More annual reports from AJ Lucas Group Limited:
2023 Report2017 ANNUAL REPORT
About us
AJ Lucas is a leading provider of
pipelines, specialist infrastructure,
construction and drilling services to
the energy, water and wastewater,
resources and public infrastructure
sectors. We are one of the largest
supplier of drilling and gas management
services to Australia’s coal industry, and
a proven developer of unconventional
hydrocarbon assets. This year we
made significant progress on our
UK investments, with drilling having
commenced and gas expected to flow
by early 2018. Read more >
CONTENTS
01 Our 3 Areas
02 Letter from the Chairman
04 Oil & Gas
08 Engineering & Construction
10 Drilling
12 Health, Safety, Environment & Quality
14 Financial Reports
Front cover image: The Preston New Road Site
79 Corporate Directory
2 AJ LUCAS GROUP LIMITED
2016 ANNUAL REPORT
Our 3 Areas
O P E R AT I N G B U S I N E S S U N I T S
I N V E S T M E N T
Drilling Services
(LDS)
Engineering &
Construction (LEC)
Oil & Gas
The major drilling
provider to the coal
sector in Australia for
mine degassing and
exploration drilling
in Australia
Pipeline contractor to
leading infrastructure
customers in the gas,
water, waste water and
coal sectors
Exploration for and
commercialisation of
unconventional UK
hydrocarbons, based on
historical exploration and
drilling experience
Delivering intelligent and practical solutions to support
Australian mines and infrastructure providers
One of the largest shale gas
acreage positions in the UK
A focused provider of
surface to inseam (SIS)
coal mine gas extraction
and well field services
Provides complementary
construction services
for the public utilities
customers
Focused on unlocking
value in the untapped
unconventional oil and
gas resources of the UK
01
Letter from the
Chairman
“Pickup in demand for the Group’s
services driven by the recovering coal
sector, together with initiatives aimed
at improving performance, maximising
cash flows and reducing overhead
costs where appropriate will lead to
improved performance in the year ahead.
Management will continue to focus on
servicing our existing loyal customer
base, winning profitable new work and
maintaining a small cost foot-print.”
I am pleased to present to you the 2017 Annual report for AJ Lucas
Group Limited. The year was a difficult one for the Australian operating
business, which delivered a disappointing result. Performance in
both divisions was severely impacted by a combination of unusual
wet weather events, subdued market conditions and the expansion
into lower margin business. A more recent pickup in demand for the
Group’s services driven by the recovering coal sector, together with
initiatives aimed at improving performance, maximising cash-flows
and reducing overhead costs, where appropriate, will lead to improved
performance in the year ahead.
On a more positive note significant progress has been made in
relation to our UK investments, bringing us closer to unlocking
the substantial value of our shale gas investments. In August 2017
Cuadrilla commenced drilling the first of two planned exploration
wells. The first well is expected to be drilled vertically through
the shale to approximately 3,500 meters and core samples taken,
after which a horizontal well of approximately 1,000 will be drilled.
A second horizontal; exploration well will then be drilled some
1,000m through shale and both wells will then be hydraulically
fractured to test and evaluate the flow of gas.
During the year the Board completed the final steps of the debt
restructuring originally announced in June 2016, with the draw-
down of Tranche 2 of the senior loan facility (“OCP Loan”), and
a capital raising, announced in May 2017, which raised a total of
$53.2 million and led to the repayment of $37.2 million of debt.
Australian operations
Both the Drilling Division (“LDS”) and the Engineering and
Construction Division (“LEC”) performed poorly during the year.
LDS revenue was down 8% to $73.4 million, driven by a difficult
coal market and the conclusion of a long-term contract in the final
quarter of the 2016 financial year. LDS sought and secured work in
adjacent markets in order to maximise utilisation of the rig fleet.
Penetration of these markets necessitated low margin entry prices
and failed to contribute satisfactorily to underlying EBITDA. This,
coupled with wet weather in the Bowen Basin and a competitive
market, resulted in disappointing financial performance. Increased
demand for the Group’s drilling services, driven by a recovering
coal sector, has led to a significant improvement in performance in
the fourth quarter, with the improved run rate continuing into the
new financial year.
I flagged in the 2016 Annual Report that the 2017 financial year
would be a difficult one for the LEC Division. This too was further
exacerbated by adverse weather in northern Victoria causing
significant delays to the completion of the VNIE pipeline contract
with our JV partners Spie-Capag. September 2016 was reported
as the second wettest in Victoria on record by the Bureau of
Meteorology, with the wet conditions continuing into the 2017
calendar year. While the commencement of two new contracts,
using the business’ directional drilling and pipeline expertise in
Australia and New Zealand, significantly improved revenue in the
second half, it was not sufficient to offset margin deterioration.
Management will continue to focus on servicing our existing loyal
customer base, winning profitable new work and maintaining
a small cost foot print. The Board has implemented initiatives,
and is evaluating further initiatives to improve performance and
maximise operating cash flow.
02
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORT
“The focus this year has been on
progressing activity at the Cuadrilla’s
Preston New Road exploration site
(“PNR”) in Lancashire UK. Construction
and procurement activities …. were
completed in May 2017.”
UK Shale Gas Investment
The focus this year has been on progressing activity at the
Cuadrilla’s Preston New Road exploration site (“PNR”) in
Lancashire UK. In October 2016 planning consent was given by
the UK Government to drill and hydraulically stimulate up to
four horizontal wells to test the flow of gas. Construction and
procurement activities commenced thereafter and were completed
at the end of May 2017 when the well conductor setting and
subsequently well drilling activities were commenced.
Cuadrilla plans to initially drill two horizontal exploration wells.
The first well is expected to be drilled vertically through the shale
to approximately 3,500 meters and core samples taken, after
which a horizontal well of approximately 1,000 will be drilled.
A second horizontal exploration well will then be drilled some
1,000m through the shale and both wells will then be hydraulically
fractured to test and evaluate the flow of gas. Drilling of both wells
is expected to be completed by year end and hydraulic fracturing
should commence in Q1 2018.
Two applications against the UK Government’s planning permission
in respect of PNR were heard by the Court of Appeal at the end of
August 2017, having both been earlier dismissed by the UK High
Court. The company remains confident that there is no material
merit in these cases and that the Court of Appeal will uphold the
decision to grant planning consent by the Secretary of State.
While the immediate focus is on executing a safe and successful
two well drilling and testing program, Cuadrilla is concurrently
evaluating the options available for further exploration and
development activities after the current drilling program is
completed. This includes consideration of further appraisal
work on the Bowland licences and the best next steps to fully
demonstrate the commerciality and ultimately value of the licence.
Work programs on Cuadrilla’s other licence holdings are expected
to be limited primarily to desktop studies and acquisition and
reprocessing of existing seismic data in the immediate future.
Centica Plc, under the farm-in arrangement with Cuadrilla and
AJ Lucas, is committed to fund a further £15.8 million as at 31
August 2017, of exploration costs, which will be fully utilised in the
drilling and hydraulic stimulation of the 2 well exploration program
ongoing at PNR. Subject to the appraisal of the PNR exploration
wells and certain milestones being met, Centrica is then required
to fund a further £46.7 million of the joint ventures appraisal
and development costs in the Bowland Licence to maintain its
25% interest.
03
LETTER FROM THE CHAIRMAN (continued)
Funding strategy
People and Safety
During the year a number of capital management initiatives were
implemented which were originally foreshadowed as part of the
debt restructuring entered into in June 2016.
In November 2016 the company drew down the second tranche of
US$20 million of the Senior Loan Note Facility. This was triggered
by the planning consent granted by the UK Government.
The capital raise launched in May 2017, comprised a $5 million
placement and a 1-for-2 entitlements offer. This was completed
in June 2017 raising $53.2 million, of which $37.2 million was
applied to the partial repayment of the related party loan facility
in satisfaction of a condition of the financing that required a
minimum of US$25 million to be repaid through an entitlements
offer. The repayment has reduced interest expense by more than
$7 million per annum.
Support from the Company’s existing shareholders, Kerogen
Investments No. 1 (UK) Limited and OCP Asia (Singapore) Pte.
Limited (and associates entities), together with the introduction of
new domestic and international institutions who participated in the
placement was paramount to completing the equity raise.
It is pleasing to note that your company’s outstanding safety
performance has continued during the year under review. There
has not been a Lost Time Injury since December 2013. While the
Total Recordable Injury Frequency Rate (TRIFR) of 6.7 was a slight
increase on the prior year, it continued to be at the leading edge of
safety performance in the industry we operate in.
Safety is at the forefront off everything AJ Lucas does. The
recognition and mitigation of risk is a primary priority of
management with health and safety KPI’s embedded in all
strategic and project plans. Senior management continually review
performance, implement corrective actions where deficiencies are
identified, and regularly report on performance to the Board.
This commitment and the outstanding performance in keeping our
staff safe is valued highly by our existing and potential customers,
and holds us in good stead to continue winning work with top
tier customers.
The board continues to monitor the remainder of the
phase 1 program expenditures to ensure that that they are
adequately funded.
Phil Arnall
Chairman
04
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORT Oil & Gas
AJ Lucas continues to focus on progressing its investment in the
Bowland shale gas asset. Granting of planning consent to drill,
hydraulically stimulate and test the flow of gas from up to four
wells at the Preston New Road (PNR) site was a defining step
towards commercialisation of the Bowland licence.
the operator on a further 8 blocks of licences in Yorkshire, which
target the same Bowland Shale as the Lancashire Bowland licence.
These licences total some 2,391 km2, making it one of the three
significant operators by licence area.
Operations
Drilling of the first of two planned exploration wells commenced
in August 2017. Cuadrilla, as the operator of the licence, expects
the first of these wells to be approximately 3,500 meters deep,
with extensive core samples to be taken throughout to fully define
the local site geology. It is expected that the horizontal wells of
approximately 1,000 meters each will be hydraulically stimulated
in the first quarter of calendar year 2018 and the flow of gas will be
tested. The Bowland licence covers just over 1000km2, with 100km2
of seismic having already been shot and processed, and 3 vertical
wells having previously been drilled into the shale.
As a responsible corporate entity Cuadrilla remains committed to
maintaining high standards of safety, environmental compliance and
transparency in its activities. As a UK industry first, it has launched
an ePortal which allows the public to track various elements of its
environmental monitoring activities including data collected on
traffic, noise, air quality, surface and ground water, and seismicity. It
has not experienced any lost time or restricted work incidents since
commencement of the PNR two exploration well program, and has
not had any material health, safety or environmental breaches.
Cuadrilla is committed to supporting the local community in
which it operates. Since relocating its head office to Lancashire,
it has invested over GBP 3 million and created numerous full and
part-time jobs in the local Community. As part of its undertakings
Cuadrilla has also paid its first GBP100,000 payment to an
independent community benefit fund. Local residents will be given
a say in which types of local community issues or projects the
community benefit fund will be used for.
In August 2017, two applications against the UK Government’s
planning permission in respect of PNR have been heard by the
Court of Appeal, following earlier having both been dismissed by
the UK High Court. The company remains confident that there is
no merit in these cases and that the Court of Appeals will uphold
decision to grant planning consent by the Secretary of State.
A legal challenge to the Governments decision to allow a
public inquiry in relation to transport issues only at a separate
exploration site, Roseacre Wood (RW) has been dismissed by the
High Court, and the deadline for an appeal to the Court of Appeals
has passed. The public Inquiry has been confirmed to go ahead on
10 April 2018, and Cuadrilla is preparing submission material. If
appropriate transport to and from the RW site can be enunciated
to the satisfaction of the Planning Inspector, Cuadrilla expects to
receive consent to drill, hydraulically stimulate and test the flow of
gas from up to 4 exploration wells at that site.
Other UK investments
Vital new source of Natural Gas
The planned horizontal exploration wells will be the first of their type
to be drilled into UK shale rock, and are an important milestone in
unlocking a vital new source of natural gas for the UK. It is estimated
that over a third of the UK’s energy came from natural gas in 20151,
with approximately 80% of households in the UK using gas for
their heating needs2. The consumption of natural gas in the UK has
exceeded domestic production since 2004 according to the UK
Department of Climate Change. The UK Oil and Gas Authority and
the UK government predict the production- consumption shortfall to
widen further in the future, with three quarters of UK gas predicted
to be imported by 2030 in the absence of an increase in domestic
production3. The Bowland shale is well placed to fill some of this
gap. There is extensive pipeline infrastructure in close proximity
to the licence area and just 1.3km away from the PNR site, which
has potential to facilitate cost efficient distribution of gas. While
independent external research on the Bowland Shale, by bodies such
as the British Geological Society, suggests presence of a significant
amount of natural gas, it notes that further work was required to
determine whether that gas could be extracted commercially.
Widening UK Production-Consumption shortfall
)
M
C
B
(
l
l
a
f
t
r
o
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s
n
o
i
t
p
m
u
s
n
o
C
-
n
o
i
t
c
u
d
o
r
P
20
10
0
-10
-20
-30
-40
-50
-60
Current shortfall
c.30 BCM
Forecast 2035
shortfall
c.52 BCM
1998 2001 2004 2007 2010 2013 2016 2019
2022
2025
2028
2031
2034
Source: UK O&GA and DECC projections, March 2017
Subsequent to Cuadrilla embarking on this development, there
has been a marked increase in activity in the UK onshore gas
industry, with a number of major industry players gearing up for
a significant increase in drilling activity in the near future. The
industry is also supported by the UK Government which stated
in its 2017 general election manifesto that it was committed to
developing the Shale gas industry in the UK.
1 Department for Business, Energy & Industrial Strategy, “Guidance on
fracking: developing shale has in the UK”, updated 13 January 2017
2 Department of Energy and Climate Change
In addition to the Bowland licences, which encompasses the PNR
and RW exploration sites, Cuadrilla also holds interests and is
3 Department for Business, Energy & Industrial Strategy, “Guidance on
fracking: developing shale has in the UK”, updated 13 January 2017
05
Oil & Gas
Along with our partners, we hold
a pre-eminent position in the
developing UK shale gas market.
Business highlights
Bowland license (AJL’s effective beneficial interest
of 48%) is one of the most advance shale gas asset
in Europe
— Over 1000m thickness of shale and
associated lithologies
— Very close to pipeline infrastructure
— Partnership with Centrica Plc (owns British Gas
a residential and business energy and service
provider in UK)
Cuadrilla is the operator of licences in the Bowland Shale
totalling 2,391 km2 making it one of three significant
operations by license area.
Globally, shale gas is expected to grow by 5.6% p.a. with
the share of shale gas in total production increasing
from just over 10% in 2014 to nearly a quarter by 2035.1
UK shale gas industry is important to restoring the UK’s
energy security
— UK domestic supplies are declining2
— Norway, a major supplier to the UK, also has
declining supplies2
— UK is increasingly a net importer of gas3
1 BP Energy Outlook 2016 edition;
2 BP Statistical Review of World Energy, 2015;
3 UKCS Oil and Gas Production Projections, DECC, 2015
06 AJ LUCAS GROUP LIMITED
06
2017 ANNUAL REPORT
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORT
Drilling at Preston New Road
Financials and other key data
Year ended 30 June
2014A
2015A
2016A
2017A
Cuadrilla
AJL interest
Carrying value ($m)
Direct exploration asset
Carrying value ($m)
45.0% 45.0% 45.1% 47.0%
104.7
104.0
106.2
87.6
10.8
16.5
18.3
20.9
Total carrying
value ($m)
98.3
120.5
124.5
125.6
Investment locations
PEDL 244
Cuadrilla 75%
PEDL 244
AJ Lucas 25%
Cuadrilla 75%
AJ Lucas 25%
EXL 189
Cuadrilla 75%
EXL 189
AJ Lucas 25%
Cuadrilla 75%
AJ Lucas 25%
07
07
Engineering &
Construction
Business highlights
More than 12 months Lost time injury (LTI) and
medical treatment incident (MTI) free and in excess of
1,500,000 man hours incident free in our Joint Venture
with Spiecapag.
Continuing to partner with Tier 1 Contractors in addition
to Spiecapag to provide niche skills as part of wider
industry engineering and construction solutions
Successful completion of the Victorian Northern
Interconnect Expansion gas pipeline project.
Completion of a number of smaller scale infrastructure
projects in electrical, gas and fuel distribution networks.
Re-entry into South East Asia and New Zealand
Horizontal Directional Drilling Market.
Recognition from the International Pipeline and Offshore
Contractors Association (IPLOCA) Health and Safety
Award sponsored by Chevron.
Lucas Engineering and Construction
continues to be an industry leader
in the delivery of projects for major
pipelines and facilities for gas,
water and petroleum products,
horizontal directional drilling (HDD)
and civil construction for the water
and power industries.
08 AJ LUCAS GROUP LIMITED
2017 ANNUAL REPORT
Safety focus – from beginning to end
Pipelines
The safety of our people is management’s primary concern and
focus. With a continuing goal of zero incidents with respect to
personnel and the environment our results during 2016-2017
indicates that our approach of talking safety, thinking safety,
acting safely and continuously removing risks from the business is
working effectively.
We have been free of recordable injuries across Engineering and
Construction for more than 12 months and have exceeded more
than 1,500,000-man hours medical treatment incident (MTI)
and lost time injury (LTI) free in our joint venture with partner
Spiecapag. This achievement has been recognised with the
awarding of runner-up for the 2016 IPLOCA Health and Safety
Award sponsored by Chevron for commitment in this field.
Partnering Approach
Our Engineering and Construction business continues to approach
opportunities in the market from the perspective of a partner
looking to exceed our customers’ expectations through the use
of innovative and flexible contracting practices. The traditional
approach to contracting, with a narrow focus on project
“mechanics” and typically a legalistic and win – lose relationship,
is value destroying and in our view obsolete. Our Engineering
and Construction business provides a flexible approach to the
customer’s project requirements and works in collaboration at
the front end of the process. It allows for upfront planning and
optimisation of the project details, and we believe it facilitates
and optimises the project’s value for all parties. In our experience
it provides a better result than the traditional rigid form of
contracting. Our successful execution and delivery of the Victorian
Northern Interconnect expansion gas pipeline project are
testaments to the success of this approach.
Industry Leader
As a niche-focused specialist engineering and infrastructure
construction business, along with our safety, our emphasis
continues to be quality. Quality in service execution that is integral
in all interactions with staff and customers. Quality that causes
us to be the first choice for clients and employees. Reflecting our
leading position in the market we participate in the Australian
Gas and Pipeline Association and Safer Together. We contribute to
industry research through several cooperative research centres.
Participation in these organisations allows us to voice our views
with respect to the interests of resource developers, pipeline
owners, operators and constructors while looking to assist in the
commercialisation of innovative advances in the industry body
of knowledge.
The company continues to be renowned for its pipeline expertise
and construction of related infrastructure works. The company has
successfully completed the Victorian Northern Interconnect Gas
expansion project involving the trenching and laying of 165kms of
gas pipeline to expand the existing Victorian and New South Wales
transmission gas pipelines in difficult terrain and under difficult
weather conditions of heavy rain and flooding in Northern Victoria
in the first half of the year which continued early in the second half.
The project was complete in July 2017.
The company is currently completing a 1 metre diameter gas
suction pipeline for South 32 to support their mine seam gas power
plant. The project is due for completion in the first half of this year.
Horizontal Directional Drilling (HDD)
Lucas remains a leader in horizontal directional drilling requiring
the installation of pipeline and conduits under urban environment
or natural obstacles such as rivers and harbours. Lucas was
amongst the first to recognise the application of this technology
to gas drainage from coal mines (particularly underground long
wall mining) and then to commercial gas capture and production.
