are non-interest-bearing and are normally settled in 30 to 60 days. Amounts due to related parties are primarily for purchases of hydrocarbon. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the end of the reporting period. The carrying amounts of trade and other payables are considered to be the same as their fair values, due to their short-term nature. 94 Viva Energy Group Limited Annual Report 2019 11. Short-term borrowings Bank overdraft Total short-term borrowings 2019 $M 7.7 7.7 2018 $M - - fi n a n c i a l s t a t e m e n t s Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. Long-term assets and liabilities 12. Property, plant and equipment Construction in progress $M Freehold land $M Freehold buildings $M Leasehold buildings $M Plant and equipment $M Total $M N o t e s t o t h e c o n s o l i d a t e d Cost As at 1 January 2018 Additions Disposals Transfers* As at 31 December 2018 AASB 16 opening adjustment Acquisition of Liberty Oil Holdings Additions Disposals Transfers* As at 31 December 2019 Accumulated depreciation As at 1 January 2018 Depreciation As at 31 December 2018 AASB 16 opening adjustment Depreciation Transfers As at 31 December 2019 222.0 230.4 - (180.3) 272.1 - - 160.8 (4.1) (257.8) 171.0 - - - - - - - 123.4 203.1 66.7 1,064.9 1,680.1 - (10.2) (0.3) 2.1 (0.3) 1.2 112.9 206.1 - 5.1 - (2.1) - - 0.4 - (0.4) 5.7 - - (0.6) 66.1 (51.9) - - - 8.8 (2.2) 129.1 241.3 (12.7) (50.9) 1,200.6 1,857.8 - 16.3 1.3 (2.5) (51.9) 21.8 162.1 (9.1) (3.4) (14.2) 262.9 115.9 211.8 - 1,478.6 1,977.3 - - - - - - - (39.7) (11.1) (50.8) - (11.3) - (62.1) (10.9) (3.2) (14.1) 12.1 - 2.0 - (221.2) (100.4) (321.6) - (271.8) (114.7) (386.5) 12.1 (116.8) (128.1) (2.0) - (440.4) (502.5) * Net transfer out of $3.4M in 2019 and net transfer out of $50.9M in 2018 represents the completed JDE ERP system and other related software intangibles transferred out from construction in progress to intangibles. Refer to Note 16 for further information. Net book value As at 31 December 2018 Less: Assets held for sale Net book value as at 31 December 2018 As at 31 December 2019 Less: Assets held for sale Net book value as at 31 December 2019 272.1 - 272.1 171.0 - 171.0 112.9 (4.0) 108.9 115.9 (5.9) 110.0 155.3 - 155.3 149.7 (0.1) 149.6 52.0 - 52.0 - - - 879.0 (0.1) 878.9 1,471.3 (4.1) 1,467.2 1,038.2 1,474.8 (0.7) (6.7) 1,037.5 1,468.1 95 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Long-term assets and liabilities continued 12. Property, plant and equipment continued All property, plant and equipment is stated at historical cost less depreciation, with the exception of construction in progress and freehold land which are not subject to depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation on assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: • Buildings 20 years • Supply and refining infrastructure 20 to 30 years • Plant and equipment • Land 4 to 15 years Not depreciated Minimum operating stock – significant estimate Minimum operating stock, which is the minimum level of inventories held in the entire supply chain and is necessary to operate supply and refining as a going concern, is treated as part of property, plant and equipment. It is valued at cost. Assets held for sale The Group has a number of in use property, plant and equipment assets that are classified as held for sale from continuing operations. These assets include Retail, Supply Chain and Aviation assets totalling $6.7M (2018: $4.1M) and meet the AASB 5 Non-current Assets Held for Sale and Discontinued Operations classification requirements. Refining assets The Group’s property, plant and equipment written down balances include $333.4M of refining assets. As required under AASB 136 Impairment of assets each period management assess all property, plant and equipment balances for any impairment indicators. Given the current volatility in refining margins, as part of the year-end process the carrying value of Group’s refining assets was tested for impairment, based on a value-in-use calculation. The calculation uses pre-tax cash flow projections based on financial forecasts. Key assumptions in the value-in-use calculation: Assumption Cash flow Approach used to determining values Earnings before interest, tax, depreciation and amortisation adjusted for working capital movement expectations and capital spend projections Estimated long-term average growth rate Pre-tax discount rate 1% 8.4% The above key assumptions used in the assessment represent management’s expectations of future trends within the industry of which the refinery operates, based on both external and internal data sources. Management has considered and assessed reasonably possible changes in the key assumptions used and has not identified any instances that could cause the carrying amount of the refinery assets to exceed their recoverable amount. The recoverable amount of the refinery has been determined based on a value-in-use calculation. That calculation uses cash flow projections based on financial forecasts approved by management covering a five-year period, and a discount rate of 8.4%. The refinery’s cash flows beyond the five-year period are extrapolated using a 1% growth rate. The critical assumptions used in the testing of the refinery’s carrying value include estimation of actual refining margin, foreign exchange rates and operational availability. The below sensitivities indicate the degree to which long-term actual outcomes would need to vary from management estimates for the recoverable amount of the refinery to equal its carrying value. • Long-term refining margins decreased by approximately 14%; • the exchange rate (USD / AUD) increased by 17%; or • operational availability reduced by 15%. 96 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d 13. Leases This note provides information on the Group leases, explains the impact of the adoption of AASB 16 Leases on the Group’s financial statements and also discloses the new accounting policies that have been applied from 1 January 2019 as a result of the AASB 16 adoption. (a) Amounts recognised on the consolidated statement of financial position fi n a n c i a l s t a t e m e n t s Right-of-use-assets Retail sites Supply and distribution sites Corporate offices Motor vehicles Total right-of-use assets 2019 $M *1 January 2019 $M 2,086.6 2,138.9 202.2 38.5 0.8 226.9 41.3 1.2 2,328.1 2,408.3 Additions to the right-of-use assets during the year, including the acquired Liberty Oil Holdings leases of $103.9M, were $118.9M. These additions were offset by depreciation expense of $199.1M. Lease liabilities Current Non-current Total lease liabilities 2019 $M *1 January 2019 $M 128.0 2,320.3 2,448.3 113.0 2,322.5 2,435.5 * In the previous year, the Group only recognised lease assets and lease liabilities in relation to leases that were classified as finance leases under AASB 117 Leases. The assets were included in property, plant and equipment and the liabilities as part of the Group’s borrowings. (b) Amounts recognised on the consolidated statement of profit or loss Depreciation charge of right-of-use assets Retail sites Supply and distribution sites Corporate offices Motor vehicles Total depreciation charge for right-of-use assets Interest expense (included within finance costs) Expense relating to short-term leases, leases of low-value assets and variable lease related payments not included in leases above The total cash outflow for leases for the year amounted to $268.6M. 2019 $M 163.3 32.5 2.9 0.4 199.1 162.5 19.4 2018 $M - - - - - - - 97 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Long-term assets and liabilities continued 13. Leases continued (c) The Group’s leasing activities and how they are accounted for Group as a lessee The Group leases various service station sites, office premises, vehicles, and storage and handling facilities. Rental contracts are typically made for fixed periods of two to 15 years, but may have extension options as described below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Until the end of the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight- line basis over the period of the lease. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of amounts assessed to be included as lease payments under AASB 16 Leases. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee’s incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions. In line with accounting standard guidance, where leases have a fixed escalation rate, the fixed rate has been applied when accounting for the lease payments. No rate has been applied to leases that increase at the rate of CPI or leases that have a variable escalation rate. Right-of-use assets are measured at cost comprising the initial measurement of the lease liability and other components as required under AASB 16. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise computer equipment and small office related items. Various extension and termination options are included in a number of leases across the Group. Management have determined that the extension of the current Alliance with Coles Express to 2029 is an appropriate timeframe to base option renewals across the lease portfolio. Beyond this timeframe there is significant flexibility in terms of managing lease contracts. For the purposes of the requirements of AASB 16, all lease extension periods that occur prior to February 2029 have been assumed to be exercised. Group as a lessor The Group has historically undertaken leasing activities as a lessor relating to Coles Express service station sites and pipeline assets under non-cancellable operating leases expiring within two to 16 years, with varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. In relation to the Group’s sublease and licensing arrangements, after consideration of the underlying contracts, it has been determined that as at 1 January 2019 the arrangements continued to exhibit the characteristics of operating leases. A reassessment of the application of AASB 16 in relation to the sublease and licensing contracts was triggered by the Alliance reset with Coles Express announced to the market on 6 February 2019, and due to the changes in the underlying arrangements it has been determined that the inflows under these arrangements fall within the scope of AASB 15 Revenue from contracts with customers. 98 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Future minimum income expected to be received in relation to non-cancellable licence agreements are as follows: Within one year After one year but not more than five years More than five years Total fi n a n c i a l s t a t e m e n t s 2019 $M 147.8 527.0 659.2 2018 $M 142.1 510.6 749.5 1,334.0 1,402.2 (d) AASB 16 Leases – Impact of adoption The Group has adopted AASB 16 from 1 January 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening statement of financial position on 1 January 2019. Adjustments recognised on the adoption of AASB 16 Leases On adoption of AASB 16 Leases, the Group recognised lease liabilities in relation to leases for which it is the lessee, which had previously been classified as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate which was adjusted for the duration of leases as of 1 January 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 6.9%. For the leases previously classified as a finance lease under AASB 117, the Group recognised the carrying amount of the lease asset and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. The measurement principles of AASB 16 are only applied after that date. The remeasurements to the lease liabilities were recognised as adjustments to the related right-of-use assets immediately after the date of initial application. Operating lease commitments disclosed as at 31 December 2018 (Less): Adjustments relating to discounting and updated treatment of extension and termination options (Less): Short-term leases recognised on a straight-line basis as expense Lease liability recognised as at 1 January 2019 on adoption of AASB 16 Add: Finance lease liabilities recognised as at 31 December 2018 Total lease liability Of which are: Current lease liabilities Non-current lease liabilities 1 January 2019 $M 2,915.8 (527.1) (4.0) 2,384.7 50.8 2,435.5 113.0 2,322.5 2,435.5 The right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. The change in accounting policy affected the following items in the consolidated statement of financial position on 1 January 2019: Assets • Right-of-use assets – increase by $2,408.3M • Prepayments – decrease by $50.1M • Property, plant and equipment – decrease by $39.8M Liabilities • Lease liabilities – increase by $2,384.7M • Provisions – decrease by $66.4M 99 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Long-term assets and liabilities continued 13. Leases continued (d) AASB 16 Leases – Impact of adoption continued Impact on segment disclosures and earnings per share Earnings before interest, tax, depreciation and amortisation (EBITDA) for the 2019 year increased for the Group as a result of the change in accounting policy. The change in policy affected each Group segment EBITDA as follows: Retail, Fuels and Marketing Refining Supply, Corporate and Overheads EBITDA $M 6.2 - 251.2 257.4 Net Profit After Tax (NPAT) for the year decreased for the Group as a result of the change in accounting policy. The change in policy affected each Group segment NPAT as follows: Retail, Fuels and Marketing Refining Supply, Corporate and Overheads NPAT $M (0.6) - (49.9) (50.5) Earnings per share decreased by 2.6c per share for the year ended 31 December 2019 as a result of the adoption of AASB 16 Leases. Practical expedients applied In applying AASB 16 for the first time, the Group has used the following approach permitted by the standard: • reliance on previous assessments on whether leases are onerous; • the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases; • the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; • lease payments are discounted based on the Group’s incremental borrowing rate; and • the use of professional judgement in determining the lease term where the contract contains options to extend or terminate the lease. 14. Long-term receivables Receivables Loans to equity-accounted investees Total non-current receivables 15. Long-term payables Coles Express long-term payable Other long-term payables Total non-current payables 2019 $M 6.4 32.0 38.4 2019 $M 91.9 1.3 93.2 2018 $M 9.0 8.5 17.5 2018 $M - - - The Coles Express long-term payable represents the present value recognition of a payment due to Coles Express in relation to the transfer of inventory at the time of the Alliance Agreement Amendments that took effect 1 March 2019. 100 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d fi n a n c i a l s t a t e m e n t s 16. Goodwill and other intangible assets Net book value As at 1 January 2018 Additions Amortisation for the year As at 31 December 2018 Cost Accumulated amortisation As at 31 December 2018 Acquisition of Liberty Wholesale Additions Transfers Amortisation for the year As at 31 December 2019 Cost Accumulated amortisation As at 31 December 2019 Goodwill $M Software $M Customer contracts $M Joint venture rights $M Other $M 213.3 9.8 - 223.1 223.1 - 223.1 97.5 - - - 320.6 320.6 - 320.6 - 50.9 (1.4) 49.5 50.9 (1.4) 49.5 - - 3.4 (4.8) 48.1 54.3 (6.2) 48.1 23.8 2.1 (5.9) 20.0 37.9 (17.9) 20.0 12.1 0.1 - (4.7) 27.5 50.1 (22.6) 27.5 147.6 - (7.7) 139.9 152.1 (12.2) 139.9 - - - (7.6) 132.3 152.1 (19.8) 132.3 - - - - - - - 2.9 137.0 - (11.4) 128.5 139.9 (11.4) 128.5 Total $M 384.7 62.8 (15.0) 432.5 464.0 (31.5) 432.5 112.5 137.1 3.4 (28.5) 657.0 717.0 (60.0) 657.0 (a) Goodwill Goodwill arises when the fair value of the consideration paid for a business acquisition exceeds the fair value of the identifiable assets and liabilities acquired. Where consideration is less than the fair value of acquired net assets, the difference is recognised immediately in the consolidated statement of profit and loss. Goodwill is not amortised and is measured at cost less any impairment losses. In accordance with Australian Accounting Standard requirements, goodwill is allocated to a Cash-Generating Unit (CGU) and is tested annually for impairment. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. A CGU level summary of the goodwill allocation is presented below. Marketing and Supply Refining Total goodwill recognised 2019 $M 320.6 - 320.6 2018 $M 223.1 - 223.1 Goodwill represents other intangible assets that did not meet the criteria for recognition as separately identifiable assets. Goodwill allocated to the Marketing and Supply CGU relates to the acquisition of Shell Aviation in 2017 and the current year addition of $97.5M is a result of the acquisition of Liberty Oil Holdings Pty Ltd (refer to Note 29). Goodwill is tested for impairment annually based on a value-in-use calculation. The calculation uses pre-tax cash flow projections based on financial budgets approved by management with conservative growth rates that do not exceed industry expectations. 101 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Long-term assets and liabilities continued 16. Goodwill and other intangible assets continued (a) Goodwill continued Key assumptions in the value-in-use calculation: Assumption Cash flow Approach used to determining values Earnings before interest, tax, depreciation and amortisation adjusted for working capital movement expectations and capital spend projections Estimated long-term average growth rate Pre-tax discount rate 3% 8.4% The above key assumption values used in the goodwill assessment represent management’s expectations of future trends within the industry of which the Marketing and Supply CGU operates, based on both external and internal data sources. Management have considered and assessed reasonably possible changes in the key assumptions used and have not identified any instances that could cause the carrying amount of the Marketing and Supply CGU to exceed its recoverable amount. There were no goodwill impairment losses recognised during the year ended 31 December 2019 (2018: nil). (b) Other intangibles The Group capitalises amounts paid for the acquisition of identifiable intangible assets, such as software, customer contracts and joint venture rights, where it is considered that they will provide benefit in future periods through revenue generation or reductions in costs. These assets, classified as finite life intangible assets, are carried in the consolidated statement of financial position at the fair value of consideration paid less accumulated amortisation and impairment losses. Intangible assets with finite useful lives are amortised on a straight-line basis over their useful lives. Amortisation for the period is included within the depreciation and amortisation expenses in the statement of profit and loss. The estimated useful lives in the current and comparative periods are reflected by the following amortisation periods: • Software 5 to 12 years • Customer contracts 6 to 10 years • Joint venture rights 20 years (i) Software Software primarily relates to the Group’s enterprise platform, Oracle JDE, which was implemented in 2018. The Group estimates the useful life of the software to be at least 12 years based on the expected technical obsolescence of such asset. This useful life profile conservatively aligns with the written commitment to provide premier support of the platform, underpinning the asset integrity of the system until at least December 2030, not including extended support option periods generally available. The actual useful life may be shorter or longer than 12 years, depending on technical innovations. (ii) Customer contracts and joint venture rights The customer contracts and joint venture rights were acquired as part of a business combination, namely, the Shell acquisition in 2014, the Shell Aviation acquisition in 2017 and the Liberty Oil Holdings Pty Limited acquisition during the current year (refer to Note 29). These intangible assets were recognised at their fair value at the date of acquisition and are subsequently amortised on a straight-line based on the timing of projected cash flows of the contracts over their estimated useful lives. (iii) Other On 27 February 2019, the Company announced the extension of the Alliance agreement with Coles Express through to 2029 under revised terms to create greater alignment between both parties and position the agreement for future growth. Under the revised terms, the Group paid Coles Express a one-off payment of $137.0M to assume responsibility from 1 March 2019 for the provision of the fuel offering, including retail fuel pricing and marketing across the Alliance network. The Group has assessed the accounting treatment of this transaction under the reacquired rights guidance of the Australian Accounting Standards, and this has been recognised as an intangible asset to be amortised over the remaining life of the Alliance agreement. 102 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d 17. Provisions At 1 January 2019 Additions/(write-back) Provisions acquired Utilised Unwinding/change of discount rate At 31 December 2019 Current Non-current At 1 January 2018 Additions/(write-back) Utilised Unwinding/change of discount rate At 31 December 2018 Current Non-current fi n a n c i a l s t a t e m e n t s Employee benefits $M Restructuring provision $M Asset retirement obligation $M Environ- mental remediation $M 73.4 30.7 3.8 (35.8) 1.7 73.8 71.9 1.9 98.4 25.8 (53.0) 2.2 73.4 67.0 6.4 2.5 3.5 - (5.1) - 0.9 0.9 - 4.8 10.5 (12.8) - 2.5 2.5 - 90.7 (9.5) 8.7 (1.4) 5.9 94.4 9.1 85.3 91.9 (2.7) (4.7) 6.2 90.7 12.0 78.7 41.0 7.5 - (9.9) 1.5 40.1 34.1 6.0 51.2 1.0 (12.0) 0.8 41.0 20.9 20.1 Other $M 89.7 (69.7) - (5.6) (0.1) 14.3 11.8 2.5 75.1 22.5 (8.1) 0.2 89.7 20.8 68.9 Total $M 297.3 (37.5) 12.5 (57.8) 9.0 223.5 127.8 95.7 321.4 57.1 (90.6) 9.4 297.3 123.2 174.1 Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. (a) Employee benefits Liabilities for wages and salaries, including annual leave and long service leave expected to be settled within 12 months of the end of the year, are measured at the amounts expected to be paid. Liabilities for long service leave and annual leave that are not expected to be settled within 12 months of the end of the year are measured at present value. In determining present value, consideration is given to the expected future wage and salary levels, expectations of employee departures and periods of service. Expected future payments are adjusted for future wage and inflation movement expectations, and discounted using market yields of corporate bonds. (b) Asset retirement obligation – significant estimate The present value of costs for the future dismantling and removal of assets, and restoration of the site on which the assets are located, is capitalised and depreciated over the useful life of the asset. Subsequent accretion to the amount of a provision due to unwinding of discounting is recognised as a finance cost. The costs for the future dismantling and removal of assets is based upon management’s best estimate using actual costs incurred in similar past projects inflated to the estimated end of useful life date and discounted using an appropriate discount rate. The Group has recognised a provision associated with plant and equipment including tanks at retail service station sites and fuel storage terminals. In determining the provision, assumptions and estimates are made in relation to discount rates, the expected cost to dismantle and remove the assets from the site and the expected timing of those costs. The carrying amount of the provision as at 31 December 2019 was $94.4M (2018: $90.7M). The Group estimates that the costs would be upon lease expiry and subsequent exit of the relevant site. As disclosed in Note 13 Leases, the Group’s rental contracts are typically for two to 15 years, but may have extension options. 103 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Long-term assets and liabilities continued 17. Provisions continued (c) Environmental provision – significant estimate Provisions for environmental remediation resulting from ongoing or past operations or events are recognised in the period in which an obligation, legal or constructive, to a third party arises and the amount can be reasonably measured. Measurement of liabilities is based on current legal requirements and existing technology. Where environmental impact studies have been completed, the result of this is used to estimate cost. In other cases, estimates are based on management experience of remediation at similar sites. The environmental remediation work provided for is expected to be undertaken within the next three years. (d) Other provision Other provisions include costs associated with the removal of contents and cleaning of tanks in preparation for demolition, and provisions against legal claims. The movement through other provisions includes an adjustment of $66.4M relating to the adoption of AASB 16 Leases. Refer to Note 13 Leases. 18. Commitments and contingencies (a) Capital commitments At 31 December 2019, the Group had capital expenditure contracted at the reporting date but not recognised as liabilities related to property, plant and equipment totalling $44.0M (2018: $40.2M). Included within the total capital commitments is $13.9M (2018: $9.6M) in commitments which represents the Group’s share of the contracts entered into by associate companies totalling $38.1M for retail outlets, investment properties and capital improvements. Refer to Note 30 Interests in associates and joint operations for further information. (b) Guarantees As at 31 December 2019, guarantees amounting to $55.7M (2018: $58.5M) have been given in respect of the Group’s share of workers compensation, surety for major contracts and other matters including government works. Under the terms of the Deed of Cross Guarantee entered in accordance with ASIC Instrument 2016/785, each Australian Group entity guarantees to each creditor payment in full of any debt in accordance with the Deed. Parties to the Deed are identified in Note 32 Deed of Cross Guarantee. No liabilities have been recognised in the consolidated statement of financial position in respect of financial guarantee contracts. (c) Contingencies and other disclosures Stamp duty – Viva Energy REIT On 24 September 2018, Viva Energy REIT received an assessment from the Victorian State Revenue Office (SRO) for $31.2M. The assessment relates to the transfer of properties prior to the completion of the Viva Energy REIT IPO in August 2016. Pursuant to the arrangements between Viva Energy REIT and the Group at the time, which were disclosed in the Prospectus, any such costs are payable by the Group. The Group lodged an objection to the assessment on 2 November 2018 and considers that it has strong prospects of having the assessment set aside. The SRO advised in a letter dated 22 November 2018 that it will not take recovery action while the objection and any appeal process is continuing. There have been no additional updates from the SRO. Management do not consider it probable that the Group has a present obligation in relation to the assessment as at 31 December 2019, and as a result have not recorded a provision in the statement of financial position. As at 31 December 2019, the Group has other contingent liabilities of $40.5M (2018: $37.5M), which includes the above stamp duty amount of $31.2M. It is management’s view that a cash outflow relating to the contingent liabilities is not probable. 104 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Capital funding and financial risk management For the purpose of the Group’s capital management, capital includes issued capital and all other equity reserves. The primary objective of the Group’s capital management is to maximise the shareholder value. The Group manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of the financial covenants. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. In order to achieve this overall objective, the Group’s capital management, amongst other things, aims to ensure that it meets financial covenants attached to the interest-bearing loans and borrowings that define capital structure requirements. Under the terms of the major borrowing facilities, the Group is required to comply with the following financial covenants: fi n a n c i a l s t a t e m e n t s • the interest cover ratio must not be less than 3.0x; • the liquidity ratio must not exceed 0.60; and • the leverage ratio must not be more than 2.0x. Breaches in meeting the financial covenants would permit the bank to immediately call loans and borrowings. There have been no breaches of the financial covenants of any interest-bearing loans and borrowing in the current period. No changes were made in the objectives, policies or processes for managing capital during the years ended 31 December 2019 and 2018. 19. Financial assets and liabilities This table provides a summary of the Group’s financial instruments, how they are classified and measured, and reference to relevant disclosure notes within the financial statements. The Group holds the following financial instruments at the end of the reporting period: Financial assets Financial assets held at amortised cost Trade and other receivables Long-term receivables Cash and cash equivalents Financial assets at fair value through profit and loss Derivative assets Financial liabilities Financial liabilities held at amortised cost Trade and other payables Short-term borrowings Long-term borrowings Lease liabilities Long term payables Financial liabilities at fair value through profit and loss Derivative liabilities Notes 2019 $M 2018 $M 8 14 6 20 10 11 21 15 20 1,247.8 1,138.7 38.4 127.2 17.5 108.6 0.2 15.5 1,413.6 1,280.3 2,165.5 1,922.8 7.7 256.9 93.2 - 108.4 50.8 - 19.0 0.9 4,990.6 2,082.9 105 13, 22 2,448.3 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Capital funding and financial risk management continued 19. Financial assets and liabilities continued Financial assets (a) Initial recognition and subsequent measurement The Group classifies its financial assets in the following measurement categories: • those to be measured at amortised cost; and • those to be measured subsequently at fair value (either through other comprehensive income or through profit or loss). The classification of financial assets at initial recognition depends on the financial assets contractual cash flow characteristics and business model the Group uses to manage them. At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Subsequent measurement of financial assets depends on the Group’s business model for managing the asset and its associated cash flow characteristics. The Group’s three measurement categories are as follows: (i) Amortised cost This category is the most relevant to the Group. Financial assets are measured at amortised cost if the asset is held within a business model to collect contractual cash flows where those cash flows represent solely payments of principal and interest. Financial assets at amortised cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The Group’s financial assets at amortised cost include trade and other receivables, long-term receivables and cash and cash equivalents. (ii) Fair value through other comprehensive income (FVOCI) The Group measures financial assets at FVOCI if the financial asset is held within a business model to collect contractual cash flows and for selling the financial assets, where those cash flows represent solely payments of principal and interest. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains and losses, interest income and foreign exchange gains and losses, which are recognised in profit or loss. Upon derecognition, the cumulative fair value change recognised in OCI is recycled to profit or loss. The Group currently holds no financial assets measured at FVOCI. (iii) Fair value through profit and loss (FVPL) Assets that do not meet the criteria for amortised cost or FVOCI are measured at FVPL and include financial assets held for trading, financial assets designated upon initial recognition at FVPL, or financial assets required to be measured at fair value. Financial assets at FVPL are carried in the statement of financial position at fair value with net changes in fair value recognised in the statement of profit or loss. During the year, derivative assets were the only assets measured at FVPL. (b) Derecognition A financial asset is derecognised from the Group’s consolidated statement of financial position when the rights to receive cash flows from the asset have expired, or the Group has transferred its rights to receive cash flows from the asset and has transferred substantially all the risks and rewards of the asset and/or control of the asset. (c) Impairment of financial assets From 1 January 2018, the Group assesses on a forward-looking basis the expected credit losses associated with its financial assets carried at amortised cost and FVOCI. The impairment methodology applied depends on the determined risk profile of each financial asset and the future expected credit risks relating to the identified asset. For trade receivables, the Group applies a simplified approach to calculating expected credit losses as permitted by AASB 9 Financial instruments, recognising a loss allowance based on expected credit losses at each reporting date. The Group has established a provision matrix that is based on historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. See Note 8 Trade and other receivables for further details. 106 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Financial liabilities (a) Initial recognition and subsequent measurement Financial liabilities are classified, at initial recognition, as financial liabilities measured at amortised cost (which for the Group are Trade and other payables, long-term payables, lease liabilities and borrowings) or as financial liabilities at FVPL. All financial liabilities are recognised initially at fair value and, in the case of payables and borrowings, net of directly attributable transaction costs. The subsequent measurement of financial liabilities depends on their classification, as described below: (i) Amortised cost This is the category most relevant to the Group and includes trade and other payables, lease liabilities, borrowings and long-term payables. Trade payables and amounts due to related parties are non-interest-bearing and are normally settled in 30 to 60 days. Amounts due to related parties are primarily for purchases of hydrocarbon. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the end of the reporting period. They are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Due to their short-term nature, the carrying amounts of trade and other payables are considered to be the same as their fair values. Trade and other payables, lease liabilities, borrowings and long-term payables are initially recognised at fair value net of transaction costs incurred, and subsequently measured at amortised cost. Any differences between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of profit or loss over the period of the liabilities using the effective interest method. fi n a n c i a l s t a t e m e n t s (ii) Fair value through profit and loss (FVPL) Derivatives are the Group’s only financial liabilities that are measured at FVPL. They are classified as held for trading and are entered into by the Group to mitigate exposure to the effects of changes in foreign exchange and commodity price movements. Changes in fair value of any derivative liabilities are recognised immediately in realised/unrealised (loss)/gain on derivatives in the consolidated statement of profit or loss. (b) Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. 20. Derivative assets and liabilities Derivatives are classified as held for trading and accounted for at fair value through profit or loss. The Group has the following derivative financial instruments at the end of the reporting period: Derivative assets Derivative liabilities 2019 $M 0.2 (19.0) 2018 $M 15.5 (0.9) Management have determined the fair value, which is classified as Level 2 in the fair value hierarchy, using the present value of estimated future settlements based on market quoted information. Gains or losses arising from changes in the fair value of financial assets at fair value through profit or loss category are presented in profit or loss within other income or other expenses in the period in which they arise. Interest income from these financial assets are recognised in the consolidated statement of profit or loss. 21. Long-term borrowings Long-term bank loans Net capitalised borrowing costs on long-term bank loans Total non-current borrowings 2019 $M 260.0 (3.1) 256.9 2018 $M 110.0 (1.6) 108.4 On 29 March 2019, the Group refinanced its borrowing facility with a US$700M syndicated, revolving credit facility for a three-year term with a one-year extension option. The facility is unsecured with terms and conditions consistent with the previous facility. At the end of the reporting period, the Group had access to the unsecured facility limit amounting to $999.1M (2018: $991.8M unsecured) that was in place primarily for working capital purposes. The amount drawn at 31 December 2019 is $260M (2018: $110.0M). The weighted average interest rate on long-term bank loans in 2019 was 2.29% (2018: 2.73%). This borrowing facility is subject to covenant arrangements disclosed under Capital funding and financial risk management on page 105. 107 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued 2018 $M 108.6 - (108.4) 0.2 (7.2) (43.6) (50.6) Total $M (125.2) 84.1 (9.5) (50.6) Capital funding and financial risk management continued 22. Consolidated net debt Net debt Cash and cash equivalents Borrowings – repayable within one year Borrowings – repayable after one year Net debt excluding lease liabilities Lease liabilities – repayable within one year Lease liabilities – repayable after one year Net debt including lease liabilities 2019 $M 127.2 (7.7) (256.9) (137.4) (128.0) (2,320.3) (2,585.7) Analysis of changes in consolidated net debt Net debt as at 1 January 2018 Cash flows Other non-cash movements Net debt as at 31 December 2018 Recognised on adoption of AASB 16 (see Note 13) Cash flows Other non-cash movements Net debt as at 31 December 2019 Other assets Liabilities from financing activities Cash/ overdrafts $M Leases due within 1 year $M Leases due after 1 year $M Borrowings due within 1 year $M Borrowings due after 1 year $M 164.7 (56.1) - 108.6 (7.1) 7.7 (7.8) (7.2) (43.5) - (0.1) (43.6) - (105.8) (2,278.9) (239.3) - 239.3 - - - 132.5 (240.9) (108.4) - (2,384.7) 18.6 - 127.2 268.7 (283.7) (128.0) - 2.2 (2,320.3) (7.7) - (7.7) (147.1) (1.4) 132.5 (282.9) (256.9) (2,585.7) 23. Contributed equity and reserves (a) Contributed equity Ordinary shares are classified as equity. These shares entitle the holder to participate in dividends, and to share in the proceeds of winding up the Group in proportion to the number of and amounts paid on the shares held. Issued and paid up capital Cost per share Movements in ordinary share capital At 1 January 2018 Restructure of the Group* IPO issuance* At 31 December 2018 At 1 January 2019 At 31 December 2019 2019 $M 4,861.3 $2.5000 Shares 809,323,406 (809,323,406) 1,944,535,168 1,944,535,168 1,944,535,168 1,944,535,168 2018 $M 4,861.3 $2.5000 $M 645.2 (645.2) 4,861.3 4,861.3 4,861.3 4,861.3 * On 13 July 2018, the Company was part of an IPO and listed a total of 1,944,535,168 shares on the ASX. As part of the IPO process, the Group acquired 100% of the shares in Viva Energy Holding Pty Limited (VEH) from Viva Energy B.V. The shares in VEH were transferred to the Group on 17 July 2018, immediately prior to the allotment of shares pursuant to the IPO on 18 July 2018. 108 Viva Energy Group Limited Annual Report 2019 (b) Treasury shares Treasury shares are shares in Viva Energy Limited that are held by the Viva Energy Employee Share Plan Trust for the purpose of issuing shares under various share-based incentives plans. Shares issued to employees are recognised on the first-in-first-out basis. Movements in treasury shares At 1 January 2019 Acquisition of treasury shares (average price: $2.23 per share) Issue of shares to employees – options exercised Issue of shares to employees – Employee Share Plan At 31 December 2019 Shares 35,694 15,142,432 (7,882,734) (13,861) 7,281,531 $M 0.1 34.1 (20.0) - 14.2 fi n a n c i a l s t a t e m e n t s (c) Reserves The following table shows a breakdown of the reserve balances and the movements in these reserves during the year. N o t e s t o t h e c o n s o l i d a t e d Post- employment benefits reserve $M Share- based payment reserve $M IPO reserve $M Cash flow hedge reserve $M - - - (4,235.2) 1.6 - - - - (3.2) Total $M 11.5 1.9 (1.4) (4,235.2) (3.2) (4,235.2) (1.6) (4,226.4) (4,235.2) (1.6) (4,226.4) - - - (3.5) - - - - - - - (4.7) 2.3 7.5 (20.0) (3.5) (1.7) (4.7) 1.2 1.9 - - - 3.1 3.1 2.3 7.5 (20.0) - - - (7.1) (4,238.7) (6.3) (4,246.5) At 1 January 2018 Movement in share-based payment reserve Remeasurement of retirement benefit obligations Recognition of IPO reserve Unrealised (losses)/gains on cash flow hedges recognised by Viva Energy REIT At 31 December 2018 At 1 January 2019 Share-based payment expenses Contributions from employees Issue of shares to employees Movement in IPO reserve Remeasurement of retirement benefit obligations Unrealised (losses)/gains on cash flow hedges recognised by Viva Energy REIT At 31 December 2019 24. Dividends declared and paid 8.7 - (1.4) - - 7.3 7.3 - - - - (1.7) - 5.6 Dividends determined and paid during the year Fully franked dividend relating to the prior period Final dividend for the year ended 31 December 2018 of 4.8 cents per fully paid share Interim dividend for the year ended 31 December 2019 of 2.1 cents per fully paid share 2019 $M - 93.3 40.9 2018 $M 13.5 - - Total dividends determined and paid during the year 134.2 13.5 109 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Capital funding and financial risk management continued 24. Dividends declared and paid continued The dividend paid in the comparative period was a payment to the sole shareholder prior to the Group listing on the ASX. The prior period dividend of $13.5M was a non-cash dividend payment paid by VEH to the then sole shareholder of VEH, Viva Energy B.V. In addition to the above dividends, since year-end the Board has determined a final dividend of 2.6 cents per fully paid ordinary share (2018: 4.8 cents). The aggregate amount of the proposed dividend expected to be paid on 15 April 2020 out of retained earnings at 31 December 2019, but not recognised as a liability at year-end, is $50.6M. Dividend franking account The balance of the franking account of the Australian consolidated tax group, headed by Viva Energy Group Limited, is $44.8M at 31 December 2019 (2018: $46.4M) based on a tax rate of 30%. The dividend of 2.6 cents per share recommended as the final dividend for 2019 will be fully franked and will reduce the franking credits available to the Group. 25. Fair value of financial assets and liabilities The Group’s accounting policies and disclosures may require the measurement of fair values for both financial and non-financial assets and liabilities. The Group has an established framework for fair value measurement. When measuring the fair value of an asset or a liability, the Group uses market observable data where available. Fair values are categorised into different levels in a fair value hierarchy based on the following valuation techniques: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability are categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. (a) Fair value measurement hierarchy for the Group Quoted in active markets (Level 1) $M Significant observable inputs (Level 2) $M Significant unobservable inputs (Level 3) $M - - - - - - 0.2 (19.0) (18.8) 15.5 (0.9) 14.6 - - - - - - 31 December 2019 Derivative assets Derivative liabilities Total at 31 December 2019 31 December 2018 Derivative assets Derivative liabilities Total at 31 December 2018 There were no transfers between levels during the 2019 and 2018 years. 