Lucas has successfully completed many large scale HDD projects
throughout Australia, New Zealand and South East Asia including
Hong Kong, China and Sri Lanka. The Company remains a
significant competitor in serving the energy, water resources and
public utility sectors for complex HDD projects.
The company is currently completing a significant HDD project
in New Zealand and is potentially reviewing a HDD opportunity
in Indonesia.
Civil Works
The Company’s construction capability continues to be in demand
for small scale civil works. The company’s highly accredited
management systems, quality assurance procedures and strong
OH&S record has been instrumental in the award and successful
completion of such contracts. Works carried out during the year
include the completion of several electricity substations and water
pumping stations throughout New South Wales. During the year we
acted as a participant in the Operations and Maintenance phase of
the Southern Seawater Desalination Plant in Western Australia.
09
Drilling
Business highlights
Best in class safety performance
•
Zero lost time injuries (LTIs) again in 2017
•
Successfully aligned on safety, people, plant
and innovative drilling solutions with Tier 1
coal customers.
Solid performance in traditional surface drilling
techniques for degasification of coal mines.
Challenging projects in CSG and water not realising
margin expectations.
Contractor of choice for innovative drilling solutions.
Our Drilling business is well placed
to retain and improve its strong
market share as the coal industry
slowly recovers. Our deep customer
interface, strong safety culture
and proven project execution
capability provides our customers
with a service offering unmatched
by others.
10
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORT Lucas Drilling Services
Lucas Drilling Services (“LDS”) offering covers the entire mine
drilling requirement from engineering services for well design,
exploration, service well and production drilling, through to well
completion and field monitoring. Its full suite of self-performing,
turnkey capabilities remains unmatched by any other specialist
drilling company in Australia.
LDS continued to provide niche services to the market, utilising
experienced project teams, equipment and innovative solutions to
successfully deliver highly technical projects.
With coal prices picking up in the latter half of calendar year 2016,
exploration expenditure by coal producers increased compared
to recent years. Production volumes from our customers also
increased, translating to higher demand for LDS’s gas drainage
capabilities and resulting in a strong start to FY18.
LDS once again achieved its safety targets for the year proving to
its customers that the effectiveness of management and systems
coupled with experience proves a winning formula. LDS believes
its customers want certainty, stability, a proven project delivery
capability and a safety culture that translates to zero incidents. A
name that is trusted by the market.
LDS re-entered the coal seam gas market during the year. Initial
new business executed was characterised by lower margins,
reflecting in part the highly competitive nature of the CSG sector at
present. LDS was however able to demonstrate its strong technical
capabilities in the sector, which resulted in a customer providing
scope extensions under a more commercially viable arrangement.
LDS management is continually working on ensuring key elements
that contribute to the sustainability of our business is equally
balanced through:
• Focus on creating customer value
• Considered effort around safe systems of work
• Tight cost management and control;
• Effective project delivery systems
• Appropriate resource management and
• Focussed strategic growth initiatives.
LDS management are highly experienced in business and technical
operations across its chosen sectors allowing for the creation
of value for its customers. LDS management remains focussed
on enhancing its capabilities and proving core competencies
by solving sub-surface resource challenges and providing
engineered cost-effective drilling solutions via vertical, angled or
horizontal boreholes.
Focusing on what has been a proven recipe for LDS over many
years, has allowed us to maintain market share in our core markets
in recent times. As such, LDS has established itself as a preferred
drilling services provider to five top tier major coal producers.
Our objective is to co-create value with our existing customers,
understand their objectives, their constraints, become more
integrated whether it be project management, well planning, site
works, drilling or infrastructure.
Lucas Drilling Services has enjoyed long term customer
relationships casting back 20+ years and a AJ Lucas Group project
CV unmatched by its competitors. We are proud to support the
following top tier customers:
• Anglo
• Arrow
•
BHP-Mitsubishi
• Rio Tinto
• South 32
• Whitehaven
11
Health, safety,
environment & quality
Lucas’ vision is “injury free every day”. To achieve this Lucas
recognises it must maintain a proactive approach to health
and safety, provide visible leadership at all levels, have in place
effective management systems that reflect the operating
environment and community standards relevant to Lucas’ service
delivery as well as ensure the right culture is embedded in the
organisation. Lucas has many years’ experience in the energy
sector and draws on that experience in the development of
systems that can deliver its HSE objectives. Lucas’ management
systems have recently been recertified by Bureau VERITAS
to comply with the requirements of ISO9001, ISO14001,
OHSAS18001 and AS/NZS4801. This 3rd party accreditation
provides reinforcement that Lucas’ systems are world class. Lucas
is currently undertaking safety leadership training for all field
supervisors to better equip them with the skills and knowledge to
effectively manage site based risk. This ongoing development of
our field leaders will see us continually improving.
Safety performance industry averages in terms of recordable
injury rates, currently 6.7, up from 5.8 in 2015-16. LTIR is currently
at zero which is an impressive effort.
Lucas project management plans define systems and processes to
manage all aspects of the work. Subordinate documents including
Safety, Emergency and Environmental Management Plans draw on
relevant elements of the Lucas system, capture critical information
arising from project risk assessments and establish a platform
to maintain risk at acceptable levels, comply with community
standards and conform with client site management systems.
These plans identify roles and responsibilities of Lucas personnel,
hazards/aspects and control measures unique to the work, as well
as define how works shall be conducted.
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
2.7
2.6
2.3
2.1
1.0
0.4
0.0
0.0
2009-10 2010-11
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
NSW Coal Surface
QLD Coal Surface
Pipelines (industry)
AJ Lucas
Fig 1 – Lost time injury rate compared to relative industry sectors
(mining and construction). Includes latest published figures from
APIA and QLD and NSW Mining.
25
20
15
10
5
0
10.10
8.60
7.60
6.80
15.30
13.80
14.80
5.89
4.11
6.81
3.90
2.49
6.59
5.80
4.98
6.70
6.50
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
NSW Coal Surface
QLD Coal Surface
Pipelines (Australian industry)
AJ Lucas
Fig 2 – Lucas total recordable injury rate compared to Surface Coal
Mining in QLD.
12
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORT Established health and safety KPIs are embedded in all project
plans, are monitored and performance is evaluated on a monthly
basis. Annual analysis of incident and audit data combined
with output from management review of system performance
and effectiveness provide the foundation for development of
improvement initiative. The Lucas Executive Leadership Team,
(ELT) provides a leadership role for the achievement of Lucas
HSEQ objectives. The committee membership includes the most
senior people from operations and support functions across the
Lucas business. Evidence of engagement and commitment by line
management is tracked and performance reviewed at the monthly
HSEQ Leadership Meetings. Consultative processes are integrated
into all levels of the organization, each with communications lines
to the HSEQ Leadership Committee.
A risk management framework aligned with ISO31000 supports
attainment of Lucas business objectives. Comprehensive risk
management processes underpin Lucas’ activity in all aspects of
its operations and governance. Our people are formally trained in
hazard identification and risk management at levels appropriate
to their roles and responsibilities. Their skills are maintained
through daily application of those processes. Well established
consultative and communication processes ensure risk is well
understood and communicated across the business. Lucas
constantly monitors integration of its risk management framework
across all of its operations. A targeted observation program
provides valuable feedback on integration of and compliance
with measures designed to ensure identified fatal hazards are
properly managed. There is a significant amount of focus applied
to communication and management of these fatal hazards within
key processes such as induction, project planning, execution and
performance monitoring. Examples of processes which support
the application of Lucas’ risk based approach to service delivery
include: detailed project planning, hazard and incident reporting
and continual improvement, personal risk management programs
such as SLAM, Safe Work Method Statements for routine work and
tasks with which significant risk is associated. Plant management,
hazardous chemicals, permitting systems, change management,
site inspections/auditing, training, procurement including
supplier assessments.
Risk Management
AJ Lucas is committed to providing a safe and
productive workplace and delivering solutions
that exceed its customers’ expectations. AJ Lucas
recognises that this may only be achieved through
effective and responsible management of risk.
AJ Lucas’ risk objectives are to promote a risk aware
culture that encourages all employees and suppliers to
take responsibility for risk and to implement effective
systems to assess and reduce strategic, operational,
governance and financial risks to acceptable levels.
AJ Lucas’ risk management system is designed to
achieve these objectives.
AJ Lucas is committed to ensuring necessary
resources are available to implement and maintain the
risk management system.
The HSEQ Committee reviews system performance
on an annual basis and more frequently when
circumstances change. The AJ Lucas Risk Management
procedure clearly identifies roles, responsibilities/
accountabilities and how risk management is
integrated into AJ Lucas processes. It establishes
a framework which encompasses a continuous
improvement process for identifying, contextualising,
analysing, communicating, resourcing and monitoring
and reviewing risk.
A project risk assessment is completed and a Project
Risk Register is maintained. The Project Risk Register
is a key reference point for development, review and
maintenance of the Workplace Health and Safety
(WHS) and environmental management plans.
AJ Lucas hazard identification and WHS Risk
Management procedures establishes processes
designed to facilitate the application of risk
management tools at operational levels of the
business, development of safe methods of work as
well as identification, capture and management of
improvements and further risk reduction measures.
All AJ Lucas personnel are trained in the aspects
of these procedures relevant to their role and
responsibilities including, but not limited to,
application of tools such as risk assessments, risk
registers and hazard reports.
13
FINANCIAL REPORT
Financial Report
CONTENTS
15 Directors’ Report
31 Auditor’s Independence Declaration
32 Consolidated Statement of Comprehensive Income
33 Consolidated Statement of Financial Position
34 Consolidated Statement of Changes in Equity
35 Consolidated Statement of Cash Flows
36 Notes to the Consolidated Financial Statements
70 Directors’ Declaration
71 Independent Auditor’s Report
77 Australian Securities Exchange Additional Information
79 Corporate Directory
14
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORT The Board of Directors of AJ Lucas Group Limited (AJ Lucas or the Company) present
their report together with the consolidated financial report of AJ Lucas Group
Limited, being the Company, its controlled entities, interests in associates and jointly
controlled entities (the Group), for the financial year ended 30 June 2017 and the
auditor’s report thereon.
Directors
and, was appointed Chairman of the Audit and Risk Committee on
24 July 2015.
The directors of the Company at any time during the financial
year and up to the date of this report and their terms of office are
as follows.
Julian Ball
BA; FCA
NAME
APPOINTMENTS
Phillip Arnall
Independent Non-Executive Chairman since
3 June 2014
Interim CEO and Executive Chairman
28 January 2014 to 3 June 2014
Independent Non-Executive Chairman
29 November 2013 to 28 January 2014
Independent Non-Executive Director
10 August 2010 to 29 November 2013
Mr Ball is a Managing Director of Kerogen Capital (Asia) Limited,
based in Hong Kong, with more than 25 years of experience in
investment banking and private equity.
Mr Ball trained as a chartered accountant at Ernst & Young in
London before relocating to Hong Kong. He worked for many years
as an investment banker at JP Morgan primarily covering the
energy and natural resources sectors prior to working in private
equity. Mr Ball is a member of the Audit and Risk and Human
Resources and Nominations Committees.
John O’Neill
Independent Non-Executive Director since
23 June 2015
Ian Meares
B Eng (Hons); MEngSc; MBA; MAICD
Julian Ball
Non-Executive Director since 2 August 2013
Ian Meares
Independent Non-Executive Director since
3 June 2014
Andrew Purcell Independent Non-Executive Director since
3 June 2014
Details of the current members of the Board, including their
experience, qualifications and special responsibilities are set
out below.
Phillip Arnall
B Com
Mr Arnall had a distinguished thirty year career in the mining
and steel industries including senior executive responsibility at
Australian National Industries Ltd and Tubemakers of Australia
Limited. Mr Arnall was a Non-Executive director of Bradken Limited
until November 2015 when he was appointed Chairman. He was
previously a director and Chairman of Ludowici Limited 2006-2012
and Chairman of Capral Limited from 2010 to 2011. Mr Arnall is a
member of both the Audit and Risk and the Human Resources and
Nominations Committees.
John O’Neill
B Bus; FCA; FAICD
Mr O’Neill has over 25 years of experience in the upstream oil and
gas industry, and was formally Executive Chairman of Pangaea
Resources, a private unconventional oil and gas company.
In addition, he was previously Chief Executive Officer of the
Australian Petroleum Fund, which held a portfolio of exploration
and producing oil and gas assets and a pipeline.
Mr O’Neill also has extensive experience in accounting and finance,
having commenced his career as a chartered accountant with
Coopers & Lybrand (now known as PriceWaterhouseCoopers)
and Ernst & Whinney (now known as Ernst & Young) in Sydney
and London. Mr O’Neill joined the Board on 23 June 2015 and was
appointed a member of the Audit and Risk Committee on that date;
Mr Meares has many years of experience in the global civil
infrastructure, mining and energy industries. He brings a deep
knowledge of the management and control of complex engineering
projects as well as a wide network of industry contacts.
Previous roles include Executive Director, Engineering and
Infrastructure, with Brookfield Multiplex where he had
responsibility for the delivery of large scale infrastructure projects
throughout Australia, responsibility for Mine Infrastructure
Delivery at Leighton Contractors, Group Manager Business
Development at Clough Limited and Managing Director of Bechtel
Australia. Mr Meares is Chairman of the Company’s Human
Resources and Nominations Committee.
Andrew Purcell
B Eng; MBA
Mr Purcell founded Teknix Capital in Hong Kong over 10 years
ago, a company specialising in the development and management
of projects in emerging markets across the heavy engineering,
petrochemical, resources and infrastructure sectors. Prior to this,
Mr Purcell spent 12 years working in investment banking across
the region for Macquarie Bank then Credit Suisse. Mr Purcell also
has significant experience as a public company director, both in
Australia and across Asia.
Mr Purcell was appointed chairman of Melbana Energy Limited
(formerly MEO Australia Limited) on 25 November 2015, and also
currently serves as a non-executive Director of Metgasgo Limited
commencing 26 September 2016. Mr Purcell was chairman of the
Audit and Risk Committee until 24 July 2015, and has continued to
be a member of the committee since.
COMPANY SECRETARY
Mr Swierkowski B Com, CA, MBA (Exec) joined the company
in June 2013, and was appointed to the position of Company
Secretary on 23 June 2015. Prior to this he has held both senior
finance and company secretarial positions in listed companies
across mining, investments and facilities management.
15
DIRECTORS’ REPORT DIRECTORS’ MEETINGS
The number of Directors’ meetings (including meetings of committees of directors) held during the financial year, during the period of each
director’s tenure, and number of such meetings attended by each director are
Board of Directors
Attended
Held
Audit and Risk
Committee
Human Resources
and Nomintions
Committee
Held
Attended
Held
Attended
10
10
10
10
10
10
9
10
10
10
4
4
–
4
4
4
4
–
4
4
2
2
2
–
–
2
2
2
–
–
Phillip Arnall
Julian Ball
Ian Meares
Andrew Purcell
John O’Neill
PRINCIPAL ACTIVITIES
The Group is a leading provider of drilling services in Australia, primarily in the coal sector, but also in the wider energy, water and
wastewater and resources sectors. The Group is also a specialist in the provision of engineering design and construction services primarily
in cross country pipelines and horizontal drilling and design and management of smaller engineering projects. In addition, The Group is an
investor in the exploration, appraisal and commercialisation of oil and gas prospects originally in Australia, but more recently in Europe
and the UK. As a result the Group is structured into three principal operating segments:
Drilling Division: Drilling services, primarily to the coal industries for the degasification of coal mines and associated services and the
commercial extraction of gas.
From left: Andrew Purcell, Julian Ball, John O’Neill, Ian Meares
and Phillip Arnall.
16
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT Engineering and Construction Division: Pipelines and associated
construction and civil services; the Division is a significant market
participant in the installation of cross country pipes including the
use of horizontal directional drilling techniques.
Oil and Gas Investments: Commercialisation of unconventional
and conventional hydrocarbons in Europe.
STRATEGY
The Lucas Drilling Division is a leader in horizontal directional
drilling, with a long history of successful project delivery. This
expertise has been leveraged through directional drilling to degas
coal mines from the surface, increasing safety and productivity
and lowering cost. The downturn in the coal market has required a
relentless focus on the provision of these services.
The AJ Lucas Engineering and Construction Division provides
specialist engineering and drilling services principally to the
energy, resources and water industries. In particular, the focus
is to be the pre-eminent installer of cross country oil and gas
pipelines by utilising considerable in house skills in contracting,
operations and safety systems in partnership with capable third
parties. This is to be achieved through the application of a highly
skilled workforce in combination with specialist equipment, thus
allowing the provision of innovative, cost saving solutions. It is
an imperative that the provision of these services and solutions
occur within excellent safety, quality and information systems
so as to ensure the minimum impact to people, assets and
the environment.
The Group has a successful track record in its oil and gas
investments with exceptional historical returns from its
investments in the Gloucester and Surat Basins. This strategy
continues with the current investment in UK shale gas exploration
activities through the Group’s direct investment in a number of
UK licences and as a shareholder in Cuadrilla Resources Holdings
Limited (“Cuadrilla”), an unlisted UK Company with interests in
the UK and Europe. The current strategic focus for this unit is to
achieve a successful drill, fracture and flow-test of the Bowland
acreage of which the Company holds and effective 48.0% interest.
CORPORATE GOVERNANCE STATEMENT
The Board of directors (“The Board”) is responsible for the
corporate governance of the Group. The Board considers strong
Corporate Governance to be core to ensuring the creation, the
enhancement and protection of shareholder value. Accordingly, the
Group adopted the 3rd Edition of the ASX Corporate Governance
Principles and Recommendations, in 1 July 2014.
The Board believes that a company’s corporate governance
policies should be tailored to account for the size, complexity
and structure of the company and the risks associated with the
company’s operations. The ASX Corporate Governance Council
allows companies to explain deviations from the Council’s
recommendations. Areas where the Group has deviated from the
Council’s recommendations at any time during the financial year
are discussed below, however the Board believes the areas of non-
conformance do not impact on the Group’s ability to operate with
the highest standards of Corporate Governance.
This statement outlines the main corporate governance practices
of the Group. Unless otherwise stated, these practices were in
place for the entire year.
FOUNDATIONS FOR MANAGEMENT
AND OVERSIGHT
Roles and responsibilities
The directors of the Company are accountable to shareholders
for the proper management of the business and affairs of
the Company. The key responsibilities of the Board include
the following:
•
contributing to and approving the corporate strategy for AJL;
• monitoring the organisation’s performance and achievement
of its corporate strategy;
•
•
approving and monitoring the progress of significant corporate
projects, including acquisitions or divestments;
reviewing and approving the annual business plan and
financial budget;
• monitoring financial performance, including preparation of
financial reports and liaison with the auditors;
•
•
•
appointment and performance assessment of the
executive Directors;
ensuring that significant risks have been identified and
appropriate controls put in place;
overseeing legal compliance and reporting requirements of
the law; and
• monitoring capital requirements and initiating capital raisings.
The Board’s responsibilities are documented in a written Board
Charter which is available in the shareholder information section
of the Company’s website. The Board charter details the functions
reserved to the Board, the roles and responsibilities of the
Chairman and the responsibilities delegated to management.
The Board Charter also gives the Directors the right to seek
independent professional advice, at the Group’s expense, on
matters relevant to carrying out their duties.
The Company Secretary is appointed by the Board and is
accountable directly to the Board, through the Chairman, on all
matters to do with the proper functioning of the Board. Each
Director is able to communicate directly with the Company
Secretary and vice versa.
Appointment and Re-Election of Directors
Through periodic reviews of the Board composition and
succession planning, the Board seeks to ensure that the skills,
knowledge, experience, independence and diversity of the Board
are appropriate for the present and future requirements of the
Group. The Human Resources and Nominations Committee actively
seeks to identify, and recommends to the Board for appointment,
directors whose skills and attributes complement and enhance the
effective operation of the Board.
Background checks are conducted prior to appointing any new
Director, with each Non-Executive Director being required to
specifically acknowledge that they have and will continue to have
the time to discharge their responsibilities to the Company.
The constitution requires one third of all directors, to retire from
office at each AGM and can present themselves for re-election
at which time the Board will provide direction to shareholders
of support or otherwise. No Director can hold office for more
than 3 years without presenting for re-election, and any Director
17
DIRECTORS’ REPORT appointed by the Directors during the year to fill a casual vacancy
is required to also present for election at the first AGM following
their initial appointment. All information relevant to a decision
on whether or not to elect or re-elect a Director is included in the
Notice of AGM.
and implementation of HR policies and practices to drive workforce
participation rates of key diversity segments.
STRUCTURING THE BOARD TO ADD VALUE
Review of Performance
Composition of the Board
The Board continually assesses its performance, the performance
of its committees and individual Directors through a structured
annual review process. The Board may at times engage the
assistance of external consultants to facilitate formal Board
performance reviews.
The constitution of the Company requires between three and ten
directors. Currently there are five directors, all of whom are non-
executive and four are also independent.
The table below sets out the independence status of each director
as at the date of this annual report.
The performance of all senior executives is reviewed annually by
the Human Resources and Nominations Committee.
Director
Status
Diversity
AJ Lucas is committed to a diverse and inclusive workplace which
supports business objectives, delivers competitive advantages and
benefits shareholders and customers. The Group is committed to
ensuring all employees are treated fairly, equally and with respect
no matter what their race, ethnicity, gender, sexual orientation,
socio-economic status, culture, age, physical ability, education,
skill levels, family status, religious, political and other beliefs and
work styles. A copy of the Group’s Diversity Policy is available in
the shareholder information section of the Company’s website.
While the Board is committed to achieving gender diversity it is
of the view that imposed targets, in particular considering the
current market conditions, would not be of benefit and could result
in hiring decisions that are contrary to the ultimate goal of “best
fit” for purpose. As such, the Group’s Diversity Policy does not at
this time require the Company to set measurable objectives for
achieving gender diversity.
The number of men and women on the Board, in senior
management and other positions as reported in the Group’s 2017
and 2016 Gender Equality Report is shown below:
Level
Board
Executive leadership personnel
Other employees
TOTAL
Level
Board
Executive leadership personnel
Other employees
TOTAL
2017
Female
Male
Total
5
3
284
292
–
1
18
19
5
4
302
311
5
3
265
273
–
1
26
27
5
4
291
300
The Company has a maternity leave scheme where a permanent
employee who has been with the company for over 24 months
can access paid maternity leave following the birth of a child.
The Group has in place various other programs to foster career
development including training sessions for line managers,
sponsoring attendance at executive management training courses,
implementation of flexible work place practices, and development
18
Phillip Arnall
Chairman and Independent Non-Executive Director
John O’Neill
Independent Non-Executive Director
Andrew Purcell Independent Non-Executive Director
Ian Meares
Independent Non-Executive Director
Julian Ball
Non-Executive Director
The Directors’ skills and experience, and the period of
their appointments with the Company are disclosed in the
Directors Report.
Skills Matrix
The Board seeks to ensure that its membership includes an
appropriate mix of skills and experience. A summary of the
directors’ skills and experience relevant to the Group as at the
end of the Reporting Period is set out below:
Phil
Arnall
John
O’Neill
Julian
Ball
Ian
Meares
Andrew
Purcell
Executive
leadership
Strategy & risk
management
Financial acumen
Health & safety
Former CEO
Mining services
Oil & gas
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
✔
The Company has induction procedures in place to allow new
directors to participate fully and actively in Board decision making
at the earliest opportunity. A checklist of information has been
prepared for incoming Directors, while Board members are
also provided comprehensive information on a regular basis by
the Executive Leadership Team so that they can discharge their
Director responsibilities effectively. The Company Secretary
coordinates the timely completion and dispatch of such material to
the Board.
Directors are encouraged, and are given the opportunity, to
broaden their knowledge of the Group’s business by visiting offices
in different locations and engaging with management. They are
encouraged to remain abreast of developments impacting their
2016
Female
Male
Total
Induction Program
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT duties and offered external training opportunities on an “as
required” basis.
and Risk Committee Charter which is available in the shareholder
information section of the Company’s website.
ETHICAL AND RESPONSIBLE
DECISION MAKING
The Company has a code of conduct to guide the directors and
key executives. It includes disclosure of conflicts of interest and
use of information not otherwise publicly known or available. Any
director with an interest in matters being considered by the Board
must take no part in decisions relating to those matters.
The Directors’ Code of Conduct is available in the shareholder
information section of the Company’s website as is the employee
Code of Conduct. These codes address the practices necessary to
maintain confidence in the Company’s integrity, to take account
of legal obligations and expectations of stakeholders and the
responsibility and accountability for reporting and investigating
unethical practices.
The Group operates a zero-tolerance approach to all forms of
bribery and corruption, whether direct or indirect. As such the
Group has an Anti-Bribery and Corruption policy, also available in
the shareholder information section of the Company’s website. The
policy prevents:
• making or acceptance of facilitation payments or kickbacks of
any kind.
•
payments to trade unions or their officials
• Any donations to political parties or charitable donations, for
the purpose of gaining commercial advantage and
•
the giving or receipt of any gifts or hospitality if it could in
anyway be intended, or reasonably interpreted, as a reward or
encouragement for a favour or preferential treatment.
Human Resources and Nominations Committee
At the beginning of the financial year the Human Resources
Committee was re-named the Human Resources and Nominations
Committee with its responsibilities expanded as documented in
a revised Human Resources and Nominations Committee Charter
which is available in the shareholder information section on the
Company’s website.
The Human Resources and Nominations Committee consists of
three members as follows:
Committee
member
Ian Meares
Status
Committee Chairman and
Independent Non-Executive Director
Phillip Arnall
Independent Non-Executive Director
Julian Ball
Non-Executive Director
INTEGRITY IN FINANCIAL REPORTING
The Board has established an Audit and Risk Committee which
provides assistance to the Board in fulfilling its corporate
governance and oversight responsibilities in relation to the
Company’s financial reporting, internal control systems, risk
management systems, regulatory compliance and external
audit. The Audit and Risk Committee is governed by the Audit
The Committee must have at least three members, all of whom
are non-executive directors and the majority of whom are
independent. The Committee must be chaired by an independent
chair, who is not chair of the board. At least one member must
have financial expertise and some members shall have an
understanding of the industry in which the Company operates.
Members of the Audit and Risk Committee as at the date of
this report and throughout the financial year are set out in the
following table. Their qualifications and experience are set out in
the Directors’ Report.
Committee
member
John O’Neill
Status
Committee Chairman and Independent
Non-Executive Director
Phillip Arnall
Independent Non-Executive Director
Andrew Purcell
Independent Non-Executive Director
Julian Ball
Non-Executive Director
The principal roles of the Committee are to:
•
assess whether the accounting methods and statutory
reporting applied by management are consistent and
comply with accounting standards and applicable laws
and regulations;
• make recommendations on the appointment of the external
auditors, assess their performance and independence
and ensure that management responds to audit findings
and recommendations;
•
•
discuss the adequacy and effectiveness of the Company’s
internal control systems and policies to assess and
manage business risks, its legal and regulatory compliance
programmes; and
ensure effective monitoring of the Company’s compliance with
its codes of conduct and Board policy statements.
The Audit and Risk Committee meets with the external auditors at
least twice a year. The Committee is authorised to seek information
from any employee or external party and obtain legal or other
professional advice.
The Committee co-operates with its external auditors in
the selection, appointment and rotation of external audit
engagement partners.
TIMELY AND BALANCED DISCLOSURE
The Company has established policies and procedures designed
to ensure compliance with ASX listing rules, continuous disclosure
requirements and accountability for compliance at a senior level so
that investors have equal and timely access to material information
that in the opinion of the Board is likely to have an impact on an
investment decision in the company or impact on the Company’s
share price.
The Company has a Continuous Disclosure and Communications
Policy, a copy of which is in the shareholder information section of
its website.
19
DIRECTORS’ REPORT COMMUNICATION WITH
SECURITY HOLDERS
The Board keeps shareholders informed of all material
information relating to the Company by communicating to
shareholders through:
•
•
continuous disclosure reporting to the ASX;
its annual reports; and
• media releases and other investor relations publications on the
Group’s website.
All company announcements lodged with the ASX are available
in the shareholder information section of the Company’s website.
Shareholders have the option to receive communications from,
and send communications to, the Company’s Share Registry
electronically, including the annual report and the notice of annual
general meeting. Additionally shareholders and potential investors
are able to post questions to the company through the Company’s
website or by telephone. The Board and senior management
endeavor to respond to queries from shareholders and analysts
for information in relation to the Group provided the information
requested is not price sensitive or is already publicly available.
The Company provides the Notice of AGM to all shareholders and
makes it available on the Company’s website. The AGM is the key
forum for two-way communication between the Company and its
shareholders. At the meeting, the Chairman encourages questions
and comments from shareholders and seeks to ensure that
shareholders are given ample opportunity to participate. Further,
the Company’s external auditor attends the annual general
meeting and is available to answer shareholder questions about
the conduct of the audit and the preparation and content of the
auditor’s report.
RISK IDENTIFICATION AND MANAGEMENT
The Board is committed to embedding risk management practices
to support the achievement of business objectives. As such the
Board has established the Audit and Risk Committee which is
responsibility for reviewing and overseeing the risk management
strategy of the Group and for ensuring it has an appropriate
corporate governance structure. The Audit and Risk Committee
discusses with management and the external auditors, at
least annually:
•
•
•
Internal controls systems;
Policies and procedures to assess, monitor, and
manage business, economic, environmental and social
sustainability risks;
Insurance program having regard to the insurable risks and
the cost of this cover; and
•
Legal and regulatory compliance programs.
A risk register is maintained and reported to the Audit and Risk
Committee periodically and at least annually, detailing likelihood
and severity of risks occurring. Management undertakes a review
of its insurable risks each year in order to fully consider potential
impacts and how they are financed in terms of limits and scope
under the Group’s insurance program. Both these reviews took
place during the year.
During the year management undertook a detailed review of
the company’s Business Continuity and Interruption Plans.
Management engaged consultants to assist with the review and
analyse the material business impacts from disruption for all key
functions across the Group; review existing Business Continuity
Plans and recommend changes/updates as required and provide
training and scenario exercise program for management to test
the preparedness and robustness of the Company’s Business
Continuity Plans. Management expect to complete the program
and testing before the end of the calendar year.
Further details of the structure, membership and responsibilities
of the Audit and Risk Committee are provided under the
“Integrity in Financial Reporting” heading in this Corporate
Governance Statement.
Within this framework, management has designed and
implemented a risk management and internal control system to
manage material business risks. Both the Chairman and Chief
Financial Officer provide representation to the Audit and Risk
Committee and the Board that the risk management system is
operating effectively in all material respects in relation to financial
reporting risks.
The Company has, in accordance with the Australian Standard
on risk management AS/NZS ISO 31000:2009, developed a risk
statement and underlying procedures for the key risk areas of
People, Environment, Business and Reputation. The Company has
had a number of external audits of particular types of risk during
the year. A copy of the risk statement and the risk management
policy are available in the shareholder information section of the
Company’s website.
The Group does not currently have an independent internal audit
function, the Board being of the view that the size and complexity
of the Company does not warrant such a function. The Group’s
operations and facilities are however subjected to regular audits,
performed by a mix of internal safety and auditing experts, and
external consultants, under an annual program of Health, Safety,
Environment and Quality audits. In addition, the Audit and Risk
Committee engages external consultants to review areas of the
business as it sees fit, with a number of these performed during
the year.
20
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT The Group’s material exposures to risk, and how the Group responds and manages these risks is detailed below.
Material Risk
External Risks
Risk Management Approach
Risks may arise from the flow through of commodity
demand or pricing from major markets into
our customer base as well as foreign exchange,
regulatory and political events that may impact
the long term sustainability of our customers’
business model.
Client focused organisational design, with a focus on regular communication with
key clients addressing various matters including safety, contract performance
and clients future work programs. Continual repositioning of the business,
and a relentless focus on efficiency and cost reduction to meet current client
expectations on existing work programs, whilst anticipating upcoming changes in
service demand.
Where appropriate the broadening of our portfolio of service offerings,
commodity and geographical exposure is considered to reduce the effect of
volatility introduced by these external risks where it makes sense to do so.
Business Risks
Risks include the risk of funding the identification
and proving reserves relating to our
unconventional assets.
The Company has dedicated financial reserves to apply to the shale gas project
in the UK. It is also heartened by the continued policy commitment by the UK
Government on establishing sovereign energy sources.
Financial Risks
Volatility in commodity markets may adversely
impact future cash flows and, as such, our credit
rating and ability to source capital from financial
markets. In addition our commercial counterparties
may as a result of adverse market conditions fail to
meet their commercial obligations.
The capital raising towards the end of the year and the associated swap from
debt to equity for one of the Company’s major lenders has improved the gearing
of the Company’s Balance Sheet and has mitigated some of this risk. We seek to
continuously improve our credit rating and key financial ratio analysis to monitor
potential volatility in this area. Similarly all customers and key suppliers credit
limits are reviewed before services are established.
Operational Risks
Cost pressures and reduced productivity could
negatively impact both operating margins and our
market competitiveness. Similarly a significant
adverse and unexpected natural or operational
event could impact operations in a materially
negative manner, as could a breach in IT and other
security processes.
Sustainability Risks
Injuring employees, damaging the environment or
having material regulatory or governance failures
may put at risk our social licence to operate or
significantly impact our reputation such that
customers and / or capital markets may shun us.
We seek to maintain adequate operating margins across our business by
monitoring in absolute and relative terms the performance of all assets against
both internal and external commercial benchmarks. Our concentrated effort
to reduce costs and hence maintain competitiveness and margin has yielded
tangible results in reducing our controllable costs. This includes initiatives to
standardise processes and control systems across the Group.
The Lucas Management System (LMS) is an integrated process by which we
manage this standardised approach.
Through the regular application of our risk management procedures we identify
the potential for significant and or unexpected risks and implement the controls
appropriate to remove or mitigate them.
Business continuity plans are developed for all our IT systems such that the
integrity of our systems allows us to recover from a “disaster event” with little
impact on the daily operations.
The LMS puts in place a significant set of requirements to ensure the safe work
environment of our employees, and the operation of our assets and equipment.
Inclusive in this are the control and governance requirements required of good
finance and accounting procedures. A broad range of policies and procedures
outline both expected and required actions and behaviours of management and
staff to achieve these objectives.
Maintenance of a safe working environment is a principal accountability of all
levels of management.
The Board holds itself to account against the standards outlined in the ASX
Corporate Governance Principles and Recommendations 3rd edition as an
example of good governance and reporting procedures and requirements.
21
DIRECTORS’ REPORT REMUNERATION
The Human Resources and Nominations Committee reviews the
remuneration of the non-executive directors, and senior officers.
Members of the Human Resources and Nominations Committee as
at the date of this report and throughout the financial year are set
out in the following table. Their qualifications and experience are
set out in the Directors’ Report.
Name
Position at date of report
Directors must also advise the Company, which advises the
ASX on their behalf, of any transactions conducted by them in
the Company’s securities within five business days after the
transaction occurs.
The Securities Trading Policy is available in the shareholder
information section of the Company’s website.
REVIEW AND RESULTS OF OPERATIONS
Ian Meares
(Chairman)
Independent non-executive director
OVERVIEW OF THE GROUP
Phillip Arnall
Independent non-executive director
Julian Ball
Non-executive director
The Human Resources and Nominations Committee Charter is
available in the shareholder section of the Company’s website. The
number of meetings and who attended those meeting throughout
the year is disclosed in the Directors report.
The remuneration of the non-executive directors is based on
the recommendations of independent remuneration consultants
and while there is no formal charter for remuneration, the Board
seeks independent advice as required. The Company’s non-
executive directors receive fees for acting as a director of the
Company. Additional fees are payable for being a member of a
Board committee or representing the Group in specific matters
from time to time. Senior executives are remunerated based on a
fixed wage plus incentive payments. The policies and practices for
remuneration of Key Management Personnel is disclosed in the
remuneration report in the Company’s Annual Report.
Trading in Company securities
The Company has in place a Securities Trading Policy which
restricts the times and circumstances in which directors, senior
executives and certain employees may buy or sell shares in the
Company. These persons are required to seek approval from the
Company Secretary prior to trading.
The following table summarises the results for the year:
Total revenue
Underlying EBITDA
Reported EBITDA
EBIT
Loss before tax
Net loss for the year
Total assets
Net assets
It has been a disappointing year for the Australian Businesses.
Trading conditions remained very challenging, particularly in the
first half of the year. Despite a relative stabilization of revenues
year-on-year, both the Drilling and Engineering and Construction
Divisions experienced significant margin declines exacerbated
by adverse weather conditions throughout the year, in particular
those that affected the Engineering and Construction Division.
Commencing in the comparative period, and continuing into the
first half of the current year, significant time and resources were
allocated to business development activities covering existing
and new markets to replenish lost business. While the Group was
successful in securing a number of new opportunities, margin
declines, impacted by adverse weather, affected performance. This
said, both operating Divisions have seen a step-up in activity levels
in the second half of the year, which should position each better for
the year ahead.
It is pleasing to have seen significant progress being made in
relation to the Group’s UK investments during the year. Following
approval being granted by the Government to drill, fracture and
flow test up to 4 wells at the Preston New Road exploration site,
site construction activities have now been completed. The drill rig
was successfully delivered in July and the first well was spudded
on 17 August 2017. The Board looks forward to completion of the
planned activities at the site, and to positive results of flow testing
in the next calendar year.
2017
Year
$’000
2017
2nd half
$’000
2017
1st half
$’000
2016
Year
$’000
2016/17
Change
%
121,970
70,563
51,407
125,478
(2.8%)
(3,846)
(8,656)
(3,162)
(2,933)
(684)
14,556
(126.4%)
(5,723)
(2,449)
(253.5%)
(14,858)
(6,037)
(8,821)
(17,350)
14.4%
(39,030)
(13,868)
(25,162)
(19,485)
(100.3%)
(39,030)
(13,868)
(25,162)
(19,485)
(100.3%)
240,223
240,223
241,092
229,136
97,771
97,771
66,440
86,790
4.8%
12.7%
Basic loss per share (cents)
9.7
3.3
6.6
6.7
44.7%
22
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT A reconciliation of the reported EBITDA to the underlying EBITDA is shown in the following table:
Reconciliation:
Consolidated loss before income tax
(2,139)
(3,258)
(4,307)
(29,326)
(39,030)
(19,485)
Drilling
$’000
E&C
$’000
Oil & Gas
$’000
Corporate
$’000
2017
$’000
2016
$’000
Depreciation and amortisation
4,817
1,364
Finance costs
Finance income
Reported EBITDA
Share of loss of equity accounted investees
Exploration asset revenue
UK investment overhead costs
Settlement of legal disputes
Recovery of receivable from equity accounted investees
Redundancy costs
Net (profit) / loss on sales of assets
Share based payments expense
Other expense
Underlying EBITDA
–
–
–
–
–
–
–
21
6,202
24,374
24,374
14,901
2,407
(202)
(202)
(272)
2,678
(1,894)
(4,307)
(5,133)
(8,656)
(2,449)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,678
(1,894)
2,717
(619)
2,209
–
–
–
–
–
–
–
–
–
–
252
–
299
2,717
(619)
2,209
252
–
299
(140)
(140)
–
92
–
92
6,751
(522)
2,820
7,445
(525)
503
102
27
404
(4,630)
(3,846)
14,556
The non-IFRS financial information presented in this document has not been audited or reviewed in accordance with Australian
Auditing Standards.