110 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d (b) Estimation of fair values Derivative assets and liabilities The Group enters into derivative financial instruments with financial institutions with investment grade credit ratings. Foreign exchange forward contracts and commodity forward contracts are valued using valuation techniques, which employ the use of market observable inputs. As at 31 December 2019, the marked-to-market value of derivative asset positions is net of a credit valuation adjustment attributable to derivative counterparty default risk. fi n a n c i a l s t a t e m e n t s 26. Financial risk management The Group’s principal financial liabilities, other than derivatives, comprise current and non-current borrowings and trade and other payables. The main purpose of these financial liabilities is to finance the Group’s operations. The Group’s principal financial assets include loans, trade and other receivables, and cash and cash equivalents that were derived directly from its operations. The Group also holds financial assets and enters into derivative transactions. Exposure to foreign currency risk, interest rate risk, liquidity risk, commodity price risk and credit risk arises in the normal course of the Group’s business. The Group’s overall financial risk management strategy is to seek to ensure that the Group is able to fund its corporate objectives and meet its obligations to stakeholders. Derivative financial instruments may be used to hedge exposure to fluctuations, especially movements in foreign exchange rates. Financial risk management is carried out by Group Treasury while risk management activities in respect to customer credit risk are carried out by the Finance and Credit teams. The Group Treasury, Finance and Credit teams operate under policies approved by the Board. The teams identify, evaluate and monitor the financial risks in close co-operation with the Group’s operating units. (a) Foreign exchange risk Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Group is exposed to movements in foreign exchange rates in the normal course of its business primarily due to the fact that it purchases product and crude in United States dollars (USD) and sells in Australian dollars (AUD). Any specific foreign exchange exposure that relates to borrowings is managed separately and subject to separate Board approvals. The objective of the Group’s foreign exchange program is to minimise the effect of a fluctuation in foreign exchange rates on Group earnings and its cash flows. Transactions which could be regarded as speculative are not permitted. The program of foreign exchange risk management identifies, measures, takes actions to mitigate this risk, and reports the performance of the program in a controlled and non-speculative manner. The focus is on cash flow exposures rather than just profit and loss. The Group manages foreign currency risk by using foreign currency forward contracts to offset foreign exchange exposures. At 31 December 2019 and 2018, the Group hedged 100% of its net USD payables and this is actively managed on a daily basis through a hedge program. As at 31 December 2019, the total fair value of all outstanding foreign currency exchange forwards amounted to a $18.8M net liability (2018: $14.6M net asset). The Group’s exposure to foreign exchange rates for classes of financial assets and liabilities including sensitivities to pre-tax profit of the Group if the AUD strengthened / weakened by 10% against the USD with all other variables held constant, are set out below. The foreign exchange program outlined is undertaken to mitigate this risk. USD denominated trade receivables (in AUD) USD denominated trade payables (in AUD) Net exposure Effect in pre-tax profit AUD strengthens against USD by 10% AUD weakens against USD by 10% 2019 $M 138.6 2018 $M 234.0 (1,661.6) (1,302.5) (1,523.0) (1,068.5) 152.3 (152.3) 106.8 (106.8) The Group has minimal exposure to other currencies (Euro, British Pound and Singapore Dollar) with total payable balances denominated in other currencies of $0.7M at 31 December 2019 (2018: $1.4M). 111 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Capital funding and financial risk management continued 26. Financial risk management continued (b) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s syndicated bank loan with floating interest rates. The Group’s exposure to interest rate risk for classes of financial assets and liabilities including sensitivities to pre-tax profit of the Group if interest rates had changed by -/+1% from the year-end rates, with all other variables held constant, are set out as follows: Financial assets Cash and cash equivalents Loan to related party Total financial assets Financial liabilities Short-term bank loans Long-term bank loans Total financial liabilities Net exposure Interest rates increase by 1% Interest rates decrease by 1% 2019 $M 127.2 38.9 166.1 7.7 256.9 264.6 (98.5) (1.0) 1.0 2018 $M 108.6 8.5 117.1 - 108.4 108.4 8.7 0.1 (0.1) (c) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Due to the dynamic nature of the underlying business, the liquidity risk policy requires maintaining sufficient cash and an adequate amount of committed credit facilities to be held above the forecast requirements of the business. The Group manages liquidity risk centrally by monitoring cash flow forecasts, maintaining adequate cash on hand and debt facilities. The debt portfolio is periodically reviewed to ensure there is funding flexibility across an appropriate maturity profile. 112 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d The table below summarises the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments: 31 December 2019 Trade and other payables Short-term bank loans Long term payables Long-term bank loans Derivative liabilities Lease liabilities Total at 31 December 2019 31 December 2018 Trade and other payables Long-term bank loans Derivative liabilities Lease liabilities Total at 31 December 2018 fi n a n c i a l s t a t e m e n t s No more than 1 year $M More than 1 year but no more than 5 years $M More than 5 years $M 2,165.5 7.7 - - 19.0 284.2 2,476.4 1,922.8 - 0.9 7.9 1,931.6 - - 1.4 260.0 - 1,136.5 1,397.9 - 110.0 - 33.5 143.5 - - 114.2 - - 2,403.2 2,517.4 - - - 102.7 102.7 Total $M 2,165.5 7.7 115.6 260.0 19.0 3,823.9 6,391.7 1,922.8 110.0 0.9 144.1 2,177.8 The financial liabilities due within the next 12-month period amount to $2,476.4M (2018: $1,931.6M). The Group has current assets of $2,629.6M (2018: $2,427.6M), a net current asset position of $181.6M (2018: $373.5M) and is in a position to meet its financial liability obligations as and when they fall due. (d) Commodity price risk The Group is exposed to the effect of changes in commodity price (i.e. oil and refined product prices) in its normal course of business. The objective of the Group’s commodity price strategy is to reduce earnings volatility as a result of movements in oil and refined product prices. The Group achieves this by: • monitoring hydrocarbon volumes priced in and out on a monthly basis and hedging up to 100% of the net exposure; and • monitoring expected refining margins and hedging constituent components to protect refining income, hedging up to 100% of net refinery exposure. The Group manages commodity price exposure through the purchase or sale of swap contracts up to 36 months forward. No commodity price hedges were outstanding at 31 December 2019 and 2018. Commodity price sensitivity analysis The Group’s exposure to commodity prices risk including sensitivities to pre-tax profit if commodity prices had changed by -/+10% from the year-end prices, with all other variables held constant, are set out as follows: Commodity prices decrease by 10% Commodity prices increase by 10% 2019 $M 4.5 (4.1) 2018 $M 3.9 (3.9) 113 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Capital funding and financial risk management continued 26. Financial risk management continued (e) Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including deposits with banks and financial institutions and other financial instruments. Customer credit risk The Group manages credit risk and the losses which could arise from default by ensuring that parties to contractual arrangements are of an appropriate credit rating, or do not show a history of defaults. The Group applies the AASB 9 Financial instruments simplified approach to measuring trade receivable expected credit losses, which uses a lifetime expected loss allowance for expected credit losses for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over past periods using historical data and also using forward looking projections of customer payment expectations. Trade receivables are often insured for events of non-payment, through third party insurance, which has also been factored into the expected loss rate calculations. Generally, trade receivables are written-off if past due for more than one year and are not subject to enforcement activity. The aging profile of the receivable balance and expected credit loss rates are detailed in Note 8 Trade and other receivables. Financial institution credit risk Financial assets such as cash at bank and forward contracts are held with high credit quality financial institutions. Maximum exposure to credit risk The Group’s maximum credit risk exposure at balance date in relation to each class of recognised financial assets, other than equity and derivative financial instruments, is the carrying amount of those assets as indicated in the consolidated statement of financial position. Taxation 27. Income tax and deferred tax (a) Reconciliation of income tax expense at Australian standard tax rate to actual income tax expense 2019 $M 158.2 (47.5) (4.9) (0.3) - (1.1) 8.2 0.7 2018 $M 307.7 (92.3) (0.9) (0.4) 345.5 0.5 18.9 0.6 (44.9) 271.9 Accounting profit before income tax expense Tax at the Australian tax rate of 30% Non-deductible transaction costs Research and development expenditure Election to form tax consolidated group Sundry items Adjustment relating to prior periods Non-refundable carry forward tax offsets Income tax (expense)/benefit for the period 114 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d (b) Income tax expense Current tax expense Deferred tax (expense)/benefit Adjustment relating to prior periods Income tax benefit/(expense) reported in the consolidated statement of profit or loss Deferred income tax benefit/(expense) included in income tax benefit/(expense) comprises: Increase/(decrease) in deferred tax assets Decrease/(increase) in deferred tax liabilities Adjustment in deferred tax relating to prior periods Tax relating to items recognised in other comprehensive income or directly in equity rather than through the statement of profit or loss Deferred tax related to items recognised in other comprehensive income during the period: Remeasurement of defined benefit obligations Unrealised losses on cash flow hedges recognised by Viva Energy REIT Deferred tax related to items recognised directly to equity during the period: Reserve arising from IPO (c) Deferred tax Deferred tax assets The balance comprises combined temporary differences attributable to: Property, plant and equipment Lease liabilities Inventories Asset retirement obligation Employee benefits Other Total deferred tax assets Deferred tax liabilities The balance comprises combined temporary differences attributable to: Right-of-use assets Intangible assets Derivative contracts Financial assets and investments Total deferred tax liabilities Net deferred tax assets/(liabilities) Net deferred tax balances expected to be realised within 12 months Net deferred tax balances expected to be realised after more than 12 months fi n a n c i a l s t a t e m e n t s 2019 $M (68.6) 15.5 8.2 (44.9) 738.8 (723.3) 17.1 32.6 (0.7) 2.0 (4.5) 29.4 2018 $M (78.4) 331.4 18.9 271.9 126.8 204.6 12.9 344.3 (0.6) 1.4 17.6 362.7 2019 $M 2018 $M 123.0 722.4 108.4 28.4 22.4 15.8 128.9 - 66.6 27.0 20.3 43.9 1,020.4 286.7 (690.5) (53.5) 0.4 (110.8) (854.4) 166.0 38.6 127.4 166.0 - (50.0) (2.5) (97.6) (150.1) 136.6 30.8 105.8 136.6 115 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Taxation continued 27. Income tax and deferred tax continued (d) Movements in deferred tax assets Property, plant and equipment $M - 128.9 - - 128.9 128.9 0.3 Lease liabilities $M Inventories $M Asset retirement obligations $M Employee benefits $M 64.0 28.3 17.7 2.6 - - (1.3) - - 3.2 - (0.6) Other $M 32.9 (6.6) 17.6 - Total $M 142.9 126.8 17.6 (0.6) 66.6 27.0 20.3 43.9 286.7 66.6 27.0 20.3 43.9 286.7 - - - - - - - - 749.7 - - 2.6 - (6.2) (27.3) 41.7 (1.2) - - - - - - - - 1.2 - 1.6 - (0.7) 1.5 5.6 (4.9) 744.8 (20.8) (4.6) - (12.2) (4.6) (0.7) 123.0 722.4 108.3 28.4 22.4 15.1 1,019.6 2018 movements Opening balance at 1 January 2018 (Charged)/credited: To profit or loss Directly to equity Acquired in business combination Closing balance at 31 December 2018 2019 movements Opening balance at 1 January 2019 (Charged)/credited: Acquired in business combination Initial recognition of AASB 16 Leases To profit or loss Directly to equity Other comprehensive income Closing balance at 31 December 2019 (e) Movements in deferred tax liabilities Property, plant and equipment $M (142.2) 142.2 - - - - - - - - 2018 movements Opening balance at 1 January 2018 (Charged)/credited: To profit and loss Other comprehensive income Closing balance at 31 December 2018 2019 movements Opening balance at 1 January 2019 (Charged)/credited: Acquired in business combination Initial recognition of AASB 16 Leases To profit and loss Other comprehensive income Closing balance at 31 December 2019 116 Right-of-use assets $M Intangible assets $M Derivative contracts $M Financial assets and investments $M (51.8) (10.1) (164.9) 1.8 - (50.0) 7.6 - (2.5) 65.9 1.4 (97.6) Total $M (369.0) 217.5 1.4 (150.1) (50.0) (2.5) (97.6) (150.1) (4.5) - 1.0 - - - 2.9 - 0.4 - - (15.1) 2.0 (110.7) (4.5) (744.8) 43.1 2.0 (854.3) (690.5) (53.5) - - - - - - (744.8) 54.3 - Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d The income tax expense for the year is the tax payable on the current year’s taxable income based on the income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and unrecognised deferred tax assets, or liabilities such as unused tax losses. Current income tax expense is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period. Management evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. fi n a n c i a l s t a t e m e n t s Deferred income tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is not accounted for if it arises from initial recognition of goodwill, or of an asset or liability in a transaction, other than a business combination that at the time of the transaction affects neither accounting nor taxable profit (or loss). Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Tax assets and liabilities are offset when there is a legally enforceable right to offset. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Tax consolidation The Company and its wholly-owned Australian controlled entities have elected to form an income tax consolidated group (TCG). In addition to its own current and deferred tax amounts, the Company also recognises the current income tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the TCG. The entities in the TCG have entered into a tax funding agreement under which the wholly-owned entities fully compensate the Company for any current income tax payable assumed and are compensated by the Company for any current income tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the Company under the income tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. Assets or liabilities arising under tax funding agreements with the entities in the TCG are recognised as current amounts receivable from or payable to other entities in the Group. Group structure 28. Group information (a) Principles of consolidation The consolidated financial statements comprise the financial statements of the Group and its subsidiaries as at 31 December 2019. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. 117 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Group structure continued 28. Group information continued (b) Controlled entities The consolidated financial statements of the Group includes the controlled entities listed below: Name of entity Viva Energy Holding Pty Limited Viva Energy Australia Group Pty Limited Viva Energy Australia Pty Limited Viva Energy Aviation Pty Limited Viva Energy Gas Pty Limited Viva Energy Refining Pty Limited VER Manager Pty Limited ZIP Airport Services Pty Ltd Viva Energy S.G. Pte Ltd Pacific Hydrocarbon Solutions Limited Liberty Oil Holdings Pty Limited* Deakin Services Pty Ltd* Liberty Oil Affinity Pty Ltd* Liberty Oil Australia Holdings Pty Ltd* Liberty Oil City Leasing (Qld) Pty Ltd* Liberty Oil City Leasing Pty Ltd* Liberty Oil Land Pty Ltd* Liberty Oil Property Pty Ltd* Liberty Oil Property (SA) Pty Ltd* Liberty Oil Rural Leasing (WA) Pty Ltd* Liberty Oil Rural Leasing Pty Ltd* Logicoil Pty Ltd* Tradeway Services Pty Ltd* Liberty Oil (SA) Pty Ltd* Liberty Oil (WA) Pty Ltd* Liberty Oil Corporation Pty Ltd* Liberty Oil Finance Pty Ltd* Liberty Oil Wholesale (S) Pty Ltd* Liberty Oil (A) Pty Ltd* Liberty Oil (B) Pty Ltd* Liberty Oil (C) Pty Ltd* Liberty Oil (D) Pty Ltd* Liberty Oil Express Pty Ltd* Liberty Oil N.S.W. Pty Ltd* Liberty Oil Queensland Pty Ltd* Liberty Oil South Australia Pty Ltd* Liberty Oil Tasmania Pty Ltd* Liberty Oil Victoria Pty Ltd* Liberty Oil Western Australia Pty Ltd* Liberty Oil Australia Pty Ltd* * Refer to Note 29 Business combinations for further detail. 