DIVISIONAL PERFORMANCE
Contributions from the business divisions were as follows:
2017
Drilling
Engineering and construction
Oil and gas
2016
Drilling
Engineering and construction
Oil and gas
Drilling
The results of the drilling division are summarised as follows:
Revenue
Underlying EBITDA
EBITDA margin
Revenue
$’000
Underlying
EBITDA
$’000
Margin %
$’000
73,373
2,678
48,596
(1,894)
–
–
79,633
45,845
–
11,385
6,900
–
3.6%
–3.9%
N/A
14.3%
15.1%
N/A
2017
Year
$’000
2017
2nd half
$’000
2017
1st half
$’000
2016
Year
$’000
2016/17
Change
%
73,373
38,763
34,610
79,633
(7.9%)
2,678
3.6%
1,117
2.9%
1,561
4.5%
11,385
14.3%
(76.5%)
The Drilling Division’s revenue was down 7.9% on the corresponding period, with a recovery evident towards the later part of the year and
stronger revenue expected in the next financial year.
23
DIRECTORS’ REPORT
First half revenue was impacted by challenging conditions in the coal mining industry; the traditional market for the Division’s services;
and, the ending of a key long term take or pay contract. This was despite managements’ effort in securing new work in adjacent markets to
replenish lost revenue that delivered $10.8 million of the $34.6 million reported revenue in the first half.
Second half revenue recovered despite adverse weather in the Bowen Basin earlier in the second half impacting some customer operations.
The recovery was driven by strengthening demand from the coal mining industry on the back of increasing, albeit still volatile, coal prices.
The Division posted $24.6 million revenue in the last quarter of which over $22.1 million came from the coal mining sector. The recovery is
expected to continue and is reflected in an order book that is stronger in terms of quantum and security than that of last year.
Underlying EBITDA of $2.7 million was well short of expectations, predominantly driven by soft demand for drilling services from the coal
mining industry in the earlier part of the year and the limited success in entering the Coal Seam Gas (“CSG”) and water drilling markets. The
Division was not successful in winning the level of new work that was expected to be secured in the water market, with a loss incurred on
an existing fixed price water well drilling contract that is expected to conclude in the first half of FY 2018. Lower margin business from the
re-entry into a more competitive than expected CSG market also contributed to the poor results.
Increasing demand from the coal mining industry, where the Division has traditionally been most successful in recent years, is expected to
lead to significant improvements in business performance in the 2018 financial year. The Division’s underlying EBITDA has already improved
substantially towards the later part of the 2017 financial year, with the Division’s last quarter underlying EBITDA being $2.8 million.
Engineering & Construction
The Engineering & Construction division reported a lower result than in the prior year as shown in the following table:
Revenue
Underlying EBITDA
EBITDA margin
2017
Year
$’000
2017
2nd half
$’000
2017
1st half
$’000
2016
Year
$’000
2016/17
Change
%
48,596
31,799
16,797
45,845
6.0%
(1,894)
(3.9%)
(1,744)
(5.5%)
(150)
6,900
(127.4%)
(0.9%)
15.1%
Engineering & Construction revenue recovered in the second half following a subdued first half. The recovery in the second half reflected
two new self-perform contracts won in each of Australia and New Zealand which utilize the businesses directional drilling and pipeline
expertise. These contracts will continue to contribute to the Division’s result in the first half of financial year 2018.
Underlying EBITDA loss of $1.9 million was well below expectations, largely driven by unseasonal heavy rain and flooding in Northern
Victoria in the first half which continued early in the second half, causing delays in the VNIE pipeline contract being completed in joint
venture with Spiecapag.
On a positive note the business is currently short listed for several key opportunities that will be awarded and executed during the 2018
financial year in both the pipeline and horizontal directional drilling markets. The Division is tendering on several of these opportunities in
its own right as well as jointly with other parties.
Oil and Gas
The Oil & Gas Division comprises the Company’s investments in
hydrocarbons in the United Kingdom. This includes the Company’s
direct equity interest in the respective Bowland, Elswick and
Bolney licences (“the licences”), represented by Exploration
and Evaluation assets, and its 47.4% shareholding in the equity
accounted investee, Cuadrilla Resources Holdings Limited
(“Cuadrilla”). Cuadrilla is the operator of licences in the highly
prospective Bowland basin totalling 2,391km2, including the
licences, and a further 1,274km2 in Yorkshire in the UK.
The focus of the Group has been on the Bowland Licence in
Lancashire, in which it has an effective 48.0% interest, and which
encompasses the Preston New Road (“PNR”) and Roseacre Wood
(“RW”) exploration sites. The Bowland joint venture has shot
and processed 100 km2 of 3D seismic and drilled 3 wells in this
exploration licence area. The PNR and RW exploration sites are
located in close proximity to gas pipeline infrastructure, thereby
enabling the timely and cost efficient commercialisation of
natural gas produced from the shale rock underlying from these
exploration sites.
Site construction activities at PNR have been completed and
drilling commenced in August with the first well spudded on
17 August 2017. Cuadrilla, as operator of the Bowland Licence,
plans to drill at least two of the four consented horizontal wells
at depths of between 2,000m and 3,500m. These will be the
first horizontal wells of their type drilled into UK shale rock, and
are expected to be completed before the end of this calendar
year. Following completion of drilling activities, the wells will be
hydraulically fractured and the flow of gas tested. Gas is expected
to flow into the low pressure grid and be delivered to local
consumers within the next 12 months.
Planning consent for the four wells at PNR was received on
6 October 2016 from the UK government. The UK Secretary of
State for Communities and Local Government (“SOS”) advised
that he was also minded to grant planning consent for a similar
application at the Roseacre Wood (“RW”) exploration site, pending
receipt of further evidence on highway safety. Following this
announcement, a planning inquiry has been set for April 2018
focusing solely on transport safety issues associated with RW.
Cuadrilla is looking forward to making a strong case for approval of
planning for that site.
In April, several applications challenging the UK Government’s
planning permission in respect of the PNR were dismissed by the
UK High Court. Two applicants were granted leave to appeal by
the Court of Appeals, with appeals hearing dates set for the end
24
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT
of August 2017. The Company remains confident that the Court of
Appeals will uphold the positive recommendation of the Planning
Inspector, the subsequent decision to grant planning consent by
the Secretary of State and the subsequent ruling by the High Court
in respect of the PNR site.
A legal challenge to the Government’s decision to allow the Public
Inquiry in relation to transport issues at RW has been dismissed
by the High Court, and the deadline for an appeal to the Court of
Appeal in respect of RW has passed.
As at 30 June 2017, Centrica Plc (“Centrica”), the UK’s premier
supplier of gas is obligated to fund a further £20.8 million of
exploration costs, which will be expended over the drilling and
hydraulic stimulation of the initial two exploration wells at PNR.
Subject to the appraisal of the PNR exploration wells and certain
milestones being met, Centrica is then required to fund a further
£46.7 million for appraisal and development in the Bowland
Licence to maintain its 25% interest.
In addition to the licences, AJ Lucas also has an interest, through
its shareholding in Cuadrilla, in four blocks of exploration licences
held exclusively by Cuadrilla, and 4 blocks of exploration licences
held jointly as joint venture with INEOS, with Cuadrilla being the
operator and owning 70% and INEOS 30. These eight blocks
are located in Yorkshire, target the same Bowland Shale as the
Lancashire licences and were awarded as part of the 14th round
of onshore oil and gas licences previously offered by the United
Kingdom Government.
OUTLOOK
The Company expects to progress the appraisal of its oil and gas
investments through the completion of the currently planned two
well drilling, fracturing and gas flow testing program. These wells
are a significant step towards apprising and ultimately realising
value from this investment.
The drilling market has shown signs of picking up driven by a
recovering, albeit still volatile coal sector. The Drilling Division’s
performance has improved significantly in the last quarter of the
financial year driven by demand from the coal mining industry,
where the Division has historically been most successful. With a
strong order book in terms of value of work and work security,
the Division is expected to deliver improved performance during
the next financial year. It will continue to focus on cost control,
overhead reduction and cash generation to assist in funding the
Group’s UK investments.
The Engineering and Construction Division continues to tender for
major cross country pipeline projects in joint venture with various
parties, and is short listed for the few major projects on offer.
The Division also continues to tender in its own right for smaller
projects that utilize the Division’s expertise in pipeline, directional
drilling and infrastructure works.
In May 2017 the Company launched a combined 1 for 2 accelerated
non-renounceable rights issue and $5 million placement which
together could have raised up to $58.7 million (“equity raise”).
The equity raise completed on 8 June 2017 raising a total of
$53.2 million, of which $37.2 million was raised from Kerogen and
settled by the part conversion of tranche 1 of the related party
loan facility including outstanding interest, as disclosed in Note
21, including outstanding interest. This satisfied a condition of the
restructure of the related party loan notes agreed in June 2016
which required a minimum of US$25 million to be repaid through
an entitlement offer. There are no further material interest or
principal repayment obligations on the remaining related party
loan facility, with interest able to be deferred until final maturity in
December 2019.
Gross interest bearing loans and borrowings have increased by
$1.5 million to $107.3 million. The drawdown of OCPT2 loan and
interest costs of $24.5 million have in part been offset by the
payment of cash interest obligations of $6.1 million on the senior
loan note facility and the partial repayment of $37.2 million of the
related party facility from the proceeds of the equity raising, and
favorable exchange differences of $3.2 million.
The Group’s net current asset position has improved significantly,
increasing to $41.1 million compared to deficiency of $4.8 million
in the comparative period, predominantly driven by the partial
repayment of the related party loan facility. Cash, cash equivalents
and cash in trust were $22.2 million at 30 June 2017, which includes
$11.8 million cash in trust representing drawn but as yet un-utilised
cash under the senior loan note facility and is available to be spent
on furthering the Group’s investments in the Bowland Licence. A
further $1.3 million of cash representing the Group’s share of joint
venture cash balances available to be utilized in the joint venture
until such time as the joint venture resolves to distribute the cash
to joint venture partners.
Cash used in operations, excluding finance costs paid, was
$21.3 million, of which $4.6 million represents the final
settlement of a long term legacy dispute. Contributing to cash
used in operations was a significant short term working capital
requirement resulting from a significant ramp up of work in the
final quarter of the financial year. Improved business conditions
in the coal mining industry, and a reduction in working capital
requirements in Engineering and Construction Division are
expected to result in a significant improvement in the Australian
businesses cash generation performance, which are expected to
contribute positively in financial year 2018.
IMPACT OF LEGISLATION AND OTHER
EXTERNAL REQUIREMENTS
There were no changes in environmental or other legislative
requirements during the year that significantly impacted the
results or operations of the Group.
REVIEW OF FINANCIAL CONDITION
DIVIDENDS
In November 2016 the Company drew down the US$20 million
second and final tranche of the senior loan note facility (“OCPT2”)
which was agreed in June 2016. 9 million shares were issued in
accordance with the conditions of the facility at the time of draw
down. The senior loan note facility accrues 12% p.a. interest on
the outstanding principal balance which is payable quarterly, with
a further 6% p.a. interest payable on termination of the facility in
June 2019.
No dividends have been declared by the Company since the end of
the previous year.
25
DIRECTORS’ REPORT ENVIRONMENTAL REGULATIONS &
NATIVE TITLE
INDEMNIFICATION AND INSURANCE OF
OFFICERS AND AUDITORS
AJ Lucas is committed to meeting stringent environmental and
land use regulations, including native title issues, are an important
element of our work. AJ Lucas is committed to identifying
environmental risks and engineering solutions to avoid, minimise
or mitigate such risks. The Group works closely with all levels of
government, landholders, and other bodies to ensure its activities
have minimal or no effect on land use and areas of environmental
and cultural importance. One of the key benefits of directional
drilling is its ability to avoid or substantially mitigate environmental
impact. Group policy requires all operations to be conducted in a
manner that will preserve and protect the environment.
The directors are not aware of any significant environmental
incidents, or breaches of environmental regulations during or since
the end of the financial year.
Indemnification
The Company has agreed to indemnify all directors and officers
of the Company against all liabilities including expenses to
another person or entity (other than the Company or a related
body corporate) that may arise from their position as directors
or officers of the Group, except where the liability arises out of
conduct involving a lack of good faith.
To the extent permitted by law, the Company has agreed to
indemnify its auditors, Ernst and Young Australia, as part of the
terms of its audit engagement agreement against claims by third
parties arising from the audit (for an unspecified amount). No
payment has been made to indemnify Ernst and Young during or
since the financial year end.
SIGNIFICANT CHANGES IN THE STATE
OF AFFAIRS
The significant changes in the state of affairs of the Group both
during the financial year and subsequent to balance date are
as described in this report and the financial statements and
notes thereto.
EVENTS SUBSEQUENT TO
REPORTING DATE
There are no items, transactions or events of a material or unusual
nature that have arisen in the interval between the end of the
financial year and the date of this report, likely in the opinion of the
directors of the Company, to affect significantly the operations of
the Group, the results of those operations, or the state of affairs of
the Group, in future financial years.
DIRECTORS’ SHAREHOLDINGS AND
OTHER INTERESTS
The relevant interest of each person who held the position of
director during the year, and their director-related entities, in
the shares and options over shares issued by the Company, as
notified by the directors to the Australian Securities Exchange in
accordance with Section 205G(1) of the Corporations Act 2001, at
the date of this report are:
Ordinary shares
Options
Current Directors
Phillip Arnall
262,500
John O’Neill
13,917,940
Andrew Purcell
82,347
–
–
–
Kerogen Investment No 1 (HK) Limited (“Kerogen”) holds
342,807,985 ordinary shares in the Company (equivalent to
58.58% of issued shares). Julian Ball is a Managing Director and
representative of Kerogen and is also a Director of AJ Lucas.
Insurance premiums
Since the end of the previous financial year, the Company has paid
premiums in respect of Directors’ and Officers’ liability and legal
expenses insurance contracts for the year ending 31 May 2018.
NON-AUDIT SERVICES
During the year, Ernst and Young, the Company’s auditor, has
performed certain other services in addition to the audit and
review of the financial statements.
The Board has considered the non-audit services provided during
the year by the auditor and in accordance with written advice
provided by resolution of the Audit and Risk Committee, is satisfied
that the provision of those non-audit services during the year
by the auditor is compatible with, and did not compromise, the
auditor independence requirements of the Corporations Act 2001
for the following reasons:
•
•
all non-audit services were subject to the corporate
governance procedures adopted by the Company and have
been reviewed by the Audit and Risk Committee to ensure they
do not impact the integrity and objectivity of the auditor; and
the non-audit services provided do not undermine the general
principles relating to auditor independence as set out in APES
110 ‘Code of Ethics for Professional Accountants’, as they did
not involve reviewing or auditing the auditor’s own work,
acting in a management or decision-making capacity for the
Company, acting as an advocate for the Company or jointly
sharing risks and rewards.
Payments due to the auditor of the Company and its related
practices for non-audit services provided during the year, as set
out in Note 9 of the consolidated financial statements, amounted
to $70,000 (2016: $174,337).
LEAD AUDITOR’S INDEPENDENCE
DECLARATION
The Lead auditor’s independence declaration is set out on page 31
and forms part of the Directors’ Report for the financial year ended
30 June 2017.
26
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT ROUNDING OFF
The Company is of a kind referred to in ASIC Corporations
Instrument 2016/191 (Rounding in Financial/Directors’ Reports)
issued by the Australian Securities and Investments Commission.
Unless otherwise expressly stated, amounts in the condensed
consolidated interim financial report and the directors’ report have
been rounded off to the nearest thousand dollars in accordance
with that Class Order.
REMUNERATION REPORT – AUDITED
The Directors present the Remuneration Report (“the Report”)
for the Company and its controlled entities for the year ended 30
June 2017. The Report forms part of the Directors’ Report and has
been audited in accordance with section 300A of the Corporations
Act 2001. The Report outlines the remuneration policy for key
management personnel comprising
1. The Non-executive directors (NEDs)
2. Senior executives (the Executives)
Key management personnel have authority and responsibility for
planning, directing and controlling the activities of the Company
and the Group.
Non-executive director
Phillip Arnall
Phillip Arnall
Julian Ball
Julian Ball
Ian Meares
Ian Meares
Andrew Purcell
Andrew Purcell
John O'Neill
John O'Neill
EXECUTIVE REMUNERATION
Policy
NON-EXECUTIVE DIRECTORS’
REMUNERATION
The Board’s policy for setting fees for non-executive directors
is to position them around the middle of market practice for
comparable non-executive director roles in companies listed
on the Australian Securities Exchange (ASX). Non-executive
directors do not receive performance related remuneration and
are not provided with retirement benefit apart from statutory
superannuation. Options and other forms of equity are not
provided for non-executive directors.
Total remuneration for all non-executive directors, last voted upon
at the 2013 Annual General Meeting, is not to exceed $750,000
per annum. The remuneration for each non-executive director is
currently $90,000 per annum, and $225,000 for the Chairman
which reflect in part the ongoing additional commitment required
as a result of the resignation of the Chief Executive Officer in
the prior reporting period. Prior to 1 July 2016 the Chairman’s
remuneration was $135,000 per annum.
In addition, $5,000 per annum is paid to directors for serving on
any committee of the Board. Where directors perform consulting
services to the Group outside of their director duties, additional
fees are paid based on commercial terms and are disclosed as
related party transactions in Note 31 of the financial report.
The following table presents details of the remuneration of each
non-executive director.
Board fees
including
superannuation
$
Committee
fees including
superannuation
$
225,000
135,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
10,000
10,000
10,000
10,000
5,000
5,000
5,000
5,000
5,000
5,000
Year
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Total
$
235,000
145,000
100,000
100,000
95,000
95,000
95,000
95,000
95,000
95,000
The key principle of the Company’s remuneration policy for key management personnel (“KMP”) is to set remuneration at a level that
will attract and retain appropriately skilled and motivated executives, including executive directors, and motivate and reward them
to achieve strategic objectives and improve business results. The Remuneration Committee obtains independent advice from time
to time on the appropriateness of remuneration packages given trends in comparative companies and the objectives of the Group’s
remuneration strategy.
The overriding philosophy of the remuneration structure is to reward employees for increasing shareholder value. This is achieved by
providing a fixed remuneration component, together with performance-based incentives.
AJ Lucas aims to set fixed annual remuneration at market median levels for jobs of comparable size and responsibility using established job
evaluation methods and to provide incentives to enable top performers to be remunerated at the upper end of the market range, subject
always to the performance of the Group.
The aim of the incentive plans is to drive performance to successfully implement annual business plans and increase shareholder value.
27
DIRECTORS’ REPORT Fixed remuneration
Fixed remuneration consists of base remuneration which is calculated on a total cost basis and includes any allowances and fringe benefit
tax charges related to employee benefits including motor vehicles as well as employer contributions to superannuation funds.
Remuneration levels are reviewed annually through a process that considers individual and segment performance of the Group. This
process includes consultation with external consultants and review of external databases to benchmark remuneration levels with
comparable companies.
Performance linked compensation
Performance linked remuneration may include short-term incentives that is designed to reward key management personnel for meeting or
exceeding their financial and personal objectives.
The short-term incentive (STI) is an ‘at risk’ bonus generally provided in the form of cash. Executives have the ability to earn an STI of up to
60% of their fixed annual remuneration, based on achievement of certain criteria. Any portion of an STI over 20% of a KMP’s fixed annual
remuneration will be held over and paid in 12 months provided the KMP continues to be employed by the Group. The criteria include a
mix of:
1. Corporate performance targets, measured mainly in reference to a mix of Group and Divisional underlying EBITDA performance
weighted commensurate with the employee’s role;
2. Corporate sustainability and safety performance; and
3.
Individual key performance indicators agreed annually between the Company and the individual.
Relationship of remuneration to Company performance
In considering the Group’s performance and benefits for shareholder value, the Remuneration Committee has had regard to the following
indices in respect of the current financial year and the previous four financial years.
Year ended 30 June
Total revenue ($'000)
Underlying EBITDA
2017
2016
2015
2014
2013
121,970
125,478
145,028
227,894
294,791
(3,846)
14,556
9,405
204
3,332
Net loss after tax attributable to members ($'000)
(39,030)
(19,485)
(45,216)
(91,693)
(126,996)
Loss per share (cents)
Dividend per share (cents)
Share price at balance date
Share price appreciation/(depreciation)
STI to KMP in relation to the year’s performance ($’000)
(9.7)
–
$0.22
22%
0
(6.7)
–
$0.18
(54%)
482
(16.9)
(34.6)
(97.6)
–
$0.39
(58%)
54
–
$0.93
(23%)
–
–
$1.20
13%
–
The corporate performance targets set by the Board were not achieved during the financial year and as such there were no bonuses
accrued or otherwise approved to key management personnel during the year.
Bonuses accrued in financial year 2016, which totaled $482,000 to KMP, were paid in financial year 2017. These were triggered by
business performance, as measured by underlying EBITDA, having exceeded annual targets, as well as the achievement of individual key
performance indicators.
No loans were made at any time during the year and no loans remain outstanding to any key management personnel.
28
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT n %
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E
DIRECTORS’ REPORT
Options over equity instruments granted as compensation
No options over ordinary shares in the Company were granted as compensation to key management person during the reporting period.
There were no outstanding options at the beginning of the financial year.
Analysis of movements in shares
The movement during the reporting period in the number of ordinary shares of the Company held directly, indirectly or beneficially by each
key management person, including their related parties, is as follows:
2017
Directors
Phillip Arnall
Andrew Purcell
John O'Neill
Executives
Brett Tredinnick
John Stuart-Robertson
Austen Perrin
Held at
1 July 2016 Purchased
Pro rata
rights
issue (1)
Net other
changes (2)
Held at
30 June
2017
175,000
54,898
–
–
87,500
27,449
–
–
262,500
82,347
10,317,940
– 3,600,000
– 13,917,940
345,722
33,972
100,000
–
–
–
–
–
50,000
–
–
–
345,722
33,972
150,000
(1) Pro rata rights issue represents entitlement shares subscribed for under the 1 for 2 accelerated non-renounceable entitlement offer announced by the Company on
22 May 2017.
Kerogen increased its holdings in ordinary shares in the Company from 207,443,135 (54.43% of the then issued shares) to 342,807,985
(58.58% of issued shares). Julian Ball is a Managing Director and representative of Kerogen and is also a Director of AJ Lucas.
Signed in accordance with a resolution of the directors pursuant to s.298 (2) of the Corporations Act 2001.
Phillip Arnall,
Chairman
Dated at Sydney, this 31st day of August 2017
30
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ REPORT
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Auditor’s Independence Declaration to the Directors of AJ Lucas Group
Limited
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Ernst & Young
200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
As lead auditor for the audit of AJ Lucas Group Limited for the financial year ended 30 June 2017, I
declare to the best of my knowledge and belief, there have been:
Auditor’s Independence Declaration to the Directors of AJ Lucas Group
a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in
Limited
relation to the audit; and
b) no contraventions of any applicable code of professional conduct in relation to the audit.
As lead auditor for the audit of AJ Lucas Group Limited for the financial year ended 30 June 2017, I
This declaration is in respect of AJ Lucas Group Limited and the entities it controlled during the financial
declare to the best of my knowledge and belief, there have been:
year.
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 AJ Lucas Group Limited and the entities it controlled during the financial
year.
Ernst & Young
Ryan Fisk
Ernst & Young
Partner
31 August 2017
Ryan Fisk
Partner
31 August 2017
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
31
AUDITOR’S INDEPENDENCE DECLARATION
Consolidated statement
of comprehensive income
for the year ended 30 June 2017
Revenue
Total revenue
Other income
Operating costs of Australian operations
Central and corporate costs
Depreciation and amortisation
Non operating expenses
Results from operations
Net finance costs
Share of loss of equity accounted investees
Loss before income tax
Income tax expense
Loss for the period
Other comprehensive income
Items that may be reclassified subsequently to profit and loss
Exchange differences on translation of foreign operations
Total items that may be reclassified subsequently to profit and loss
Other comprehensive income for the period
Total comprehensive loss for the period
Total comprehensive loss attributable to owners of the Company
Earnings per share:
Basic (loss)/earnings per share (cents)
Diluted (loss)/earnings per share (cents)
The accompanying notes are an integral part of these consolidated financial statements.
Note
2017
$’000
2016
$’000
6
121,970
125,478
8
8
7
17
10
121,970
125,478
619
522
(121,185)
(104,746)
(4,631)
(6,176)
(6,202)
(14,901)
(2,712)
(10,776)
(12,141)
(10,599)
(24,172)
(2,717)
(2,135)
(6,751)
(39,030)
(19,485)
–
–
(39,030)
(19,485)
(4,398)
(4,398)
4,392
4,392
(4,398)
4,392
(43,428)
(15,093)
(43,428)
(15,093)
11
11
(9.7)
(9.7)
(6.7)
(6.7)
3232
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTFINANCIAL STATEMENTS
Consolidated statement
of financial position
as at 30 June 2017
Current assets
Cash and cash equivalents
Cash in trust
Trade and other receivables
Inventories
Other assets
Total current assets
Non-current assets
Property, plant and equipment
Exploration assets
Investments in equity accounted investees
Total non-current assets
Total assets
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Employee benefits
Total current liabilities
Non-current liabilities
Interest-bearing loans and borrowings
Employee benefits
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Reserves
Accumulated losses
Total equity
The accompanying notes are an integral part of these consolidated financial statements.
Note
2017
$’000
2016
$’000
12
12
13
14
15
16
18
17
20
21
23
21
23
10,324
11,847
22,494
30,853
1,098
6,866
15,634
25,754
16,047
1,288
76,616
65,589
37,850
20,982
39,024
18,314
104,775
106,209
163,607
163,547
240,223
229,136
29,457
1,126
4,884
30,923
34,743
4,759
35,467
70,425
106,149
70,984
836
937
106,985
71,921
142,452
142,346
97,771
86,790
24
24
416,443
362,034
29,227
33,625
(347,899)
(308,869)
97,771
86,790
3333
FINANCIAL STATEMENTS
Consolidated statement
of changes in equity
for the year ended 30 June 2017
Balance 1 July 2016
Total comprehensive income
Loss for the period
Other comprehensive income
Foreign currency translation differences
Total comprehensive income/(loss)
Transactions with owners recorded directly
in equity
Share
capital
$’000
Translation
reserve
$’000
Option
reserve
$’000
Employee
equity
benefits
reserve
$’000
Accumulated
losses
$’000
Total
equity
$’000
362,034
28,955
637
4,033
(308,869)
86,790
–
–
–
–
(4,398)
(4,398)
–
–
–
–
–
–
–
–
–
–
(39,030)
(39,030)
–
(4,398)
(39,030)
(43,428)
–
–
54,409
54,409
Issue of ordinary shares, net of transaction costs
Total contributions by and distributions to owners
54,409
54,409
–
–
Balance 30 June 2017
416,443
24,557
637
4,033
(347,899)
97,771
Balance 1 July 2015
Total comprehensive income
Loss for the period
Other comprehensive income
Foreign currency translation differences
Total comprehensive income/(loss)
Transactions with owners recorded directly
in equity
Issue of ordinary shares, net of transaction costs
Share based payment transactions
Total contributions by and distributions to owners
339,670
24,563
637
4,007
(289,384)
79,493
–
–
–
–
4,392
4,392
22,364
–
22,364
–
–
–
–
–
–
–
–
–
–
–
–
–
26
26
(19,485)
(19,485)
–
4,392
(19,485)
(15,093)
–
–
–
22,364
26
22,390
Balance 30 June 2016
362,034
28,955
637
4,033
(308,869)
86,790
The accompanying notes are an integral part of these consolidated financial statements.
3434
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTFINANCIAL STATEMENTS
Consolidated statement
of cash flows
for the year ended 30 June 2017
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Cash used in operations
Interest received
Income taxes paid
Interest and other costs of finance paid
Net cash used in operating activities
Cash flows from investing activities
Payments for equity accounted investees
Payments for interest in exploration assets
Acquisition of plant and equipment
Recovery of receivables from equity accounted investees
Procees from sale of plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Transaction costs on borrowings
Proceeds from issue of shares
Transaction costs on share issue
Payment of finance lease liabilities
Corporate advisory fees
Net cash from financing activities
Net increase / (decrease) in cash and cash equivalents
Net foreign exchange difference
Cash and cash equivalents at beginning of the period
Cash and cash equivalents at end of the period
The accompanying notes are an integral part of these consolidated financial statements.
Note
2017
$’000
2016
$’000
123,198
135,121
(144,478)
(138,201)
(21,280)
(3,080)
202
–
241
(21,742)
(6,108)
(13)
30(b)
(27,186)
(24,594)
17
30(a)
(5,153)
(2,732)
(5,116)
–
228
(5,480)
(856)
(969)
525
136
(12,773)
(6,644)
24,381
32,459
(1,630)
18,201
(1,101)
(90)
–
(2,420)
10,314
(1,068)
(93)
(1,547)
39,761
37,645
(198)
(131)
22,500
22,171
6,407
138
15,955
22,500
3535
FINANCIAL STATEMENTS
36
36
38
44
44
45
46
46
47
48
48
49
49
49
49
50
50
51
53
54
54
56
56
57
58
62
64
65
65
66
67
68
69
1. REPORTING ENTITY
AJ Lucas Group Limited (“AJ Lucas” or “the Company”) is a
company domiciled in Australia. The address of the Company’s
registered office is 1 Elizabeth Plaza, North Sydney, NSW, 2060.
The consolidated financial statements of the Company as at and for
the financial year ended 30 June 2017 comprise the Company and
its subsidiaries (together referred to as the ‘Group’ and individually
referred to as ‘Group entities’).
AJ Lucas is a for-profit diversified infrastructure, construction and
mining services group specialising in providing services to the
energy, water and wastewater, resources and property sectors.
It also holds investments in unconventional and conventional
hydrocarbons in Europe and Australia.
2. BASIS OF PREPARATION
(A) STATEMENT OF COMPLIANCE
The consolidated financial statements are general purpose
financial statements which have been prepared in accordance with
Australian Accounting Standards (‘AASBs’) including Australian
interpretations adopted by the Australian Accounting Standards
Board (‘AASB’) and the Corporations Act 2001. The consolidated
financial statements comply with International Financial Reporting
Standards (IFRSs) and interpretations adopted by the International
Accounting Standards Board (IASB). The consolidated financial
statements were authorised for issue by the Board of Directors on
31 August 2017.
(B) BASIS OF MEASUREMENT
The consolidated financial statements have been prepared on the
historical cost basis except for the following:
•
•
derivative financial instruments are measured at fair
value; and
liabilities for cash-settled share-based payment arrangements
are measured at fair value.
The methods used to measure material fair values are discussed in
Note 5.
(C) GOING CONCERN
The consolidated financial statements have been prepared on a
going concern basis, which assumes that the Group will be able to
continue trading, realise its assets and discharge its liabilities in
the ordinary course of business, for a period of at least 12 months
from the date that these financial statements are approved.
The directors note the following events and conditions which have
been considered in assessing the appropriateness of the going
concern assumption:
•
The Group generated a loss after tax for the period of
$39.0 million, primarily as a result of: non-cash depreciation
and amortisation charges of $6.2 million; net finance costs
of $24.2 million; share of loss of equity accounted investee of
$2.7 million; and, non-operating expenses of $2.7 million;
•
The Group has a current asset surplus of $41.1 million.
INDEX
1. REPORTING ENTITY
2. BASIS OF PREPARATION
3. SIGNIFICANT ACCOUNTING POLICIES
4.
NEW STANDARDS AND INTERPRETATIONS
NOT YET ADOPTED
5. DETERMINATION OF FAIR VALUES
6. OPERATING SEGMENTS
7.
FINANCE INCOME AND FINANCE COSTS
8. OTHER EXPENSES
9. AUDITOR’S REMUNERATION
10. INCOME TAX
11. EARNINGS PER SHARE
12. CASH, CASH EQUIVALENTS AND CASH IN TRUST
13. TRADE AND OTHER RECEIVABLES
14.
INVENTORIES
15. OTHER ASSETS
16. PROPERTY, PLANT AND EQUIPMENT
17.
INVESTMENTS IN EQUITY ACCOUNTED INVESTEES
18. EXPLORATION ASSETS
19. DEFERRED TAX ASSETS AND LIABILITIES
20. TRADE AND OTHER PAYABLES
21. INTEREST-BEARING LOANS AND BORROWINGS
22. OPERATING LEASES
23. EMPLOYEE BENEFITS
24. CAPITAL AND RESERVES
25. FINANCIAL INSTRUMENTS
26. INTERESTS IN JOINT OPERATIONS
27. CONSOLIDATED ENTITIES
28. CONTINGENCIES AND COMMITMENTS
29. PARENT ENTITY DISCLOSURES
30. RECONCILIATION OF CASH FLOWS FROM
OPERATING ACTIVITIES
31. RELATED PARTIES
32. DEED OF CROSS GUARANTEE
33. EVENTS SUBSEQUENT TO BALANCE DATE
3636
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS •
•
•
The Group used net cash of $27.2 million in its operating
activities during the year with cash, cash equivalents and cash
in trust of $22.2 million at balance date;
The Group’s near term future financial performance will be
driven by demand for its drilling, engineering and construction
services, which in turn will be impacted by various factors
which are outside its control. The Group’s core markets in
Australia have remained depressed over recent year. However,
the price of coal has recovered significantly during the year,
although prices remained volatile. While the Drilling Division
has experienced a significantly strengthening in its order book
driven by increased demand for drilling services to the coal
sector, forecasting business performance carries an inherent
degree of uncertainty;
The Company has a 47.4% interest in Cuadrilla, which in
turn has a 51.25% interest in an oil and gas licence (PEDL
165) located in Bowland UK. Separately, the Company has a
direct interest of 23.75% in PEDL 165, thus giving an effective
48% interest in PEDL 165 (see Note 18). Approval to drill and
fracture 2 exploration wells in the licence was received from
the UK Government and drilling activity has commenced.
Appeals against the Secretary of State’s decision approval was
upheld in the High Court in April 2017. Further appeals are due
to be heard by the Court of Appeals in late August 2017 with
work continuing onsite; and
•
The ongoing exposure to contingent liabilities as disclosed in
Note 28.
In assessing the appropriateness of using the going
concern assumption, the Directors have had regard to the
following matters:
•
•
•
•
•
•
•
The ability of the Group to raise additional debt and/or equity,
as demonstrated during the year through the accelerated non-
renounceable entitlement offer launched in May 2017 and the
debt refinancing completed in June 2016;
The amount of cash in trust at balance date, as described in
Note 12;
The reasonableness of the profitability and cash flow forecasts
of the Group, which have been prepared by management
on the basis of past experience, guidance and commentary
provided by customers and competitors together with
macroeconomic indicators;
The arrangement summarised at Note 18 under which Centrica
Plc (“Centrica”) has provided certain commitments to fund
exploration expenditure in respect of the Bowland and
Elswick licences;
The continuing support of Kerogen Investments No. 1 (HK)
Limited (“Kerogen”), both as a substantial debtholder and
shareholder of the Company;
The implied value of the Group’s investment in both Cuadrilla
and also its direct holding in the Bowland and Elswick licences,
as evidenced by the partial sale of the Group’s direct and
indirect interests in the licences to Centrica in June 2013;
The significant increase in the value of the Bowland
licence should the 2 wells that are currently being drilled
be successful;
• Announcements made by the United Kingdom Government in
support of the shale gas industry to provide the indigenous
security of supply of energy in the United Kingdom; and
•
The ability of the Group to determine the extent and timing of
its future contributions to Cuadrilla.
In light of the above, if the entity is unable to continue as a going
concern, it may be required to realise its assets and extinguish its
liabilities other than in the normal course of business at amounts
different from those stated in the statement of financial position.
(D) FUNCTIONAL AND PRESENTATION CURRENCY
The consolidated financial statements are presented in Australian
dollars which is the Company’s functional currency. The Company
is of a kind referred to in ASIC Corporations Instrument 2016/191
(Rounding in Financial/Directors’ Reports) issued by the Australian
Securities and Investments Commission. Unless otherwise
expressly stated, amounts in these financial statements have been
rounded off to the nearest thousand dollars in accordance with
that Class Order.
(E) USE OF ESTIMATES AND JUDGMENTS
The preparation of the consolidated financial statements
in conformity with AASBs requires management to make
judgements, estimates and assumptions that affect the application
of accounting policies and the reported amount of assets,
liabilities, income and expenses. Actual results may differ from
these estimates.
Estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised and in any future
periods affected.
Information about significant areas of estimation uncertainty
and critical judgements in applying accounting policies that
have the most significant effect on the amount recognised
in the consolidated financial statements are described in the
following notes:
• Note 3(f) – Estimation of percentage completion in relation to
revenue recognition
• Note 14 – Inventories;
• Note 17 – Carrying value of equity accounted investments
• Note 18 – Carrying value of exploration assets
• Note 19 – Recognition of deferred tax asset;
• Note 25 – Valuation of financial instruments; and
• Note 28 – Contingencies.
(F) CHANGES IN ACCOUNTING POLICIES
The accounting policies set out below have been applied
consistently to all periods presented in these consolidated
financial statements, and have been applied consistently by all
Group entities.
3737
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF CONSOLIDATION
Business combinations
Business combinations are accounted for using the acquisition
method as at the acquisition date, which is the date on which
control is transferred to the Group. The consideration transferred
in the acquisition is measured at fair value, as are the identifiable
net assets acquired. The excess of consideration transferred over
the fair value of net assets acquired is recognised as goodwill and
is tested annually for impairment. Transaction costs, other than
those associated with the issue of debt or equity securities, that
the Group incurs in connection with a business combination are
expensed as incurred.
The consideration transferred does not include amounts related
to the settlement of pre-existing relationships. Such amounts are
generally recognised in profit or loss.
Any contingent consideration payable is recognised at fair value at
the acquisition date. If the contingent consideration is classified as
equity, it is not remeasured and settlement is accounted for within
equity. Otherwise, subsequent changes to the fair value of the
contingent consideration are recognised in profit or loss.
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group
controls an entity when it is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability
to affect those returns through its power over the entity. Power
is determined in relation to rights that give the Group the current
ability to direct the activities that significantly affect returns from
the Group’s investment. In assessing control, the Group takes into
consideration potential voting rights that currently are exercisable.
The financial statements of subsidiaries are included in the
consolidated financial statements from the date that control
commences until the date that control ceases.
Investments in equity accounted investees
The Group’s interest in equity accounted investees comprise
interests in joint ventures and an associate.
Associates are those entities in which the Group has significant
influence, but not control or joint control, over the financial and
operating policies. Jointly ventures are those entities over whose
activities the Group has joint control, whereby the Group has rights
to the net assets of the arrangement, rather than rights to its
assets and obligations for its liabilities.