118 Country of incorporation/ establishment Equity holding 2019 % Equity holding 2018 % Australia Australia Australia Australia Australia Australia Australia Australia Singapore Papua New Guinea Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d fi n a n c i a l s t a t e m e n t s (c) Interests in associates The Group holds interest in the following investments accounted for using the equity method: Name of entity Liberty Oil Holdings Pty Limited* LOC Global Pty Ltd Viva Energy REIT Westside Petroleum Pty Limited Fuel Barges Australia Pty Ltd * Refer to Note 29 Business combinations for further detail. Country of incorporation/ establishment Equity holding 31 Dec 2019 % Equity holding 31 Dec 2018 % Australia Australia Australia Australia Australia - 50 36 50 50 50 - 38 50 - Further details regarding these investments can be found in Note 30 Interests in associates and joint operations. (d) Interests in joint operations The Group has a 52% interest in W.A.G Pipeline Pty Ltd (2018: 52%), a 50% interest in Crib Point Terminal Pty Ltd (2018: 50%) and a 33% interest in Cairns Airport Refuelling Services Pty Ltd (2018: 33%). These are classified as joint operations under AASB 11 Joint Arrangements. Further details regarding these investments can be found in Note 30 Interests in associates and joint operations. 29. Business combinations On 27 February 2019, the Group agreed to acquire the remaining 50% interest in Liberty Oil Holding Pty Limited’s wholesale business (and controlled entities) (Liberty Oil Holdings), a significant step in the Group’s regional growth strategy. The acquisition was finalised on 1 December 2019. The Group also established a new retail joint venture of which it owns 50%, to continue to grow the Liberty Oil retail business. Liberty Oil Holdings is a significant national supplier of bulk fuels and lubricants to customers and distributors operating predominantly in the regional and rural markets. The business includes a network of 17 regional storage depots, a company operated transport fleet of more than 60 vehicles, and supply to a network of more than 250 dealer owned service stations carrying either the Shell or Liberty brands. Details of the purchase consideration, the net assets acquired and goodwill are as follows: Purchase consideration: Cash settlement Fair value of previously held investment Total purchase consideration $M 42.0 42.0 84.0 A gain of $1.3M has been recognised as a result of remeasuring to fair value the equity interest in Liberty Oil Holdings Pty Limited held by the Group before the business combination. This gain is recognised in line item Gain on step acquisition in the consolidated statement of profit and loss. 119 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Group structure continued 29. Business combinations continued The acquisition had the following effect on the Group’s assets and liabilities: Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Land Right-of-use assets Intangible assets Other assets Trade and other payables Provisions Lease liabilities Net deferred tax assets Net identifiable assets acquired Goodwill on acquisition Total purchase consideration Recognised values $M 17.2 129.3 11.5 16.7 5.1 103.9 15.0 1.7 (198.9) (12.5) (103.9) 1.4 (13.5) 97.5 84.0 The recognised values represent the fair value of assets recorded on acquisition. The accounting for the acquisition is provisional and will be finalised in the next accounting period. In completing the purchase price allocation, management has been required to make judgements relating to the fair value of assets and liabilities, in particular the valuation of certain liabilities. Intangible assets acquired of $15.0M represent customer contracts ($12.1M) and brand intangibles ($2.9M). These assets will be amortised over 10 years. Refer to Note 16 Goodwill and other intangible assets for further details. Goodwill acquired of $97.5M represents other intangible assets that did not meet the criteria for recognition as separately identifiable assets at the date of acquisition. It will not be deductible for tax purposes. The carrying value of goodwill is allocated to the Marketing and Supply CGU. Refer to Note 16 Goodwill and other intangible assets. Goodwill on acquisition has been provisionally accounted for. If new information regarding the fair values of acquired assets and liabilities is obtained during the measurement period, the goodwill and respective asset and liability balances shall be retrospectively adjusted. Acquired receivables The fair value of acquired trade receivables is $90.8M. The gross contractual amount for trade receivables due is $91.5M, with a loss allowance of $0.7M. Revenue and profit contribution Liberty Oil Holdings Pty Ltd contributed revenues of $173.6M and loss after tax of $0.9M to the Group from the transaction date to 31 December 2019. If the acquisition had occurred on 1 January 2019, Pro Forma revenue and profit for the year ended 31 December 2019 would have been revenues of approximately $1,771.4M1 and loss after tax of approximately $9.4M1 respectively. These amounts have been calculated using Liberty Oil Holding’s results and adjusting them for differences in the accounting policies between the Group and the acquired subsidiaries. 1. Prior to 1 December 2019, Liberty Oil Holdings Pty Ltd financial results incorporated the financial results of both the wholesale and the retail businesses. The acquisition disclosed in this note relates to the wholesale business only; however, it is impracticable for the financial results prior to 1 December 2019 to be split between the lines of business. 120 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Purchase consideration – cash outflow Outflow of cash to acquire subsidiary, net of cash acquired Cash consideration Less: Balances acquired Net outflow of cash – investing activities fi n a n c i a l s t a t e m e n t s 2019 $M 42.0 (17.2) 24.8 2018 $M - - - Acquisition-related costs Acquisition-related costs of $2.0M are included within general and administration expenses or salaries and wages in the consolidated statement of profit and loss and in operating cash flows in the statement of cash flows. There were no acquisitions in 2018 that were within the scope of AASB 3 Business combinations. The pre-IPO restructure has been treated as a common control transaction and is outside the scope of AASB 3. 30. Interests in associates and joint operations (a) Associates An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. The Group has a non-controlling interest in the following entities which are classified as associates under the current ownership structure in accordance with AASB 128 Investments in Associates and Joint Ventures. These investments have been recognised in the consolidated financial statements using the equity method: Liberty Oil Holdings Pty Limited LOC Global Pty Ltd Viva Energy REIT Westside Petroleum Pty Limited Fuel Barges Australia Pty Ltd Total investments accounted for using the equity method 2019 $M - 15.5 615.9 10.4 - 641.8 2018 $M 58.4 - 591.6 14.9 - 664.9 During the 2019 period the Group acquired a 50% equity share of Fuel Barges Australia Pty Ltd. This entity has not yet commenced operations. Liberty Oil Holdings Pty Limited On 27 February 2019, the Group agreed to acquire the remaining 50% interest in Liberty Oil Holding Pty Limited’s wholesale business (and controlled entities). The acquisition was finalised on 1 December 2019. Prior to this acquisition the Group held a 50% interest. The Group also established a new retail joint venture of which it owns 50%. This investment is disclosed below. Liberty had no other contingent liabilities or capital commitments as at 31 December 2019 and 2018, except as disclosed in Note 18 Commitments and contingencies. Movement of Liberty Oil Holdings investment Balance at the beginning of the year Dividends received Share of Liberty Oil Holdings loss Capital contribution Transfer of investment value on establishment of LOC Global Pty Ltd Business combination adjustment Balance at end of year 2019 $M 58.4 (1.6) (5.6) 5.0 (15.5) (40.7) - 2018 $M 58.4 - - - - - 58.4 121 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Group structure continued 30. Interests in associates and joint operations continued (a) Associates continued LOC Global Pty Ltd LOC Global Pty Ltd (LOC Global) is a private entity that is based in Melbourne, Australia. The Group holds 50% (2018: 0%) equity holding in LOC Global. LOC Global had no other contingent liabilities or capital commitments as at 31 December 2019, except as disclosed in Note 18 Commitments and contingencies. Movement of LOC Global investment Balance at the beginning of the year Transfer of investment from Liberty Oil Holdings (refer above) Share of LOC Global profit Share of LOC Global OCI Balance at end of year 2019 $M 2018 $M - 15.5 - - 15.5 - - - - - Viva Energy REIT Viva Energy REIT is an ASX listed real estate investment trust that owns a portfolio of service stations primarily leased to Viva Energy Australia Pty Limited, a wholly-owned, consolidated subsidiary of the Group. As at 31 December 2019, the Group held a 35.5% interest (2018: 38.0%) in Viva Energy REIT and was represented by two of five Board members. The 276,060,625 shares owned in Viva Energy REIT had a fair value of $734.3M (2018: $621.1M) as at 31 December 2019 based on the ASX quoted share price. Movement of Viva Energy REIT investment Balance at the beginning of the year Dividends received Share of Viva Energy REIT profit Share of Viva Energy REIT OCI Balance at end of year 2019 $M 591.6 (39.2) 70.3 (6.8) 615.9 2018 $M 570.2 (37.5) 63.5 (4.6) 591.6 Westside Petroleum Pty Limited In May 2018, the Group agreed to acquire a 50% non-controlling interest in Westside Petroleum Pty Ltd (Westside), an independently owned and operated retail fuels business with more than 50 retail sites across New South Wales, Victoria and Queensland. The transaction was finalised in August 2018 after ACCC and FIRB approval, for a settlement purchase price of $14.9M. Movement of Westside Petroleum investment Balance at the beginning of the year Acquisition Dividends received Share of Westside Petroleum profit/(loss) Share of Westside Petroleum OCI Balance at end of year 122 2019 $M 2018 $M 14.9 - - (4.5) - 10.4 - 14.9 - - - 14.9 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Total share of profits in associates for the 2019 year amounted to $60.2M (2018: $63.5M). Included within the capital commitments disclosed in Note 18 Commitments and contingencies, is $13.9M (2018: $9.6M) in commitments which represents the Group’s share of capital contracts entered into by associate companies totalling $38.1M for retail outlets, investment properties and capital improvements. Viva Energy REIT had no other contingent liabilities or capital commitments as at 31 December 2019 and 2018, except as disclosed in Note 18 Commitments and contingencies. fi n a n c i a l s t a t e m e n t s Aggregate summary information of associates This summarised financial information represents the aggregate summary information of associates with the majority relating to Viva Energy REIT. It represents the amounts shown in financial statements of the associate companies in accordance with Australian Accounting Standards. Current assets Non-current assets Current liabilities Non-current liabilities Net assets Net assets – Group’s share based on percentage of investment Adjustments resulting from the equity accounting method Carrying amount of investments accounted for using the equity method Revenue Net profit from continuing operations Net (loss) from associate acquired during the period Other comprehensive income Total comprehensive income Distributions received from equity accounted for investments 2019 $M 97.1 2018 $M 145.6 2,715.5 2,561.1 (122.2) (911.9) (194.2) (905.6) 1,778.5 1,606.9 632.3 9.5 641.8 612.7 52.2 664.9 2,072.9 1,926.0 189.5 (8.5) (19.1) 161.9 40.8 167.1 - (12.2) 154.9 37.5 (b) Joint operations Joint operations are those entities whose financial and operating policies the Group has joint control over, and where the Group has rights to the assets and obligations for the liabilities of the entity. The Group owns a 52% interest in W.A.G Pipeline Pty Ltd, a 50% interest in Crib Point Terminal Pty Ltd and a 33% interest in Cairns Airport Refuelling Services Pty Ltd. The investments are incorporated in Australia with principal operations in Victoria and Cairns, and are classified as joint operations under AASB 11 Joint Arrangements, where the Group recognises its direct right to the jointly held assets, liabilities, revenues and expenses and has proportionately consolidated its interests under the appropriate headings in the consolidated financial statements. The joint operations had no other contingent liabilities or capital commitments as at 31 December 2019 and 2018, except as disclosed in Note 18 Commitments and contingencies. 123 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Group structure continued 31. Parent company financial information The financial information presented below presents that of the parent entity of the Group, Viva Energy Group Limited. Statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Contributed equity IPO reserve Employee share-based payment reserve Retained earnings Total equity Results Profit of the Company Total comprehensive income of the Company 32. Deed of Cross Guarantee 2019 $M 2018 $M - 4,791.8 4,791.8 4.0 - 4.0 17.8 4,782.9 4,800.7 5.0 - 5.0 4,787.8 4,795.7 4,861.3 4,861.3 (71.3) (7.1) 4.9 (67.8) - 2.2 4,787.8 4,795.7 136.9 136.9 2.2 2.2 As at 31 December 2019, the Company (as the Holding Entity) and all the controlled entities listed in Note 28(b) Group information (with the exception of Viva Energy S.G. Pte Ltd and Pacific Hydrocarbon Solutions Limited) are parties to a Deed of Cross Guarantee dated 14 December 2018 (Deed). Parties marked with an asterisk (*) in Note 28(b) Group information were added as parties to the Deed by an Assumption Deed dated 13 December 2019. Under the Deed, each company guarantees the debts of the others to each creditor payment in full of any debt in accordance with the terms of the Deed. By entering into the Deed, the controlled entities have been relieved from the requirement to prepare a financial report and directors’ report under Instrument 2016/785 issued by the Australian Securities and Investments Commission (Instrument). The companies referred to above represent a ‘Closed Group’ for the purposes of the Instrument. 