Investments in associates and joint ventures are accounted for
using the equity method and are initially recognised at cost, which
includes transaction costs. Subsequent to initial recognition, the
consolidated financial statements include the
Group’s share of the profit or loss and other comprehensive
income of equity accounted investees, after adjustments to align
the accounting policies with those of the Group, from the date that
significant influence or joint control commences until the date that
significant influence or joint control ceases. A partial redemption of
equity interests is accounted for as a reduction in the investment
value equal to the cash redemption.
3838
When the Group’s share of losses exceeds its interest in an equity
accounted investee, the carrying amount of that interest, including
any long-term investments that form part thereof, is reduced to
zero, and the recognition of further losses is discontinued except to
the extent that the Group has an obligation or has made payments
on behalf of the investee.
Joint operations
An operation is a joint arrangement whereby the parties that
jointly control the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement. The
consolidated financial statements include the Group’s share of
assets and liabilities held jointly and the Group’s share of expenses
incurred and income earned jointly.
Transactions eliminated on consolidation
Intra-group balances and transactions, and any unrealised
income and expenses, are eliminated in preparing the
consolidated financial statements. Unrealised gains arising from
transactions with equity accounted investees are eliminated
against the investment to the extent of the Group’s interest in
the investee. Unrealised losses are eliminated in the same way as
unrealised gains, but only to the extent that there is no evidence
of impairment.
(B) FOREIGN CURRENCY
Foreign currency transactions
Transactions in foreign currencies are translated to the respective
functional currencies of the Group’s entities at exchange rates at
the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies
at the reporting date are translated to the functional currency at
the exchange rate at reporting date.
Non-monetary assets and liabilities denominated in foreign
currencies that are measured at fair value are retranslated to
the functional currency at the exchange rate at the date that
the fair value was determined. Non-monetary items in a foreign
currency that are measured in terms of historical cost are not
retranslated. Foreign currency differences arising on retranslation
are recognised in profit or loss, except for differences arising
on the retranslation of available-for-sale equity instruments
or qualifying cash flow hedges, which are recognised in other
comprehensive income.
Foreign operations
The assets and liabilities of foreign operations, including
goodwill and fair value adjustments arising on acquisition, are
translated to Australian dollars at exchange rates at the reporting
date. The income and expenses of foreign operations are
translated to Australian dollars at exchange rates at the dates of
the transactions.
Foreign currency differences are recognised in other
comprehensive income, and presented in the foreign currency
translation reserve (translation reserve) in equity. When a foreign
operation is disposed of such that control, significant influence
or joint control is lost, the cumulative amount in the translation
reserve related to that foreign operation is reclassified to profit
or loss as part of the gain or loss on disposal. When the Group
disposes of only part of its interest in a subsidiary that includes a
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS foreign operation while retaining control, the relevant proportion
of the cumulative amount is reattributed to non-controlling
interests. When the Group disposes of only part of an associate or
joint venture while retaining significant influence or joint control,
the relevant proportion of the cumulative amount is reclassified to
profit or loss.
When the settlement of a monetary item receivable from or
payable to a foreign operation is neither planned nor likely in the
foreseeable future, foreign exchange gains and losses arising
from such a monetary item are considered to form part of a net
investment in a foreign operation and are recognised in other
comprehensive income and are presented in the translation
reserve in equity.
(C) FINANCIAL INSTRUMENTS
The Group classifies non-derivative financial assets into the
following categories: financial assets at fair value through profit
and loss, held to maturity financial assets, loans and receivables
and available for sale financial assets.
Non-derivative financial assets and financial liabilities
– recognition and de-recognition
The Group initially recognises loans and receivables and debt
securities on the date that they are originated. All other financial
assets and financial liabilities are recognised initially on the
trade date.
The Group derecognises a financial asset when the contractual
rights to the cash flows from the asset expire, or it transfers the
rights to receive the contractual cash flows on the financial asset
in a transaction in which substantially all the risks and rewards
of ownership of the financial asset are transferred. Any interest
in transferred financial assets that is created or retained by the
Group is recognised as a separate asset or liability.
The Group derecognises a financial liabilities when its contractual
obligations are discharged, cancelled or expire.
Financial assets and liabilities are offset and the net amount
presented in the statement of financial position when, and only
when, the Group has a legal right to offset the amounts and
intends either to settle on a net basis or to realise the asset and
settle the liability simultaneously.
Non-derivative financial assets and financial
liabilities - measurement
Loans and receivables
Loans and receivables are financial assets with fixed or
determinable payments that are not quoted in an active market.
They comprise trade and other receivables.
Such assets are recognised initially at fair value plus any directly
attributable transaction costs. Subsequent to initial recognition
they are measured at amortised cost using the effective interest
method, less any impairment losses.
Non-derivative financial liabilities
The Group classifies non-derivative financial liabilities into the
other financial liabilities category. Other financial liabilities
comprise loans and borrowings, bank overdrafts and trade and
other payables. Such financial liabilities are recognised initially
at fair value plus any directly attributable transaction costs.
Subsequent to initial recognition, these financial liabilities are
measured at amortised cost using the effective interest method.
Derivative financial instruments, including hedge accounting
The Group may from time to time hold derivative financial
instruments. Embedded derivatives are separated from the host
contract and accounted for separately if certain criteria are met.
Derivatives are recognised initially at fair value; attributable
transaction costs are recognised in profit or loss as incurred.
Subsequent to initial recognition, derivatives are measured at
fair value and changes therein are generally recognised in profit
and loss.
(D) SHARE CAPITAL
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of ordinary shares and share options are
recognised as a deduction from equity, net of any tax effects.
Dividends are recognised as a liability in the period in which they
are declared.
(E) LEASES
At inception of an arrangement, the Group determines whether the
arrangement is or contains a lease.
Leased assets
Leases where the Group assumes substantially all the risks and
rewards of ownership are classified as finance leases. Upon initial
recognition, the leased asset is measured at an amount equal to
the lower of its fair value and the present value of the minimum
lease payments. Subsequent to initial recognition, the asset is
accounted for in accordance with the accounting policy applicable
to that asset.
Other leases are operating leases and are not recognised on the
Group’s statement of financial position.
Lease payments
Payments made under operating leases are recognised in profit
or loss on a straight-line basis over the term of the lease. Lease
incentives received are recognised as an integral part of the total
lease expense, over the term of the lease.
Minimum lease payments made under finance leases are
apportioned between the finance expense and the reduction of
the outstanding liability. The finance expense is allocated to each
period during the lease term so as to produce a constant periodic
rate of interest on the remaining balance of the liability.
Cash and cash equivalents
Comprise cash balances and call deposits with original maturities
of three months or less.
(F) REVENUE
Services rendered
Cash in trust
Comprises cash balances held in trust under the terms of the
senior term loan notes.
Revenue from services rendered is recognised in profit or loss in
proportion to the stage of completion of the transaction at the
reporting date. The stage of completion is assessed by reference to
surveys of work performed.
3939
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Construction contracts
Contract revenue includes the initial amount agreed in the
contract plus any variations in contract work, claims and incentive
payments to the extent that it is probable that they will result in
revenue and can be measured reliably. As soon as the outcome
of a construction contract can be estimated reliably, contract
revenue is recognised in profit or loss in proportion to the stage
of completion of the contract. Contract expenses are recognised
as incurred unless they create an asset related to future
contract activity.
The stage of completion is assessed by reference to surveys of
work performed. When the outcome of a construction contract
cannot be estimated reliably, contract revenue is recognised
only to the extent of contract costs incurred that are likely to
be recoverable. An expected loss on a contract is recognised
immediately in the profit or loss.
(G) FINANCE INCOME AND FINANCE COSTS
Finance income comprises interest income on funds invested and
gains on hedging instruments that are recognised in profit or loss.
Interest income is recognised as it accrues in profit or loss, using
the effective interest method.
Finance costs comprise interest expense on borrowings, unwinding
of the discount on provisions and deferred consideration, foreign
currency losses and losses on financial instruments. Borrowing
costs that are not directly attributable to the acquisition,
construction or production of a qualifying asset are recognised in
profit or loss using the effective interest method.
Foreign currency gains and losses are reported on a net basis.
(H)
INCOME TAX
Income tax expense comprises current and deferred tax. Income
tax is recognised in profit or loss except to the extent that it relates
to a business combination, or items recognised directly in equity,
or in other comprehensive income.
Current tax
Current tax is the expected tax payable or receivable on the
taxable income or loss for the year, using tax rates enacted or
substantially enacted at the reporting date, and any adjustment
to tax payable in respect of previous years. Current tax unpaid at
the end of the year is recognised as an income tax liability. Also
included in income tax liability is outstanding current tax liabilities
in relation to prior periods where contractually agreed payment
plans have been put in place.
Deferred tax
Deferred tax is recognised in respect of deductible temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for
taxation purposes. Deferred tax is not recognised for the following
temporary differences:
•
the initial recognition of assets or liabilities in a transaction
that is not a business combination and that affects neither
accounting nor taxable profit or loss;
•
relating to investments in subsidiaries and associates and joint
arrangements to the extent that it is probable that they will
not reverse in the foreseeable future; and
•
arising on the initial recognition of goodwill.
Deferred tax is measured at the tax rates that are expected to
be applied to temporary differences when they reverse, based
on the laws that have been enacted or substantively enacted
by the reporting date. Deferred tax assets and liabilities are
offset if there is a legally enforceable right to offset current tax
liabilities and assets, and they relate to income taxes levied by
the same tax authority on the same taxable entity, or on different
tax entities, but they intend to settle current tax liabilities and
assets on a net basis or their tax assets and liabilities will be
realised simultaneously.
A deferred tax asset is recognised only to the extent that it is
probable that future taxable profits will be available against which
the temporary difference can be utilised. Deferred tax assets are
reviewed at each reporting date and are reduced to the extent that
it is no longer probable that the related tax benefit will be realised.
Tax consolidation
The Company and its wholly owned Australian resident entities are
part of a tax-consolidated group. As a consequence, all members
of the tax consolidated group are taxed as a single entity. The head
entity within the tax-consolidated group is AJ Lucas Group Limited.
Current tax expense/income, deferred tax liabilities and deferred
tax assets arising from temporary differences of the members of
the tax-consolidated group are recognised in the separate financial
statements of the members of the tax-consolidated group using
the group allocation approach.
Any current tax liabilities (or assets) and deferred tax assets
arising from unused tax losses of the subsidiaries are assumed by
the head entity in the tax-consolidated group and are recognised
by the Company as amounts payable (receivable) to/(from) other
entities in the tax-consolidated group in conjunction with any
tax funding arrangement amounts (refer below). Any difference
between these amounts is recognised by the Company as an equity
contribution or distribution.
The Company recognises deferred tax assets arising from unused
tax losses of the tax-consolidated group to the extent that it is
probable that future taxable profits of the tax-consolidated group
will be available against which the asset can be utilised.
Any subsequent period adjustments to deferred tax assets arising
from unused tax losses as a result of revised assessments of the
probability of recoverability is recognised by the head entity only.
Nature of tax funding arrangements and tax
sharing arrangements
The head entity, in conjunction with other members of the tax-
consolidated group, has entered into a tax funding arrangement
which sets out the funding obligations of members of the tax-
consolidated group in respect of tax amounts. The tax funding
arrangements require payments to/from the head entity equal to
the current tax liability/(asset) assumed by the head entity and any
tax-loss deferred tax asset assumed by the head entity, resulting in
the head entity recognising an inter-entity receivables/(payables)
equal in amount to the tax liability/(asset) assumed. The inter-
entity receivables/(payables) are at call.
4040
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Contributions to fund the current tax liabilities are payable as
per the tax funding arrangement and reflect the timing of the
head entity’s obligation to make payments for tax liabilities to the
relevant tax authorities.
The head entity in conjunction with other members of the
tax-consolidated group, has also entered into a tax sharing
agreement. The tax sharing agreement provides for the
determination of the allocation of income tax liabilities
between the entities should the head entity default on its tax
payment obligations.
(I) EARNINGS PER SHARE
The Group presents basic and diluted earnings per share (EPS)
data for its ordinary shares. Basic EPS is calculated by dividing the
profit or loss attributable to ordinary shareholders of the Company
by the weighted average number of ordinary shares outstanding
during the period. Diluted EPS is determined by adjusting the profit
or loss attributable to ordinary shareholders and the weighted
average number of ordinary shares outstanding for the effects
of all dilutive potential ordinary shares, which comprise share
rights and options granted to employees and the options over the
Company’s ordinary shares.
(J) SEGMENT REPORTING
An operating segment is a component of the Group that engages
in business activities from which it may earn revenues and
incur expenses, including revenues and expenses that relate
to transactions with any of the Group’s other components. All
operating segment operating results are regularly reviewed by
the Group’s Executive Leadership Team (“ELT”) to make decisions
about resources to be allocated to the segment and assess its
performance, and for which discrete financial information is
available. The ELT is the primary decision making body responsible
for the day to day management of the business and comprises
the Group’s Executive General Managers, the Human Resources
Executive, The Chief Financial Officer and is chaired by the
Chairman of the Board.
Segment results that are reported to the ELT include items directly
attributable to a segment as well as those that can be allocated on
a reasonable basis. Unallocated items comprise mainly corporate
assets, head office expenses, and income tax assets and liabilities.
(K) CONSTRUCTION WORK IN PROGRESS
Construction work in progress represents the gross unbilled
amount expected to be collected from customers for contract work
performed to date. It is measured at cost plus profit recognised to
date less progress billings and recognised losses. Cost includes all
expenditure related directly to specific projects and an allocation
of fixed and variable overheads incurred in the Group’s contract
activities based on normal operating capacity.
Construction work in progress is presented as part of inventories
in the statement of financial position for all contracts where
costs incurred plus recognised profits exceed progress billings.
If progress billings exceed costs incurred plus recognised profits,
then the difference is presented as deferred income in the
statement of financial position.
(L)
INVENTORIES
Inventories are valued at the lower of cost and net realisable value.
Cost incurred in bringing each product to its present location and
condition are included in the cost of inventory. Net realisable value
is the estimated selling price in the ordinary course of business.
(M) PROPERTY, PLANT AND EQUIPMENT
Recognition and measurement
Items of property, plant and equipment are measured at cost less
accumulated depreciation and impairment losses.
Cost includes cost of materials and direct labour, the costs of
dismantling and removing the items and restoring the site on which
they are located and any other costs attributable to bringing the
assets to a working condition for their intended use. Cost may also
include transfers from other comprehensive income of any gain or
loss on qualifying cash flow hedges of foreign currency purchases
of property, plant and equipment. In respect of borrowing costs
relating to qualifying assets, the Group capitalises borrowing costs
directly attributable to the acquisition, construction or production
of a qualifying asset as part of the cost of that asset. Purchased
software that is integral to the functionality of the related
equipment is capitalised as part of that equipment.
When parts of an item of property, plant and equipment have
different useful lives, they are accounted for as separate items
(major components) of property, plant and equipment.
Sale of non-current assets
The net gain or loss on disposal is included in profit or loss at
the date control of the asset passes to the buyer, usually when
an unconditional contract for sale is signed. The gain or loss on
disposal is calculated as the difference between the carrying
amount of the asset at the time of disposal and the net proceeds
on disposal (including incidental costs).
Subsequent costs
The cost of replacing part of an item of property, plant and
equipment is capitalised in the carrying amount of the item if it is
probable that the future economic benefits embodied within the
part will flow to the Group and its cost can be measured reliably.
The costs of the day-to-day servicing of property, plant and
equipment are recognised in profit or loss as incurred.
Depreciation
Depreciation is calculated to write off the cost of items of property,
plant and equipment, less their estimated residual value, using the
straight line method over the estimated useful life. Leased assets
are depreciated over the shorter of the lease term and their useful
lives unless it is reasonably certain that the Group will obtain
ownership by the end of the lease term. Depreciation is recognised
in the profit and loss.
During the year the Company has re-evaluated the useful life
of plant and equipment, following an external review. This has
resulted in an increase in the assessed useful life of some plant and
equipment thereby reducing depreciation expense. The decrease
for the period as a result of increased useful life is estimated at
$8 million.
4141
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Estimated useful lives for the current and comparative periods are
as follows:
Leasehold improvements
Buildings
Plant and equipment
Leased plant and equipment
Enterprise Development
Years
5
10-40
3-15
3-15
6
The residual value, useful life and depreciation method applied to
an asset are adjusted if appropriate at least annually.
(N)
INTANGIBLE ASSETS
Other intangible assets
Other intangible assets that are acquired by the Group are
measured at cost less accumulated amortisation and accumulated
impairment losses.
Subsequent expenditure
Subsequent expenditure on capitalised intangible assets is
capitalised only when it increases the future economic benefits
embodied in the specific asset to which it relates. All other
expenditure is recognised in profit or loss as incurred.
(O) EXPLORATION AND EVALUATION ASSETS
Exploration and evaluation costs, including the costs of acquiring
licences, are capitalised as exploration and evaluation assets on
an area of interest basis. Costs incurred before the Group has
obtained legal rights to explore an area are recognised in profit
or loss.
Exploration and evaluation assets are only recognised if the rights
of the area of interest are current and either:
•
•
the expenditures are expected to be recouped through
successful development and exploitation of the area of
interest; or
activities in the area of interest have not at the reporting date,
reached a stage which permits a reasonable assessment of the
existence or otherwise of economically recoverable reserves
and active and significant operations in, or in relation to, the
area of interest are continuing.
Exploration and evaluation assets are assessed for impairment
if sufficient data exists to determine technical feasibility and
commercial viability, and facts and circumstances suggest that
the carrying amount exceeds the recoverable amount. For the
purposes of impairment testing, exploration and evaluation assets
are allocated to cash-generating units to which the exploration
activity relates. The cash generating unit shall not be larger than
the area of interest.
In applying the exploration and evaluation asset recognition policy,
and in determining recoverable amount management are required
to make certain estimates and assumptions as to future events
and circumstances, in particular whether an economically viable
4242
extraction operation can be established. Any such estimates and
assumptions may change as new information becomes available.
Where the Group is party to a farm-in arrangement any proceeds
or non-cancellable expenditure funded by the purchaser is
recognised as disposal proceeds. The non-cancellable expenditure
to be funded by the purchaser is recognised as a receivable carry
asset within exploration assets in accordance with the Group’s
interest percentage. The assets disposed per the terms of the
farm-in arrangement are treated as costs of disposal, alongside
any other costs incurred, with the net profit or loss recognised in
the income statement as incurred.
The cancellable portion of deferred consideration, and
consideration contingent on a future event is disclosed as a
contingent asset and is not recognised by the Group until it has
actually been incurred or becomes non-cancellable, at which
point, additional profit will be recognised in the profit and loss for
these amounts.
(P)
IMPAIRMENT
Financial assets (including receivables)
A financial asset not carried at fair value through profit or loss is
assessed at each reporting date to determine whether there is
objective evidence that it is impaired. A financial asset is impaired
if objective evidence indicates that a loss event has occurred after
the initial recognition of the asset, and that the loss event had a
negative effect on the estimated future cash flows of that asset
that can be estimated reliably.
Objective evidence that financial assets (including equity
securities) are impaired can include default or delinquency by a
debtor, restructuring of an amount due to the Group on terms that
the Group would not consider otherwise, indications that a debtor
or issuer will enter bankruptcy, or the disappearance of an active
market for a security. In addition, for an investment in an equity
security, a significant or prolonged decline in its fair value below its
cost is objective evidence of impairment.
The Group considers evidence of impairment for receivables at
both a specific asset and collective level. All individually significant
receivables are assessed for specific impairment. All individually
significant receivables found not to be specifically impaired are
then collectively assessed for any impairment that has been
incurred but not yet identified. Receivables that are not individually
significant are collectively assessed for impairment by grouping
together receivables with similar risk characteristics.
In assessing collective impairment, the Group uses historical
trends of the probability of default, timing of recoveries and the
amount of loss incurred, adjusted for management’s judgement as
to whether current economic and credit conditions are such that
the actual losses are likely to be greater or less than suggested by
historical trends.
An impairment loss in respect of a financial asset measured at
amortised cost is calculated as the difference between its carrying
amount and the present value of the estimated future cash flows
discounted at the asset’s original effective interest rate. Losses are
recognised as profit or loss and reflected in an allowance account
against receivables. Interest on the impaired asset continues
to be recognised through the unwinding of the discount. When
a subsequent event causes the amount of impairment loss to
decrease, the decrease in impairment loss is reversed through
profit or loss.
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Non-financial assets
The carrying amounts of the Group’s non-financial assets (other
than inventories, construction work in progress and deferred tax
assets) are reviewed at each reporting date to determine whether
there is any indication of impairment. If any such indication exists,
then the asset’s recoverable amount is estimated.
The recoverable amount of an asset or cash-generating unit is
the greater of its value in use and its fair value less costs to sell.
In assessing value in use, the estimated future cash flows are
discounted to their present value using a post-tax discount rate
that reflects current market assessments of the time value of
money and the risks specific to the asset.
For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash
inflows from continuing use that are largely independent of
the cash inflows of other assets or Group’s of assets (“the cash
generating unit” or “CGU”). The Group’s corporate assets do not
generate separate cash inflows. If there is an indication that a
corporate asset may be impaired, then the recoverable amount is
determined for the CGU to which the corporate asset belongs.
An impairment loss is recognised if the carrying amount of an
asset or its CGU exceeds its recoverable amount. Impairment
losses are recognised in profit or loss. Impairment losses
recognised in respect of CGUs are allocated first to reduce the
carrying amount of any goodwill allocated to the units and then to
reduce the carrying amount of the other assets in the unit (group
of units) on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In
respect of other assets, impairment losses recognised in prior
periods are assessed at each reporting date for any indications
that the loss has decreased or no longer exists. An impairment
loss is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss is
reversed only to the extent that the asset’s carrying amount does
not exceed the carrying amount that would have been determined,
net of depreciation or amortisation, if no impairment loss had
been recognised.
Goodwill that forms part of the carrying amount of an investment
in an associate is not recognised separately, and therefore is not
tested for impairment separately. Instead, the entire amount of
the investment in an associate is tested for impairment as a single
asset when there is objective evidence that the investment in an
associate may be impaired.
and related on costs. Benefits are discounted to determine their
present value, using the yield at the reporting date on government
bonds that have maturity dates approximating the terms of
the Group’s obligations. The calculation is performed using
the projected unit credit method. Any actuarial gains or losses
are recognised in the income statement in the period in which
they arise.
Termination benefits
Termination benefits are recognised as an expense when the
Group is demonstrably committed, without realistic possibility
of withdrawal, to a formal detailed plan to either terminate
employment before the normal retirement date, or to provide
termination benefits as a result of an offer made to encourage
voluntary redundancy. Termination benefits for voluntary
redundancies are recognised as an expense if the Group has made
an offer of voluntary redundancy, it is probable that the offer will
be accepted, and the number of acceptances can be estimated
reliably. If benefits are payable more than 12 months after the
reporting period, then they are discounted to their present value.
Short-term benefits
Short-term employee benefit obligations are measured on an
undiscounted basis and are expensed as the related service is
provided. A liability is recognised for the amount expected to be
paid under short-term cash bonus or profit-sharing plans if the
Group has a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee and
the obligation can be estimated reliably.
Share-based payment transactions
The grant date fair value of share based payment awards granted
to employees is recognised as an employee expense, with a
corresponding increase in equity, over the period in which the
employees become unconditionally entitled to the awards.
The amount recognised as an expense is adjusted to reflect the
number of awards for which the related service and non-market
vesting conditions are expected to be met, such that the amount
ultimately recognised as an expense is based on the number of
awards that meet the related service and non-market performance
conditions at the vesting date. For share-based payment awards
with non-vesting conditions, the grant date fair value of the
share-based payment is measured to reflect such conditions
and there is no true-up for differences between expected and
actual outcomes.
(Q) EMPLOYEE BENEFITS
(R) PROVISIONS
Defined contribution superannuation funds
A defined contribution plan is a post-employment benefit plan
under which an entity pays fixed contributions into a separate
entity and will have no legal or constructive obligation to pay
further amounts. Obligations for contributions to defined
contribution plans are recognised as an employee benefit expense
in profit or loss in the periods during which services are rendered
by employees.
A provision is recognised if, as a result of a past event, the
Group has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic
benefits will be required to settle the obligation. Provisions are
determined by discounting the expected future cash flows at a
pre-tax rate that reflects current market assessments of the time
value of money and the risks specific to the liability. The unwinding
of the discount is recognised as finance cost.
Other long-term employee benefits
Onerous contracts
The Group’s net obligation in respect of long-term employee
benefits is the amount of future benefit that employees have
earned in return for their service in the current and prior periods
A provision for onerous contracts is measured at the present value
of the lower of the expected cost of terminating the contract and
the expected net cost of continuing with the contract.
4343
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. NEW STANDARDS AND
INTERPRETATIONS NOT YET ADOPTED
The following accounting standards, amendments to accounting
standards and interpretations have been identified as those
which may impact the Group in the period of initial adoption.
They were available for early adoption for the Group’s annual
reporting period beginning 1 July 2015, but have not been applied
in preparing this financial report.
AASB 9 FINANCIAL INSTRUMENTS
AASB 9 Financial Instruments replaces the existing guidance in
AASB 139 Financial Instruments: Recognition and measurement.
AASB 9 includes revised guidance on the classification and
measurement of financial instruments, including a new expected
credit loss model for calculating impairment of financial assets and
the new general ledger hedge accounting requirements. It also
carries forward the guidance and recognition and derecognition
of financial instruments from AASB 139. AASB 9 is effective
for annual reporting periods on or after 1 July 2018, with early
adoption permitted. The impact of this standard has yet to be
quantified by the Group.
AASB 15 REVENUE FROM CONTRACTS
AASB 15 Revenue from Contracts with Customers establishes a
comprehensive framework for determining whether, how much
and when revenue is recognised. It replaces existing revenue
recognition guidance, including AASB 118 Revenue, AASB 111
Construction Contracts and associated interpretations. The new
standard will be applicable for the Group for the reporting period
commencing 1 July 2018, with early adoption permitted. Based on
an initial impact assessment, the new standard is not expected to
significantly impact revenue recognition, however a full analytical
review has not at this stage been completed.
AASB 16 LEASES
AASB 16 Leases requires the recognition of a right of use asset and
a lease liability for all leases with a term of more than 12 months.
The assets and liability will initially be measured on a present
value of future cash flows basis. Currently the company only
recognises a lease liability and asset in relation to finance leases,
while lease payments in relation to operating leases are expensed
on a straight line basis. The new standard will be effective from
1 July 2019. The impact of this standard has yet to be quantified by
the Group.
There are also other amendments and revisions to accounting
standards that have not been early adopted. These changes are not
expected to result in any material changes to the Group’s financial
performance or financial position.
5. DETERMINATION OF FAIR VALUES
A number of the Group’s accounting policies and disclosures
require the determination of fair value, for both financial
and non-financial assets and liabilities. Fair values have been
determined for measurement and / or disclosure purposes as
described below. When applicable, further information about the
assumptions made in determining fair values is disclosed in the
notes specific to that asset or liability.
PROPERTY, PLANT AND EQUIPMENT
The fair value of property, plant and equipment recognised as
a result of a business combination is the estimated amount for
which a property could be exchanged on the date of acquisition
between a willing buyer and a willing seller in an arm’s length
transaction after proper marketing wherein the parties had each
acted knowledgeably. The fair value of items of plant, equipment,
fixtures and fittings is based on the market approach and cost
approaches using quoted market prices for similar items when
available and replacement cost when appropriate. Current
replacement cost estimates reflect adjustment for physical
deterioration as well as functional and economic obsolescence.
INVENTORIES
The fair value of inventories acquired in a business combination
is determined based on its estimated selling price in the ordinary
course of business less the estimated costs of completion and sale,
and a reasonable profit margin based on the effort required to
complete and sell the inventories.
TRADE AND OTHER RECEIVABLES
The fair value of trade and other receivables, excluding
construction work in progress, is estimated as the present value of
future cash flows, discounted at the market rate of interest at the
reporting date.
DERIVATIVES
The fair value of interest rate swaps is based on broker quotes.
Those quotes are tested for reasonableness by discounting
estimated future cash flows based on the terms and maturity
of each contract and using market interest rates for a similar
instrument at the measurement date. Fair values reflect the
credit risk of the instrument and include adjustments to take
account of the credit risk of the Group entity and counterparty
when appropriate. Further disclosures relating to the fair value
of derivatives with reference to Level 2 inputs are disclosed in
Note 25.
NON-DERIVATIVE FINANCIAL LIABILITIES
Fair value, which is determined for disclosure purposes, is
calculated based on the present value of future principal and
interest cash flows, discounted at the market rate of interest at the
reporting date. For finance leases, the market rate of interest is
determined by reference to similar lease agreements.
SHARE-BASED PAYMENT TRANSACTIONS
The fair value of employee stock options is measured using
the Monte Carlo pricing model. Measurement inputs include
share price on measurement date, exercise price of the
instrument, expected volatility (based on an evaluation of the
Company’s historic volatility, particularly over the historic period
commensurate with the expected term), expected term of the
instruments (based on historical experience and general option
holder behaviour), expected dividends, and the risk-free interest
rate (based on government bonds). Service and non-market
performance conditions attached to the transactions are not taken
into account in determining fair value.
4444
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS There are varying levels of integration between the Drilling and
Engineering & Construction reportable segments. The accounting
policies of the reportable segments are the same as described in
Note 3.
Information regarding the results of each reportable segment
is included below. Performance is assessed based on segment
earnings before interest, income tax, depreciation and
amortisation (EBITDA) and segment profit before interest and
income tax. Inter-segment pricing is determined on an arm’s
length basis.
6. OPERATING SEGMENTS
The Group has three reportable segments, as described below,
which are the Group’s strategic divisions. The strategic divisions
offer different products and services, and are managed separately
because they require different technology and marketing
strategies. For each of the strategic divisions, the Board reviews
internal management reports on a monthly basis. The following
summary describes the operations in each of the Group’s
reportable segments:
Drilling
Drilling services to the coal industries for
degasification of coal mines and associated
services and commercial extraction of gas.
Engineering &
construction
(E&C)
Pipelines and associated construction and civil
services. The Division is also the market leader
in the installation of pipes including using
horizontal directional drilling techniques.
Oil & gas
Commercialisation of unconventional
and conventional hydrocarbons in the
United Kingdom.
June 2017
Reportable segment revenue
Drilling
$’000
E&C
$’000
Oil & Gas
$’000
Reportable
Segments
$’000
Corporate/
unallocated
$’000
Eliminations
$’000
Total
$’000
Revenue – services rendered
73,373
–
Revenue – construction contracts
–
48,596
Total consolidated revenue
73,373
48,596
–
–
–
73,373
48,596
121,970
–
–
–
EBITDA
2,678
(1,894)
(4,307)
(3,523)
(5,133)
Depreciation, amortisation and impairment
(4,817)
(1,364)
Finance income
Finance cost
–
–
–
–
–
–
–
(6,181)
–
–
(21)
202
(24,374)
Reportable segment profit / (loss)
(2,139)
(3,258)
(4,307)
(9,704)
(29,326)
–
–
–
–
–
–
–
–
73,373
48,596
121,970
(8,656)
(6,202)
202
(24,374)
(39,030)
June 2016
Reportable segment revenue
Drilling
$’000
E&C
$’000
Oil & Gas
$’000
Reportable
Segments
$’000
Corporate/
unallocated
$’000
Eliminations
$’000
Total
$’000
Revenue – services rendered
79,633
–
Revenue – construction contracts
–
45,845
Total consolidated revenue
79,633
45,845
–
–
–
79,633
45,845
125,478
–
–
–
EBITDA
11,385
6,900
(9,571)
8,714
(11,163)
Depreciation, amortisation and impairment
(11,700)
(3,176)
Finance income
Finance cost
–
–
–
–
–
–
–
(14,876)
–
–
(25)
272
(2,407)
Reportable segment profit / (loss)
(315)
3,724
(9,571)
(6,162)
(13,323)
–
–
–
–
–
–
–
–
79,633
45,845
125,478
(2,449)
(14,901)
272
(2,407)
(19,485)
4545
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.
OPERATING SEGMENTS (continued)
June 2017
Segment assets
Segment liabilities
Drilling
$’000
E&C
$’000
Oil & Gas
$’000
Reportable
Segments
$’000
Corporate/
unallocated
$’000
Total
$’000
66,631
33,259
127,002
226,892
13,331
240,223
(13,465)
(12,379)
(5,393)
(31,237)
(111,215)
(142,452)
Depreciation and amortisation
(4,817)
(1,364)
Share of loss of equity accounted investees
Equity accounted investments
Capital expenditure
June 2016
Segment assets
Segment liabilities
–
–
–
–
–
(2,717)
(6,181)
(2,717)
104,775
104,775
(21)
(6,202)
–
–
(2,717)
104,775
3,067
1,425
–
4,492
624
5,116
Drilling
$’000
E&C
$’000
Oil & Gas
$’000
Reportable
Segments
$’000
Corporate/
unallocated
$’000
Total
$’000
60,257
27,590
125,038
212,885
16,251
229,136
(7,988)
(13,482)
(5,028)
(26,498)
(115,848)
(142,346)
Depreciation and amortisation
(11,700)
(3,176)
–
(14,876)
(25)
(14,901)
Share of profit of equity accounted investees
Equity accounted investments
Capital expenditure
Recovery of receivables from equity
accounted investees
GEOGRAPHICAL INFORMATION
–
–
792
–
–
–
115
–
(6,751)
(6,751)
106,209
106,209
907
–
–
–
–
62
(6,751)
106,209
969
525
–
525
Geographical revenue and assets are based on the respective geographical location of customers and assets.
Revenues
Non-current assets
2017
$’000
2016
$’000
2017
$’000
2016
$’000
121,970
124,989
37,849
39,024
–
–
–
125,758
124,523
489
–
–
121,970
125,478
163,607
163,547
2017
$’000
2016
$’000
202
–
202
241
31
272
(24,533)
(16,604)
–
(3,070)
3,229
17,663
(1,422)
(2,044)
(24,374)
(2,407)
(24,172)
(2,135)
Australia
Europe
Asia/Pacific
7. FINANCE INCOME AND FINANCE COSTS
Interest income
Net change in fair value of derivative liability
Finance income
Interest expense
Remission of interest
Amortisation of prepaid fees on debt facilities
Net foreign exchange gain / (loss)
Finance costs
Net finance costs recognised in profit and loss
4646
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. OTHER EXPENSES
Loss before income tax has been arrived at after charging the following items:
Depreciation and amortisation of property, plant and equipment
Total depreciation, amortisation and impairment
UK investment overhead costs
Settlement of historical legal disputes
Recovery of receivable from equity accounted investees
Redundancy costs
Net (profit) / loss on sales of assets
Share based payment expense
Other (income) / expense
Total non-operating costs
9. AUDITOR’S REMUNERATION
Audit services
Auditors of the Company — EY Australia and other network firms
Audit and review of financial reports
Other professional services
Other professional services related to due diligence investigations and general tax advisory services.
2017
$’000
6,202
6,202
2,209
252
–
299
(140)
–
92
2016
$’000
14,901
14,901
2,820
7,445
(525)
503
102
27
404
2,712
10,776
2017
$
2016
$
313,000
293,000
70,000
174,337
383,000
467,337
4747
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. INCOME TAX
Recognised in profit or loss
Current tax benefit
Current year
Tax losses not recognised and temporary differences derecognised in current year
Total current tax benefit
Deferred tax expense recognised in profit or loss
Origination and reversal of temporary differences
Prior year adjustment
Prior year tax losses not recognised
Total income tax expense / (benefit) in profit or loss
Numerical reconciliation between tax benefit and pre-tax net profit/(loss)
Accounting loss before income tax
Prima facie income tax benefit calculated at 30%
Adjustment for:
Equity settled share based payments
Equity accounted (gain)/loss
Non-deductible expenses
Non-deductible option expense
Effect of tax rate in foreign jurisdictions
Non-deductible finance cost
Fair value – derivative option (gain)/loss non-assessable
Prior year tax losses not recognised
Current year tax losses not recognised
Current year temporary differences not recognised
Income tax over-provided in prior year
Income tax expense / (benefit) attributable to operating loss
11. EARNINGS PER SHARE
BASIC EARNINGS PER SHARE
2017
$’000
2016
$’000
(8,405)
(4,149)
5,861
(596)
(2,544)
(4,745)
2,544
4,745
767
(767)
–
(336)
336
–
(39,030)
(19,485)
(11,709)
(5,846)
(328)
725
760
12
–
–
1,927
241
435
173
4,352
3,278
–
(767)
8,404
(2,216)
(767)
–
(9)
336
4,546
(4,745)
336
–
The calculation of basic earnings per share at 30 June 2017 was based on the loss after tax attributable to ordinary shareholders of
$39,030,000 (2016: loss after tax $19,485,000) and a weighted average number of ordinary shares outstanding of 402,515,181 (2016:
290,031,908) calculated as follows:
Weighted average number of ordinary shares (basic)
Issued ordinary shares at 1 July
Accelerated rights offer
Equity placements
Weighted average number of ordinary shares (basic) at 30 June
DILUTED EARNINGS PER SHARE
2017
Number
2016
Number
381,110,165
267,383,816
13,626,466
22,459,518
7,778,550
188,574
402,515,181 290,031,908
There were no dilutive potential ordinary shares outstanding at 30 June 2017 or 30 June 2016, therefore no adjustments have been made
to basic earnings per share to arrive at diluted earnings per share. At 30 June 2016, 1,000,000 rights and options, which have expired in
December 2016, were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been
anti-dilutive.
4848
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. CASH, CASH EQUIVALENTS AND CASH IN TRUST
Bank balances
Share of Joint Venture cash
Total cash and cash equivalents
Cash in trust
Total cash in trust
Share of Joint Venture cash
2017
$’000
8,974
1,350
10,324
11,847
11,847
2016
$’000
2,197
4,669
6,866
15,634
15,634
Represents the Groups share of joint operation cash balances. These cash balances are available to be utilised within the joint venture until
such time as the Joint venture resolves to distribute the cash to joint venture partners.
Cash in trust
Represents cash drawn under the senior loan notes facility disclosed in Note 21 that remains un-utilised at balance date. These cash
balances are available to be utilised in accordance with the senior loan note facility primarily for the purpose of furthering the Groups
investments in the Bowland licence.
13. TRADE AND OTHER RECEIVABLES
Current
Trade receivables (net of impairment losses)
Deposits supporting bank guarantees
2017
$’000
2016
$’000
13,771
8,723
15,187
10,567
22,494
25,754
No new impairment provisions were recognised against trade receivables and other receivables at 30 June 2016 or 30 June 2017.