124 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d fi n a n c i a l s t a t e m e n t s The aggregate assets and liabilities of the companies which are party to the Deed and the aggregate of their results for the period to 31 December 2019 and 2018 are set out below: Revenue Replacement cost of goods sold Inventory gain/(loss) Sales duties and taxes Transportation expenses Historical cost of goods sold Gross profit Gain on bargain purchase Net (loss)/gain on disposal of property, plant and equipment Other income Transportation expenses Salaries and wages General and administration expenses Maintenance expenses Operating leases Sales and marketing expenses Impairment Results from operations Interest income Share of profit in associates Realised/unrealised (loss)/gain on derivatives Net foreign exchanges gain/(loss) Movement in financial assets Depreciation and amortisation expenses Finance costs Profit before income tax expense Income tax benefit/(expense) Profit after tax 2019 $M 2018 $M 16,541.6 16,394.4 (10,084.9) (10,328.6) (49.5) (93.6) (4,607.5) (4,135.3) (333.2) (286.0) (15,075.1) (14,843.5) 1,466.5 1,550.9 1.3 (1.9) (0.6) (258.8) (257.7) (140.9) (115.4) (19.4) (105.4) (1.3) 567.0 2.8 60.2 7.9 37.2 - (355.6) (189.8) 129.7 (39.8) 89.9 - 10.2 10.2 (283.4) (249.1) (140.3) (98.1) (286.3) (114.2) (1.4) 388.3 2.7 63.5 39.7 (29.8) - (129.6) (41.7) 293.1 276.8 569.9 125 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Group structure continued 32. Deed of cross guarantee continued Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Assets classified as held for sale Derivative assets Prepayments Current tax assets Non-current assets Long-term receivables Property, plant and equipment Right-of-use assets Goodwill and other intangible assets Post-employment benefits Investments accounted for using the equity method Net deferred tax assets Other non-current assets Total assets Liabilities and equity Current liabilities Trade and other payables Provisions Short-term borrowings Short-term lease liabilities Derivative liabilities Non-current liabilities Provisions Long-term borrowings Long-term lease liabilities Long-term payables Total liabilities Net assets Equity Contributed equity Treasury shares Reserves Retained earnings Total equity 126 2019 $M 2018 $M 126.5 1,203.0 1,195.2 6.7 0.2 20.2 40.3 107.2 1,141.4 1,010.9 4.1 15.5 71.0 83.2 2,592.1 2,433.3 40.6 1,464.2 2,328.1 657.0 6.9 641.8 165.9 2.1 19.7 1,463.8 - 432.5 11.4 664.9 136.5 1.5 5,306.6 7,898.7 2,730.3 5,163.6 2,163.5 127.8 7.7 128.0 19.0 1,941.1 123.2 - 7.2 0.9 2,446.0 2,072.4 95.7 256.9 2,320.3 93.2 2,766.1 5,212.1 174.1 108.4 43.6 - 326.1 2,398.5 2,686.6 2,765.1 4,857.1 4,857.1 (14.2) (4,246.5) 2,090.2 2,686.6 - (4,226.5) 2,134.5 2,765.1 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d fi n a n c i a l s t a t e m e n t s Other disclosures 33. Post-employment benefits (a) Superannuation Plan The main provider of superannuation benefits in the Group is the Viva Energy Superannuation Fund (VESF). This fund was established on 1 August 2014, and provides a mixture of defined benefits and accumulation style benefits. Currently, the principal type of benefits provided under the VESF (to eligible members) is a lump sum, pension or lump sum and accumulation benefits. Lump sum and pension benefits are based primarily on years of service and the highest average salary of the employee. The Viva Energy Superannuation Plan (Plan) is a sub-plan in the Plum Division of the MLC Super Fund, which is operated by NULIS Nominee (Australia) Limited (the Trustee). The Plan is a ‘regulated fund’ under the provision of the Superannuation Industry (Supervision) Act 1993. The Plan is treated as a complying defined benefit superannuation fund for taxation purposes. The Group’s Superannuation Plan has a defined benefit section and also a defined contribution section. The defined contribution section receives fixed contributions from Group companies and the Group’s legal or constructive obligation is limited to these contributions. The defined benefit section was closed to new members in 1998. (b) Defined benefit superannuation – significant estimate The liability or asset recognised in the consolidated statement of financial position in respect of defined benefit superannuation section is the present value of the defined benefit obligation at the end of the reporting period less the fair value of Plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using market yields of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms approximating to the terms of the related obligation. Gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised in the period in which they occur, directly in other comprehensive income. They are included in retained earnings in the consolidated statement of changes in equity and recognised as remeasurement of retirement benefit obligations in the consolidated statement of financial position. Changes in the present value of the defined benefit obligation resulting from Plan amendments or curtailments are recognised immediately in the consolidated statement of profit or loss within salaries and wages as past service costs. Contributions to the defined contribution section of the Group’s superannuation fund and other independent defined contribution superannuation funds are recognised as an expense as they become payable. The following sets out details in respect of the defined benefit section only. Amounts recognised in consolidated statement of financial position Present value of defined benefit obligation Fair value of defined benefit plan assets Net defined benefit asset recognised in the consolidated statement of financial position 2019 $M (98.5) 105.4 6.9 2018 $M (111.4) 122.8 11.4 127 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued Other disclosures continued 33. Post-employment benefits continued (b) Defined benefit superannuation – significant estimate continued Changes in the defined benefit obligation and fair value of Plan assets Present value of defined benefit obligation Fair value of defined benefit plan assets 2019 $M (111.4) 2018 $M (123.1) (4.6) (3.3) - (0.4) (6.5) 0.4 - 27.9 - (0.6) - (98.5) (5.0) (3.8) - (1.7) (0.6) 2.5 - 21.1 - (0.8) - 2019 $M 122.8 - 3.7 4.1 - - - - 2018 $M 138.4 - 4.2 (2.2) - - - - (27.9) (21.1) 2.1 0.6 - 2.7 0.8 - (111.4) 105.4 122.8 2019 $M 2018 $M 3.9 (0.5) 1.2 4.6 (0.4) 4.2 (4.1) 0.4 6.5 (0.4) (0.7) 1.7 4.5 (0.5) 1.0 5.0 (0.4) 4.6 2.2 1.7 0.6 (2.5) (0.6) 1.4 Balance at 1 January Current service cost Net interest on the defined benefit (liability)/asset Return on assets less interest income Actuarial gain/(loss) – change in demographic assumptions Actuarial gain/(loss) – change in financial assumptions Actuarial gain/(loss) – experience adjustments Tax on remeasurement of defined benefit obligation Benefits paid Employer contributions Employee contributions Business acquisition Balance at 31 December Amounts recognised in consolidated statement of profit or loss Amounts recognised in profit or loss Service cost Member contributions Plan expenses Current service cost Net interest on the new defined benefit liability/(asset) Components of defined benefit cost recorded in profit or loss Amounts recognised in other comprehensive income Remeasurement of the net defined benefit liability: Return on assets less interest income Actuarial (gain)/loss – change in demographic assumptions Actuarial (gain)/loss – change in financial assumptions Actuarial (gain)/loss – experience adjustments Tax on remeasurement of defined benefit obligation Components of defined benefit cost recorded in other comprehensive income 128 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d The major categories of Plan assets of the fair value of the total Plan assets are, as follows: Australian equities International equities Property Fixed income bonds Other Cash Total Plan assets fi n a n c i a l s t a t e m e n t s 2019 $M 8.4 12.6 10.4 41.1 12.6 20.3 2018 $M 11.6 16.8 10.3 51.2 12.9 20.0 105.4 122.8 The Group has agreed to pay nil contributions (2018: 8.8%) to the Plan for two years and then expects to recommence contributions after that time. The following payments are expected to be contributed to the defined benefit plan in future years: 2019 $M 2018 $M Within the next 12 months Between 2 and 5 years Between 5 and 10 years Beyond 10 years Total expected payments - 2.4 1.6 0.3 4.3 The average duration of the defined benefit plan obligation at the end of the reporting period is 5.7 years (2018: 5 years). Actuarial assumptions The principal assumptions used in determining benefit obligations for the Group’s Plan are shown below: Discount rate Expected rate of salary increases Pension increase rate 2019 % 1.9 2.5 2.0 1.6 4.1 2.1 0.6 8.4 2018 % 3.1 2.5 2.1 Pensioner mortality has been assumed following the mortality under the Australian Life Tables 2010-12. Significant assumptions used to determine the present value of the defined benefit obligation are the discount rate and expected salary increases. The sensitivity analysis shown below has been based on reasonable possible changes of the assumptions occurring at the end of the reporting period: Discount rate: 1.0% increase 1.0% decrease Expected rate of salary increases: 1.0% increase 1.0% decrease Impact on defined benefit obligation 2019 $M 2018 $M (5.7) 6.2 3.0 (3.2) (6.1) 6.9 4.4 (4.1) The sensitivity analyses above have been determined based on a method that extrapolates the impact on the defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period. The sensitivity analyses are based on a change in a significant assumption, keeping all other assumptions constant. The sensitivity analyses may not be representative of an actual change in the defined benefit obligation as it is unlikely that changes in assumptions would occur in isolation of one another. 129 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued 34. Related party disclosures Note 28 Group information provides information about the Group’s structure, including details of the subsidiaries and the parent entities. Entities in the Group engage in a variety of related party transactions as part of the normal course of business. They supply products to related entities and overseas related corporations outside of the Group, and purchase crude and products from and pay service fees to overseas related corporations. • All related party transactions are conducted at arm’s length on a commercial basis. • Outstanding balances at the year-end are unsecured and interest free and settlement occurs in cash. • For the year ended 31 December 2019, the Group has not recorded any impairment of receivables relating to amounts owed by related parties, nor has there been any expenses recognised during the period in respect of bad or doubtful debts written off from related parties (2018: nil). • The assessment of related party receivables is undertaken on an ongoing basis each financial year through examining the financial position of the related party and the market in which the related party operates. The following table provides the total amount of transactions that have been entered into with related parties for the relevant financial year. (a) Transactions with related parties Sales and purchases of goods and services Purchases Sales of goods and services Sales of assets Other transactions Dividends paid to parent* Return of capital* Outstanding balances arising from sales/purchases of goods and services Receivables Payables 2019 $’000 2018 $’000 10,687,684 10,598,718 964,193 604,685 - - - 58,581 13,474 45,108 90,477 82,117 1,407,737 1,290,261 * Represents a 2018 non-cash dividend and capital return settled through the sale of assets of $58.6M to the immediate parent prior to the IPO. (b) Transactions with associates Sales and purchases of goods and services Purchases Sales of goods and services Other transactions Interest income from associates Sales of assets to associates Lease expense paid to associates Dividends from associates Loan to associates Outstanding balances arising from sales/purchases of goods and services Receivables Payables 130 2019 $’000 2018 $’000 43,843 30,961 1,608,118 1,440,714 601 31,480 252 420 146,370 135,389 40,838 30,335 37,517 8,500 35,905 13,199 87,924 12,829 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d (c) Transactions with key management personnel or entities related to them Executive Directors of controlled entities are entitled to receive discounts on their purchases of Company products under the same conditions as are available to all other employees of the Group. The terms and conditions of the transactions with Directors or their Director related entities were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-Director related entities or on an arm’s length basis. Dealings between the Group and various related companies are identified in this note. fi n a n c i a l s t a t e m e n t s Some Directors hold directorships within the Vitol group of companies and any transactions entered into by the Group with the Vitol group of companies are in the ordinary course of business and are at arm’s length. (d) Key management personnel compensation Short-term employee benefits Post-employee benefits Employee option plan Total compensation paid to key management personnel (e) Long Term Incentive Plan (LTI) 2019 $’000 2,972 132 1,263 4,367 2018 $’000 2,766 106 5,608 8,480 The Company has established a Long Term Incentive (LTI) Plan to assist in the motivation, retention and reward of eligible employees. The LTI Plan is designed to reward long-term performance, provide alignment with the interest of shareholders, and encourage long-term value creation. The amount of rights that will vest depends on the Company’s relative total return to shareholders (TSR), free cash flow (FCF) and return on capital employed (ROCE). A Performance Right entitles the participant to acquire one ordinary share for nil consideration at the end of the performance period, subject to the satisfaction of the performance conditions. The Board retains discretion to make a cash payment to participants on vesting of Performance Rights in lieu of an allocation of shares. Performance Rights are granted under the Plan for no consideration and carry no dividend or voting rights. Set out below are summaries of rights granted under the Plan: Balance at the start of the financial year Granted during the year Cancelled during the year Balance at the end of the financial year The following Performance Rights arrangements were in existence at the end of the year: 2019 Number of rights 1,600,000 2018 Number of rights - 2,052,041 1,600,000 (128,000) - 3,524,041 1,600,000 Tranche FY18 Tranche FY19 Tranche Grant date 23 July 2018 23 July 2018 23 July 2018 19 March 2019 19 March 2019 23 May 2019 23 May 2019 22 October 2019 22 October 2019 Number of performance rights outstanding Fair value at grant date ($AUD) 31 December 2019 31 December 2018 $1.39 $2.27 $2.27 $1.73 $2.23 $1.31 $1.97 $1.32 $1.79 736,000 368,000 368,000 699,047 699,047 270,599 270,599 56,375 56,374 800,000 400,000 400,000 - - - - - - 3,524,041 1,600,000 131 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued 34. Related party disclosures continued (e) Long Term Incentive Plan (LTI) continued Fair value of Performance Rights The FY19 LTI Plan Performance Rights with the relative TSR hurdle vesting condition have been valued by an independent expert using a hybrid trinomial option model. This model uses a combination of Monte Carlo simulation and a trinomial lattice to model the performance of the Company’s shares and the individual shares within the entities in the S&P/ASX 100 index. The FY19 LTI Plan Performance Rights with FCF and ROCE hurdles are valued using a hybrid employee stock option model with a single share price target. Specifically, this model adjusts the spot prices as at the valuation date for expected dividends during the vesting period. Model inputs for Performance Rights granted during the year included: Grant date 19-Mar-19 23-May-19 22-Oct-19 Share price at grant date Expected life Volatility Risk-free rate of return Dividend yield Vesting date $2.52 $2.21 $1.96 2.79 years 2.61 years 2.19 years 25% 25% 27.5% 1.45% 1.07% 0.71% 4.40% 4.40% 4.10% 31-Dec-21 31-Dec-21 31-Dec-21 (f) Deferred Share Rights issued During the period the Company issued Share Rights to certain members of senior management. Subject to satisfaction of service conditions, a share right entitles the participant to receive one ordinary share for nil consideration on vesting. Share Rights carry no dividend or voting rights. The table below sets out the number Share Rights granted under the Plan: Balance at the start of the financial year Granted during the year Cancelled during the year Balance at the end of the financial year The following deferred Share Rights arrangements were in existence at the end of the year: Grant date 22 October 2019 Fair value at grant date ($AUD) $1.88 The above deferred Share Rights vest on 31 December 2020. 2019 Number of rights 2018 Number of rights - 213,903 - 213,903 - - - - Number of deferred Share Rights outstanding 31 December 2019 31 December 2018 213,903 - Fair value of Performance Rights The deferred Share Rights were valued by adjusting the share price with the expected dividends for the period from the grant to the vesting date. 132 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d (g) Legacy LTI Section 10.4.3 of the Prospectus described the Legacy LTI introduced by VEH in 2015. Under that plan options over preference shares in VEH (VEH Options)1 were issued to certain participants, including the CEO and CFO. At, or around the time, of the Company’s listing on the ASX in 2018, outstanding VEH Options were acquired by the Company and, as consideration, options over shares in the Company were issued to Legacy LTI participants (Legacy LTI options). For further information, refer to the Company’s Prospectus or the 2018 Annual Report. All offers under the Legacy LTI were made in the years prior to listing and no further offers will be made under this plan. The table below sets out information in relation to the Legacy LTI options. fi n a n c i a l s t a t e m e n t s Balance at the start of the financial year Issued during the year Exercised during the year Balance at the end of the financial year 1. Legacy LTI options issued in connection with the Company’s Initial Public Offer (IPO) to replace VEH Options. The following Legacy LTI options were in existence at the end of the year: Grant date 26 April 2016 26 April 2016 25 October 2017 Total Expiry date 1 January 2020 1 January 2020 1 January 2022 Exercise price ($AUD) 0.82 1.51 1.21 2019 Number of options 16,534,520 2018 Number of options - - 16,534,5201 (7,882,734) - 8,651,786 16,534,520 Number of options outstanding 31 December 2019 31 December 2018 6,152,382 13,073,808 961,310 1,538,094 8,651,786 1,922,618 1,538,094 16,534,520 Weighted average remaining contractual life of options outstanding at end of period 0.4 years 1.2 years Total expenses arising from employee plan transactions recognised during the 2019 year was $2,248,341 (2018: $1,900,000). 35. Auditor’s remuneration The auditor of the Company and the Group is PricewaterhouseCoopers Australia (PwC). The following fees were paid or payable to PwC for services provided to the Company and the Group. Audit or review services: Audit or review of financial reports of the Group# Non-audit services: Other assurance services* Due diligence services and other services Total # 2019 Audit or review services include $220,000 additional work for 2018 audit. * Other assurance services in 2018 includes $2,127,824 of IPO related services. 2019 $ 2018 $ 1,015,000 635,000 70,000 27,381 2,197,824 117,276 1,112,381 2,950,100 133 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Notes to the consolidated financial statements continued 35. Auditor’s remuneration continued The Directors have formed the view, based on advice from the Risk and Audit Committee, that the provision of non-audit services during the 2019 financial year was compatible with, and did not compromise, the general standard of independence for auditors imposed by the Corporations Act 2001. The non-audit services provided did not involve the external auditor reviewing or auditing its own work or acting in a management or decision making capacity for the Company, or otherwise could reasonably be expected to compromise its independence. No officer of the Company was a partner or director of PricewaterhouseCoopers during the financial year. A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 78. 36. Events occurring after the reporting period Divestment of Viva Energy REIT investment and use of proceeds On 21 February 2020, the Group confirmed that it had sold its 35.5% security holding in Viva Energy REIT (VVR) by way of a fully underwritten block trade, and a sale to each of the Charter Hall Group (ASX: CHC) and the Charter Hall Long WALE REIT (ASX: CLW). A 25.5% interest in VVR was sold through the underwritten trade, and a 5% interest was sold to each of CHC and CLW. Following completion of those transactions, the Company will receive $2.66 per VVR security, being a total of $734.3M, and an estimated $112.9M pre-tax profit on the sales. Following receipt of proceeds, the Group intends to return capital to shareholders through a potential buy-back of shares in the Company, subject to all necessary approvals. 134 Viva Energy Group Limited Annual Report 2019 N o t e s t o t h e c o n s o l i d a t e d Directors’ declaration This Directors’ declaration is required by the Corporations Act 2001. The Directors declare that in their opinion: (a) the consolidated financial statements and notes of the Viva Energy Group for the year ended 31 December 2019 set out on pages 80 to 134 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards and the Corporations Regulations 2001; (ii) giving a true and fair view of the Viva Energy Group’s financial position as at 31 December 2019 and of its performance for the year ended on that date; (b) there are reasonable grounds to believe that the Viva Energy Group will be able to pay its debts as and when they become due and payable; and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 32 Deed of Cross Guarantee to the financial statements will be able to meet any obligations or liabilities to which they are, or may become, subject to by virtue of the Deed of Cross Guarantee described in Note 32 Deed of Cross Guarantee to the financial statements. The Basis of preparation on page 85 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the year ended 31 December 2019. The declaration is made in accordance with a resolution of the Directors. fi n a n c i a l s t a t e m e n t s D i r e c t o r s ’ l d e c a r a t i o n Robert Hill Chairman Scott Wyatt CEO and Director 24 February 2020 135 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsIndependent auditor’s reportDisclosuresAdditional informationCorporate directory Independent auditor’s report Independent auditor’s report To the members of Viva Energy Group Limited Auditor’s Independence Declaration Report on the audit of the financial report As lead auditor for the audit of Viva Energy Group Limited for the year ended 31 December 2019, I declare that to the best of my knowledge and belief, there have been: Our opinion (a) In our opinion: no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and The accompanying financial report of Viva Energy Group Limited (the Company) and its controlled no contraventions of any applicable code of professional conduct in relation to the audit. (b) entities (together the Group) is in accordance with the Corporations Act 2001, including: This declaration is in respect of Viva Energy Group Limited and the entities it controlled during the period. giving a true and fair view of the Group's financial position as at 31 December 2019 and of its financial performance for the year then ended complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: ● ● Chris Dodd ● Partner ● PricewaterhouseCoopers ● ● the consolidated statement of profit or loss for the year ended 31 December 2019 the consolidated statement of comprehensive income for the year then ended the consolidated statement of financial position as at 31 December 2019 the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. ● Melbourne 24 February 2020 Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au 111 Liability limited by a scheme approved under Professional Standards Legislation. 136 Viva Energy Group Limited Annual Report 2019 Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the management structure of the Group, its accounting processes and controls and the industry in which it operates. a u d i t o r ’ s r e p o r t I n d e p e n d e n t Materiality Audit scope Key audit matters ● Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. ● Amongst other relevant topics, we communicated the following key audit matters to the Audit and Risk Committee: Inventory valuation − − Environmental and asset retirement provisions − Lease accounting and adoption of new Australian Accounting Standard AASB 16 Leases ● These are further described in the Key audit matters section of our report. ● For the purpose of our audit we used overall Group materiality of $12.4 million, which represents approximately 5% of the Group’s weighted current and previous two year average profit before tax. ● We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. ● We chose Group’s profit before tax because, in our view, it is a benchmark against which the performance of the Group is commonly measured and is a generally accepted benchmark. We used a weighted average over three 112 137 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsNotes to the consolidated financial statementsDirectors’ declarationDisclosuresAdditional informationCorporate directory Independent auditor’s report continued years to respond to longer- term trends in refining margins and reduce volatility in the measure year-on-year. ● We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter How our audit addressed the key audit matter Inventory valuation (Refer to note 5) [$1,195.6m] To assess the valuation of inventory, we performed the following procedures amongst others: The Group accounts for inventory at standard cost and to allocate purchase price variances (PPV) to inventories to the extent that they are incurred in bringing inventories to their present location and condition. In addition, at month-end adjustments are made to the cost of inventories to ensure costs are assigned on a first-in-first-out (FIFO) basis in accordance with Australian Accounting Standards AASB 102: Inventories. Allocation of PPVs and the month-end adjustments are estimates and require the use of judgement. This was a key audit matter due to the judgement involved and the significance of the inventory balance. ● Assessed the design and operating effectiveness of relevant key internal controls over inventory valuation. ● Tested the mathematical accuracy for a sample of the valuation calculations. ● Tested the consistency of key inputs into the valuation models used to calculate the FIFO adjustments, including refining margins and manufacturing costs, by comparing them to evidence obtained from other audit procedures. ● Assessed the reasonableness of management’s assumptions used to allocate PPVs by comparing against inventory turnover. ● Compared the carrying value of inventory to the estimated selling price obtained from an external website to check that inventory was measured at the lower of cost and net realisable value. 113 138 Viva Energy Group Limited Annual Report 2019 Environmental and asset retirement provisions (Refer to note 17) [$134.5m] We performed the following procedures amongst others: As at 31 December 2019, the Group recognised the following provisions: ● Environmental provisions: $40.1m ● Asset retirement provision: $94.4m The provisions relate to the Group’s obligations to rehabilitate sites, either during or at the end of their operations. This includes the Group’s conversion of its former Clyde refinery to a storage terminal. This was a key audit matter as the calculation of the provisions required the Group to make judgements in estimating the cost and timing of future rehabilitation work, discounted to their present value and the provisions are material. a u d i t o r ’ s r e p o r t I n d e p e n d e n t ● Tested the mathematical accuracy for a sample of the provision calculations. ● Obtained and read the litigation register and board minutes to identify any legal notices in relation to environmental obligations and checked that these were appropriately considered in the determination of the provisions. ● Assessed the competence, experience and objectivity of the internal and external experts used to prepare the relevant calculations for the determination of the provisions. ● Corroborated a sample of estimates used in the provision calculations to third party support or estimates made by external experts. ● Evaluated the completeness of the provisions through comparing new sites acquired/opened during the year with the sites for which a provision has been recognised. ● Performed sensitivity analysis over key estimates and assumptions, such as the discount and inflation rates used by making changes that we consider reasonably possible to assumptions, to assess the impact on the asset retirement provision determined. Lease accounting and adoption of new Australian Accounting Standard AASB 16 Leases (AASB 16) (Refer to note 13) [$2,448.3m] On 1 January 2019, the Group adopted AASB 16 and as a result, applied new accounting policies for leasing from that date. As at 31 December 2019, the Group recognised the following: ● Right-of-use (RoU) assets: $2,328.1m We performed the following procedures amongst others: ● Tested the mathematical accuracy of the calculation of the RoU asset and the Lease liability on a sample basis. ● Selected a sample of lease agreements and agreed key inputs to the supporting lease contracts and performed a recalculation of impact to RoU assets and Lease liabilities. ● Assessed the reasonableness of management assumptions in the determination of lease terms, including 114 139 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsNotes to the consolidated financial statementsDirectors’ declarationDisclosuresAdditional informationCorporate directory Independent auditor’s report continued ● Lease liabilities (current and non-current): $2,448.3m extension and termination options, in the context of the requirements of AASB 16. We considered the adoption AASB 16 a key audit matter given: the financial significance of RoU assets and Lease liabilities the judgement required in determining the lease term where the lease contract contains an option to extend or terminate the lease the judgements in assessing the criteria of the Group’s sublease arrangements in determining the appropriate accounting treatment. ● Assessed the appropriateness of the accounting treatment of sublease arrangements. ● Evaluated the adequacy of the lease disclosures in light of the requirements of Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 31 December 2019, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Operating and financial review, Board of Directors and Directors’ Report. We expect the remaining other information to be made available to us after the date of this auditor's report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. 115 140 Viva Energy Group Limited Annual Report 2019 a u d i t o r ’ s r e p o r t I n d e p e n d e n t Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 56 to 72 of the Financial report for the year ended 31 December 2019. In our opinion, the remuneration report of Viva Energy Group Limited for the year ended 31 December 2019 complies with section 300A of the Corporations Act 2001. 116 141 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsNotes to the consolidated financial statementsDirectors’ declarationDisclosuresAdditional informationCorporate directory Independent auditor’s report continued Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Chris Dodd Partner Niamh Hussey Partner Melbourne 24 February 2020 117 142 Viva Energy Group Limited Annual Report 2019 Disclosures On 11 July 2018, the Company was granted certain waivers by ASX from ASX Listing Rule 10.1. The following information is required to be disclosed in the Annual Report by the terms of the waivers. Summary of material terms of certain supply agreements with affiliates of Vitol Holding B.V. Members of the Group and affiliates of Vitol Holding B.V. are parties to a number of contractual arrangements, including the following material contracts: • Vitol Asia Pte Ltd (Vitol Asia) and Viva Energy SG Pte Ltd are parties to a fuel supply agreement dated 18 June 2018 (Vitol Fuel Supply Agreement); • Vitol Aviation BV (Vitol Aviation) and Viva Energy Aviation Pty Ltd (Viva Aviation) are parties to an agreement relating to the supply of aviation fuel dated 23 April 2018 (Vitol Aviation Fuel Supply Agreement); and • Vitol Asia and Viva Energy Australia Pty Ltd are parties to a standard-form ISDA Master Agreement dated 13 August 2014 (Hedge Agreement). Vitol Fuel Supply Agreement Overview Under the Vitol Fuel Supply Agreement, Vitol Asia agrees to supply to Viva Energy, and Viva Energy agrees to purchase (and to ensure that each other member of the VEA Group purchases) from Vitol, the following products: • all of Viva Energy’s requirements for feedstock for its refining operations, including crude oil and condensate (Feedstock), subject to certain exceptions; and • all of the hydrocarbon products (other than Feedstock) required by the VEA Group for its Australian operations, except for products produced by the VEA Group’s refining operations, products purchased under ‘buy-sell’ agreements with local refiners, and any lubricant products purchased from Shell Markets (Middle East) Limited under an Agreement for the Sale and Distribution of Lubricants (Shell Lubricants Agreement), (collectively, Product). Exclusivity arrangements Pursuant to the Vitol Fuel Supply Agreement, Viva Energy agrees that it will not (and will ensure that each other member of the VEA Group does not), except with the prior written consent of Vitol Asia but subject to certain exceptions, acquire product from any third party or acquire any interest in a third-party supplier of product which is inconsistent with Viva Energy’s obligations under the agreement. Further, Viva Energy agrees that if it or any member of the VEA Group wishes to sell any Products which are ultimately exported out of Australia, Vitol Asia shall be the sole and exclusive market interface for all such sales on terms to be mutually agreed. In addition, if any member of the Group at any time seeks to purchase any lubricants of the kind purchased by Viva Energy under the Shell Lubricants Agreement other than pursuant to the terms of that agreement, Vitol Asia shall, to the maximum extent permitted by law, be the exclusive supplier of such lubricants to Viva Energy on terms to be mutually agreed by the parties but based on the terms of the Vitol Fuel Supply Agreement. For the purposes of the above paragraphs, VEA Group means the Company and each of its direct and indirect holding companies and subsidiaries, and subsidiary undertakings and associated companies from time to time of such holding companies. a u d i t o r ’ s r e p o r t I n d e p e n d e n t l D i s c o s u r e s 143 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsNotes to the consolidated financial statementsDirectors’ declarationAdditional informationCorporate directory Disclosures continued Term and termination The initial term of the Vitol Fuel Supply Agreement is 10 years, which Vitol Asia may renew for a further period of five years and which, following such renewal, the parties may renew again for a further period of five years by mutual agreement.1 The Vitol Fuel Supply Agreement may be terminated in the following circumstances: • by the non-defaulting party, if the defaulting party becomes insolvent or fails to pay any amount due under the agreement; • by the non-defaulting party, if Vitol Asia fails to deliver, or Viva Energy fails to take delivery of, for reasons other than ‘Force Majeure’, at least 75% of the aggregate quantities of Product nominated or agreed for delivery and receipt in a month for six or more consecutive months; • by either party giving not less than 12 months’ notice, if Vitol Asia announces that it intends to discontinue its Product trading business serving Australia; and • by Vitol Asia, in the event of Viva Energy’s breach of certain of its obligations under the Vitol Fuel Supply Agreement (including its obligations under the exclusivity arrangements), any event of default or review event under Viva Energy’s financing arrangements, and certain other termination events. Pricing terms Under the Vitol Fuel Supply Agreement, the price for each delivery of Product is, or is determined by reference to, a price mutually agreed by the parties based on prevailing market conditions, the actual price at which the relevant Vitol entity acquired the Product or the average price in the relevant index for the Product plus reasonable financing and handling costs and the cost of freight and logistics, as well as applicable market and quality premiums/discounts. Procurement fee The parties have agreed that no procurement fee will be payable to Vitol Asia during the first five years of the term of the Vitol Fuel Supply Agreement. A procurement fee may be payable following this period, if mutually agreed by the parties and determined on the basis of prevailing market conditions. Title and risk Title to the Product in each shipment passes from Vitol Asia to Viva Energy as the Product passes on to the ship at the load port. All risk in the Product in each shipment passes to Viva Energy on and from that time. Shortfall If, except to the extent that such was caused by Viva Energy, Vitol Asia is unable to source or deliver sufficient Product to meet any shipment that has been nominated by Viva Energy, then to the extent of such shortfall, Viva Energy may, with the prior written consent of Vitol Asia (not to be unreasonably withheld or delayed), enter into a short-term agreement for the supply of such Product shortfall. Guarantee Under a separate but related document, certain members of the Group (including Viva Energy Holdings Pty Ltd and Viva Energy Australia Group Pty Ltd) have guaranteed to Vitol Asia the due and punctual performance and observation by Viva Energy of its obligations under the Vitol Fuel Supply Agreement. The Company is a guarantor in respect of those obligations. Vitol Aviation Fuel Supply Agreement Overview Under the Vitol Aviation Fuel Supply Agreement: • Viva Aviation agrees to provide refuelling services on behalf of Vitol Aviation to Vitol Aviation’s international customers that require such services (Refuelling Services) and, among other things, must establish and maintain or otherwise ensure access and use of facilities at airports necessary to deliver aviation fuel to Vitol Aviation’s customers; and • Vitol Aviation is responsible for managing its international customer accounts in connection with the Refuelling Services. 1. Renewal of the Vitol Fuel Supply Agreement will be subject to shareholder approval, should ASX Listing Rule 10.1 apply at that time. 144 Viva Energy Group Limited Annual Report 2019 Term and termination The Vitol Aviation Fuel Supply Agreement remains in force until terminated in accordance with its terms, including for convenience by either party upon 12 months’ notice, such notice not to be given prior to the fourth anniversary of the commencement of the agreement.2 The Vitol Aviation Fuel Supply Agreement may also be terminated in the following circumstances: • where the other party commits a material breach of the agreement, which is not remedied; • where the other party repudiates the contract; • where an ‘Insolvency Event’ occurs in respect of the other party; or • where the other party suspends or ceases, or threatens to suspend or cease, carrying on all or a substantial part of its business. Exclusivity Vitol Aviation agrees to not utilise any party other than Viva Aviation in the provision of services similar to the Refuelling Services within Australia, unless and except to the extent that Viva Energy is unable to perform the agreed services. Pricing Vitol Aviation and Viva Aviation must use reasonable endeavours to agree on a fuel rate and commission rate in connection with each customer tender. Viva Aviation must invoice Vitol Aviation on a monthly basis in respect of sales to Vitol Aviation’s customers, and Vitol Aviation is entitled to receive the agreed commission and fuel rate in respect of each such sale. Hedge agreement Vitol Asia and Viva Energy Australia Pty Ltd are parties to a standard-form ISDA Master Agreement pursuant to which Viva Energy hedges the price risks associated with the volatility of crude oil pricing. Each member of the Group has provided a guarantee to Vitol Asia in respect of Viva Energy’s performance under this agreement. The agreement will remain on foot until terminated by agreement of the parties or otherwise in accordance with its terms. l D i s c o s u r e s 2. Continuation of the Vitol Aviation Fuel Supply Agreement for any period beyond the 10-year anniversary of the Company’s listing on the ASX will be subject to shareholder approval, should ASX Listing Rule apply at that time. 145 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsNotes to the consolidated financial statementsDirectors’ declarationIndependent auditor’s reportAdditional informationCorporate directory Additional information The information below is current as at 25 February 2020. Voting rights Shareholders in the Company have a right to attend and vote at all general meetings in accordance with the Company’s Constitution, the Corporations Act 2001 (Cth) and the ASX Listing Rules. Substantial holders As at 25 February 2020, Viva Energy has three substantial holders who, together with their associates, hold 5% or more of the voting rights in the Company, as notified to the Company under the Corporations Act. Name Sumitomo Mitsui Trust Holdings Pendal Group Date notice received 6 November 2019 20 March 2019 Number of shares 99,332,762 97,535,578 Viva Energy B.V. (now known as VIP Energy Australia B.V.) 17 July 2018 871,845,097 Percentage of capital 5.11% 5.02% 44.84% Distribution of shareholders and number of shares The following table shows the total number of shares on issue in the Company as at 25 February 2020 and the distribution of Viva Energy shareholders by the size of their shareholding. Total holders 2,058 3,820 2,960 3,041 125 Number of shares held 1,071,242 11,757,806 23,072,161 71,581,254 1,837,052,705 12,004 1,944,535,168 Percentage 0.06% 0.60% 1.19% 3.68% 94.47% 100.00% Size of holdings 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over 146 Viva Energy Group Limited Annual Report 2019 Top 20 shareholders The 20 largest registered shareholders as at 25 February 2020 are shown below. 1 2 3 4 VIP ENERGY AUSTRALIA B. V HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED CITICORP NOMINEES PTY LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED 5 NATIONAL NOMINEES LIMITED 6 7 8 9 BNP PARIBAS NOMS PTY LTD BNP PARIBAS NOMINEES PTY LTD UBS NOMINEES PTY LTD SCOTT WYATT 10 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 11 ARGO INVESTMENTS LIMITED 12 NAVIGATOR AUSTRALIA LTD 13 CITICORP NOMINEES PTY LIMITED 14 BNP PARIBAS NOMS(NZ) LTD 15 WARBONT NOMINEES PTY LTD 16 MR DANIEL PAUL RIDGWAY 17 THYS HEYNS 18 MR DENIS JEAN-MARC URTIZBEREA 19 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA 20 BORAN PTY LTD Number of shares held 871,845,097 336,891,341 180,411,923 166,949,168 93,954,113 48,931,339 25,631,019 15,745,409 10,958,920 8,427,738 8,000,000 6,679,274 6,215,857 4,458,004 3,863,781 3,502,916 2,922,380 2,811,665 2,145,242 2,000,000 Percentage 44.84% 17.33% 9.28% 8.59% 4.83% 2.52% 1.32% 0.81% 0.56% 0.43% 0.41% 0.34% 0.32% 0.23% 0.20% 0.18% 0.15% 0.14% 0.11% 0.10% Total 1,802,345,186 Balance of register 142,189,982 Grand total 1,944,535,168 92.69% 7.31% 100.00% A d d i t i o n a l i n f o r m a t i o n 147 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsNotes to the consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosuresCorporate directory Additional information continued Holders with less than a marketable parcel As at 25 February 2020, there were 124 shareholders holding less than a marketable parcel of shares (A$500) based on the closing market price of $1.86. Voluntary escrow As at 25 February 2020, there were 6,344,634 ordinary shares subject to voluntary escrow until 30 June 2020. Shares purchased on-market We purchase shares on-market for the purposes of our Employee Share Plan and for the purposes of our incentive plans. During the period (from 1 January 2019 to 25 February 2020) 15,205,047 shares were purchased on-market at an average price of $2.24 per share. Unquoted equity securities As at 25 February 2020, the Company has on issue: • 1,538,095 Options exercisable at $1.21 expiring 1 January 2022 held by one employee; • 213,903 Deferred Share Rights granted under the Company’s STIP, held by one employee; and • 3,524,041 Performance Rights granted under the Company’s LTIP, held by eight employees. 148 Viva Energy Group Limited Annual Report 2019 Corporate directory Head office Level 16, 720 Bourke Street Docklands, Victoria, Australia 3008 Telephone: 03 8823 4444 Share registry Link Market Services Limited Tower 4, 727 Collins Street Melbourne, Victoria, Australia 3008 Telephone: 1300 554 474 Investor relations investors@vivaenergy.com.au Website To view the 2019 Annual Report, Corporate Governance Statement, shareholder and Company information, news announcements, financial reports, historical information, and background information on Viva Energy, please visit our website at vivaenergy.com.au. A d d i t i o n a l i n f o r m a t i o n C o r p o r a t e d i r e c t o r y 149 Viva Energy Group Limited Annual Report 2019Consolidated financial statementsNotes to the consolidated financial statementsDirectors’ declarationIndependent auditor’s reportDisclosures