14. INVENTORIES
Materials and consumables
Construction work in progress
Total inventories
15. OTHER ASSETS
Prepayments
2017
$’000
3,926
26,927
2016
$’000
2,582
13,465
30,853
16,047
2017
$’000
2016
$’000
1,098
1,288
4949
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. PROPERTY, PLANT AND EQUIPMENT
30 June 2017
At cost
Accumulated depreciation/amortisation/impairment
Carrying amount at 30 Jun 2017
30 June 2016
At cost
Accumulated depreciation/amortisation/impairment
Carrying amount at 30 Jun 2016
RECONCILIATIONS
Leasehold
improvements
$’000
Land &
buildings
$’000
Plant &
equipment
$’000
Enterprise
development
$’000
Total
$’000
7
(7)
–
7
(7)
–
3,912
146,971
11,939
162,829
(888)
(112,800)
(11,284)
(124,979)
3,024
34,171
655
37,850
3,912
143,253
11,315
158,487
(792)
(107,400)
(11,264)
(119,463)
3,120
35,853
51
39,024
Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below:
Carrying amount at 1 July 2016
Additions
Disposals
Depreciation and amortisation
Carrying amount at 30 June 2017
Carrying amount at 1 July 2015
Additions
Disposals
Depreciation and amortisation
Carrying amount at 30 June 2016
Leasehold
improvements
$’000
Land &
buildings
$’000
Plant &
equipment
$’000
Enterprise
development
$’000
–
–
–
–
–
3,120
–
–
35,853
4,492
(88)
(96)
(6,086)
3,024
34,171
51
624
–
(20)
655
Leasehold
improvements
$’000
Land &
buildings
$’000
Plant &
equipment
$’000
Enterprise
development
$’000
1
–
–
(1)
–
3,270
49,922
–
(40)
(110)
907
(197)
(14,779)
3,120
35,853
–
62
–
(11)
51
Total
$’000
39,024
5,116
(88)
(6,202)
37,850
Total
$’000
53,193
969
(237)
(14,901)
39,024
An independent expert was engaged to perform an independent valuation of the Group’s plant and equipment at 30 June 2017. No
impairment charge was recognised as a result of this process.
17. INVESTMENTS IN EQUITY ACCOUNTED INVESTEES
Balance at 1 July
Purchase of additional ownership interest
Movement of foreign currency translation recognised in equity
Share of equity accounted profits / (losses) during the year
Balance at 31 December 2016
2017
$’000
2016
$’000
106,209
103,997
5,153
(3,870)
(2,717)
5,480
3,483
(6,751)
104,775
106,209
The Group’s share of loss of equity accounted investees is $2,717,000 (2016: $6,751,000). During both the current and the prior year, the
Group did not receive dividends from any of its investments in equity accounted investees.
At 30 June 2017, the liabilities of Marais-Lucas Technologies Pty Limited exceeded its assets. As a result the Group investment in Marais-
Lucas Technologies Pty Limited is fully impaired. The Group does not have any obligation to settle the liabilities of the investee.
The following summarises the changes in the Group’s ownership interest in associates:
5050
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Ownership
Carrying value
Jun 2017
%
Jun 2016
%
Jun 2017
$’000
Jun 2016
$’000
Cuadrilla Resources Holdings Limited (associate)
47.40%
45.08%
104,775
106,209
Marais-Lucas Technologies Pty Limited (joint controlled entity)
50.00%
50.00%
–
–
104,775
106,209
Summary financial information for the equity accounted investees, not adjusted for the percentage ownership held by the Group, is
as follows:
Current assets
Non-currant assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Income
Expenses
Loss
18. EXPLORATION ASSETS
Cost
Bowland exploration asset
Elswick exploration asset
Bolney exploration asset
2017
Cuadrilla
Resources
Holdings
Ltd
$’000
Marais-
Lucas
Technologies
Pty Ltd
$’000
2016
Cuadrilla
Resources
Holdings
Ltd
$’000
Marais-
Lucas
Technologies
Pty Ltd
$’000
Total
$’000
12,135
225,237
237,372
608
150
758
12,743
6,977
239,387
239,790
238,130
246,767
(9,328)
(6,327)
(15,655)
(7,035)
–
(7,035)
3,547
7,619
631
250
881
6,344
–
Total
$’000
7,608
240,040
247,648
9,891
7,619
(16,363)
(6,327)
(22,690)
11,166
6,344
17,510
–
–
–
2,148
–
2,148
(5,781)
(5,781)
(103)
(5,884)
(17,124)
(103)
(17,227)
(103)
(5,884)
(14,976)
(103)
(15,079)
2017
$’000
2016
$’000
12,734
5,131
3,117
9,884
5,201
3,229
20,982
18,314
The exploration assets comprise the Group’s equity interest (“direct interest”) in the above licences and represents expenditure incurred.
The Group is beneficially entitled to an additional interest (“indirect interest”) in these licences through its shareholding in the equity
accounted associate, Cuadrilla Resources Holding Limited (“Cuadrilla”) as shown below:
Beneficial interest
Bowland tenement
Elswick tenement
Bolney tenement
Indirect
Interest
%
Direct
Interest
%
Jun 2017
%
Jun 2016
%
24.29
23.79
35.55
23.75
22.06
25.00
48.04
45.85
60.55
46.85
44.69
58.81
The indirect interest comprises Cuadrilla’s equity interest in the respective licence multiplied by the Group’s equity interest in Cuadrilla as
shown in Note 17.
Relinquishment requirements
Exploration licenses contain conditions relating to achieving certain milestones on agreed deadlines. Where milestones are not achieved
within agreed deadlines, the terms of the license may require partial relinquishment of the license area or be withdrawn. Applications can
be made to alter or extend exploration license conditions. Cuadrilla has to date met all of its milestones in respect of UK licences.
5151
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18.
EXPLORATION ASSETS (continued)
Future Expenditure on the Bowland and Elswick licences
In June 2013 the existing owners, Cuadrilla and the Group, each
sold 25% of their interest in the Bowland and Elswick Lancashire
exploration licences to Centrica Plc (“Centrica”). Consideration
for the interest included cash and a farm-in arrangement.
Continuation of the farm-in was contingent upon certain appraisal
and operational milestones being achieved. In August 2015, a
revised arrangement was agreed between Centrica, Cuadrilla and
the Company with respect to the outstanding farm in arrangement
(Carry) and Contingent Consideration.
The portion of Centrica’s initial farm in funding remaining as at
30 June 2017 is approximately £20.81m. There is also a further
contingent farm in funding of £46.7 million (“Contingent Carry”),
for Centrica to maintain its 25% interest after the commercial flow
of gas, to be applied against various appraisal and development
activities. The Contingent Carry is subject to certain appraisal and
operational milestones in respect of the license area.
As a result of an agreement in August 2015 with Cuadrilla for the
Company to increase its interest in the Bowland Joint Venture to
23.75% and Cuadrilla to correspondingly reduce its interest to
51.25%, the Company’s entitlement to the Carry and Contingent
Carry has been reduced proportionately in relation to its direct
interest in the licences. The Company continues to benefit from
the Carry and Contingent Carry through its 47.4% ownership
in Cuadrilla.
Planning approvals to drill and fracture wells
Planning consent for the four wells at PNR was received on
6 October 2016 from the UK government. The UK Secretary of
State for Communities and Local Government (“SOS”) advised
that he was also minded to grant planning consent for a similar
application at the RW exploration site, pending receipt of further
evidence on highway safety. Following this announcement, a
planning inquiry has been set for April 2018 focusing solely on
transport safety issues associated with RW. Cuadrilla is looking
forward to making a strong case for approval of planning for
that site.
In April, several applications challenging the UK Government’s
planning permission in respect of the PNR were dismissed by the
UK High Court. Two applicants were granted leave to appeal by the
UK Court of Appeals, with appeals hearing dates set for the end
of August 2017. The Company remains confident that the Court of
Appeals will uphold the positive recommendation of the Planning
Inspector, the subsequent decision to grant planning consent by
the Secretary of State and the subsequent ruling by the High Court
in respect of the PNR site.
A legal challenge to the Government’s decision to allow the Public
Inquiry in relation to transport issues at RW has been dismissed
by the High Court, and the deadline for an appeal to the Court of
Appeal in respect of RW has passed.
Monument Prospect
In 2009 and 2010 the Company acquired a 10% net profit interest
(NPI) over certain oil and gas leasehold interests in East Texas,
totaling $87 million from Thomas Knowlton (Knowlton). The NPI
was fully impaired by the Company in the year of acquisition.
In early 2015 the Company commenced a detailed review of
the NPI to determine if any value could be recovered. It was
discovered that while Knowlton had acquired oil and gas leases
no exploration had been undertaken on the leases, and they had
expired. Negotiations were commenced with Knowlton who agreed
to return a significant amount of funds to AJ Lucas, however
payment was not forthcoming, and there was no evidence that
Knowlton had the funds for the payment agreed. In April 2015
AJ Lucas commenced proceedings against Knowlton in Texas for
fraud. In May 2015 Knowlton died and thus could not be cross-
examined in the Court proceedings. The Court did however allow
AJ Lucas’s lawyers to issue subpoenas to obtain information for
the proceedings.
Using the subpoena powers AJ Lucas obtained information from
bank accounts of Knowlton, his company and his former wife.
Those bank accounts include the ones where AJ Lucas deposited
money for its NPI interest. The information obtained was subject to
detailed examination by forensic experts in Sydney. The conclusion
from this detailed examination is that AJ Lucas was the subject
of fraud and that there are no known assets from which AJ Lucas
could recover money. Accordingly, the Directors do not propose to
pursue the matter further unless assets are uncovered from which
AJ Lucas can recover funds.
It should be noted that Knowlton was also subject to detailed
investigation by the USA Internal Revenue Service and Californian
Franchise Tax Board, neither of which found assets of Knowlton.
5252
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. DEFERRED TAX ASSETS AND LIABILITIES
RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES
Deferred tax assets and liabilities are attributable to the following:
Consolidated
Inventories
Equity accounted investments
Property, plant and equipment
Provisions for employee benefits
Trade creditors
Share raising costs
Other creditors and accruals
Unrealised foreign exchange differences
Deferred tax asset write down
Tax assets/(liabilities)
Set off of tax
Net assets/(liabilities)
Movement in temporary differences during the year:
2017
Inventories
Equity accounted investments
Property, plant and equipment
Provisions for employee benefits
Trade creditors
Share raising costs
Other creditors and accruals
Unrealised foreign exchange differences
Deferred tax asset written off
Tax Assets
Tax Liabilities
Net
2017
$’000
2016
$’000
2017
$’000
2016
$’000
2017
$’000
2016
$’000
–
–
–
–
(1,177)
(2,613)
(774)
(2,613)
(1,177)
(2,613)
(774)
(2,613)
11,086
11,088
1,823
89
1,055
1,401
227
(12,296)
1,815
205
710
738
(1,451)
(9,313)
3,790
(3,790)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11,086
11,088
1,815
205
710
738
(1,451)
(9,313)
–
–
–
1,823
89
1,055
1,401
227
(12,296)
–
–
–
3,387
(3,790)
(3,387)
(3,387)
3,790
3,387
–
–
–
Balance
30 Jun 2016
$’000
Recognised
directly in
equity
$’000
Recognised
in profit
or loss
$’000
Balance
30 Jun 2017
$’000
(774)
(2,613)
11,088
1,823
89
1,055
1,401
227
(12,296)
–
–
–
–
–
–
–
–
–
–
–
(403)
–
(2)
(8)
116
(345)
(663)
(1,678)
2,983
–
(1,177)
(2,613)
11,086
1,815
205
710
738
(1,451)
(9,313)
–
5353
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 19. DEFERRED TAX ASSETS AND LIABILITIES (continued)
2016
Inventories
Equity accounted investments
Doubtful debts impairment recognised
Provisions for employee benefits
Trade creditors
Share raising costs
Other creditors and accruals
Unrealised foreign exchange differences
Deferred tax asset written off
Balance
30 Jun 2015
$’000
Recognised
directly in
equity
$’000
Recognised
in profit
or loss
$’000
Balance
30 Jun 2016
$’000
(1,104)
(2,613)
10,553
1,561
361
1,305
4,049
2,051
(16,163)
–
–
–
–
–
–
–
–
–
–
–
330
–
535
262
(272)
(250)
(2,648)
(1,824)
(774)
(2,613)
11,088
1,823
89
1,055
1,401
227
3,867
(12,296)
–
–
UNRECOGNISED DEFERRED TAX ASSETS
As at 30 June 2017, the Group had not recognised deferred tax assets of $51,474,406 (2016: $43,239,121) in relation to income tax losses.
20. TRADE AND OTHER PAYABLES
Current
Trade payables
Other payables and accruals
Provisions
21. INTEREST-BEARING LOANS AND BORROWINGS
Current
Lease liabilities
Senior loan notes
Loans from related party
Non-current
Lease liabilities
Senior loan notes
Loans from related party
2016
$’000
2015
$’000
12,463
12,862
4,132
9,908
16,581
4,434
29,457
30,923
Jun 2017
$’000
Jun 2016
$’000
37
156
933
1,126
–
56,559
49,590
90
101
34,552
34,743
37
30,121
40,826
106,149
70,984
(A) LOANS AND BORROWING TERMS AND MATURITIES
Senior loan notes
The senior loan notes comprise US$45 million of loan notes secured by a first ranking fixed and floating security interest over the Company
and each of its operating and investment subsidiaries.
The senior loan notes were fully drawn at balance date following the second draw down announced by the Company in November 2016.
Funds drawn but not utilised are held in trust bank deposits until utilised in accordance with the senior loan note facility, primarily for the
purpose of furthering the Group’s investments in the Bowland licence.
5454
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Interest is charged at 18% of the drawn amount, with 12% payable quarterly in arrears and 6% accruing until termination or repayment of
the facility. The loan notes terminate in June 2019, but can be terminated by note holders and become payable in the event of a breach of
certain financial covenants or other terms of the senior loan notes.
As part consideration of the facility, the Company agreed to issue a total of 20 million ordinary shares to note holders in two tranches. The
first tranche of 11 million ordinary shares was issued in June 2016 and the remaining 9 million ordinary shares were issued in November
2016 as disclosed in Note 24. The costs of the shares, together with other prepaid transaction costs incurred are being amortised over the
life of the loan notes.
Loans from related party
Loans from related parties are provided by Kerogen Investments No.1 (HK) Limited (“Kerogen”), a substantial shareholder holding 58.58%
of the ordinary shares outstanding at balance date. In accordance with the condition of the restructure and maturity extension agreed in
June 2016 to repay a minimum of US$25 million, the Company repaid $37,225,334 as part of an entitlement offer completed in June 2017 as
disclosed in note 24.
The related party loans terminate in December 2019, with interest payable able to be deferred until maturity at the discretion of the
Company. In addition, Kerogen has agreed that its debt be subordinated with its fixed and floating security now ranking behind the senior
term loan notes. Interest charged on the facility is as follows and compounds quarterly if unpaid.
Loan balance at 30 June 17
Interest rate
Tranch 1
US$3.7m
20% initially
Tranche 2
US$38.5m
16% initially
increasing to 21% from June 2018
increasing to 18% from June 2018
Additional transaction costs, including restructure fees payable to Kerogen, are amortised over the expected term of the loan facility.
(B) AVAILABLE FINANCING FACILITIES
(i) The Group has access to the following lines of credit
Lease liabilities
Senior term loan notes
Loans from related party
Total facilities utilised at balance date:
Lease liabilities
Senior term loan notes
Loans from related party
Total facilities not utilised at balance date:
Senior term loan notes
(ii) The Group has access to the following Bond and facilities provided by surety entities
Bond facilities in aggregate
Amount utilised
Unused bond facilities
Bank indemnity guarantee
Amount utilised
Unused facilities
2017
$’000
2016
$’000
37
56,715
50,523
127
57,154
75,378
107,275
132,659
37
56,715
50,523
127
30,222
75,378
107,275
105,727
–
–
–
–
–
26,932
26,932
3,500
(3,500)
–
8,723
10,566
(8,723)
(10,566)
–
–
5555
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21.
INTEREST-BEARNING LOANS AND BORROWINGS (continued)
(C) FINANCING LEASE LIABILITIES
Finance lease liabilities
Payments
Within one year
Between one and five years
Less: interest
Within one year
Between one and five years
Total lease liabilities
Lease liabilities provided for in the financial statements:
Current
Non-current
Total lease liabilities
22. OPERATING LEASES
2017
$’000
2016
$’000
39
–
39
(2)
–
(2)
37
37
–
37
96
40
136
(6)
(3)
(9)
127
90
37
127
OPERATING LEASE COMMITMENTS – GROUP AS LESSEE
The Group has entered into commercial leases on certain facilities, motor vehicles, office equipment and project based equipment. The
Group has the option, under some of its leases, to lease the additional assets for additional terms. Future minimum rentals payable under
non-cancellable operating leases are as follows:
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
2017
$’000
2016
$’000
1,001
1,720
2,721
611
609
1,220
During the financial year $750,000 (2016: $915,000) was recognised as an expense in the profit and loss in respect of the operating leases.
23. EMPLOYEE BENEFITS
Provision for employee benefits, including on-costs:
Current
Non-current
SUPERANNUATION PLANS
2017
$’000
2016
$’000
4,884
836
5,720
4,759
937
5,696
Benefits provided under the superannuation funds to which the Group contributes are based on accumulated contributions and earnings
for each employee in accordance with the Superannuation Guarantee Charge legislation. The amount recognised as an expense for the
financial year was $3,583,277 (2016: $3,289,000).
5656
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
24. CAPITAL AND RESERVES
Reconciliation of movement in capital and reserves attributable to equity holders of the parent follows.
SHARE CAPITAL – ORDINARY SHARES
Details of the share placements, entitlements, exercise of options and associated costs recognised directly in equity are as follows:
2017
On issue at 1 July 2016
November 2016 placement
May 2017 placement
Entitlement offer
Transaction costs incurred
On issue at 30 June 2017
2016
On issue at 1 July 2015
Entitlement offer
April 2016 placement
June 2016 placement
Transaction costs incurred
On issue at 30 June 2016
Issue Price
Per Share $
No. of Shares
$’000
381,110,165
362,034
0.21
9,402,000
0.275
18,209,091
1,974
5,008
0.275
176,467,474
48,528
N/A
(1,101)
585,188,730
416,443
Issue Price
Per Share $
No. of Shares
$’000
267,383,816
339,670
0.21
100,268,337
21,056
1,955,012
11,503,000
N/A
0.21
N/A
–
2,376
(1,068)
381,110,165
362,034
In May 2017 the Company undertook a pro rata Entitlement
Offer and Placement at a price of $0.275. A total of $37,225,334,
representing Kerogen’s full subscription under the entitlement
offer and sub-underwriting arrangement, was satisfied by the
part conversion of tranche 1 of the related party loan facility as
disclosed in Note 21, including outstanding interest. This satisfied a
condition of the restructure of the related party loan notes agreed
in June 2016 which required a minimum of US$25m to be repaid
through an entitlement offer.
Separately shares were issued in November 2016 and June 2016
to satisfy obligations under the Senior Term Loan Notes (Note
21) and as part consideration for corporate advisory work to an
independent corporate advisor in relation to the facility.
In the comparative period the company completed a pro rata
entitlement offer at $0.21 in April 2016. Entitlement shares were
underwritten, with certain sub-underwriters, excluding Kerogen,
entitled to a bonus share for each 6 shares allotted under the
underwriting agreements. These bonus shares were issue under
a placement in April 2016. Kerogen’s subscription under the
entitlement offer and sub-underwriting arrangement was satisfied
by the conversion of interest due and payable of $13,011,727, with
the remainder of Kerogen’s subscription paid in cash.
Holders of ordinary shares are entitled to receive dividends and,
in the event of a winding up of the Company, to any proceeds of
liquidation after all creditors and other stockholders have been
paid in full.
On a show of hands, every holder of ordinary shares present at a
shareholder meeting in person or by proxy is entitled to one vote
and upon a poll, each share is entitled to one vote.
NATURE AND PURPOSE OF RESERVES
Employee equity benefits reserve
The employee equity benefits reserve represents the expense
associated with equity-settled compensation under the employee
management rights incentive plans.
Translation reserve
The translation reserve comprises all foreign currency differences
arising from the translation of the financial statements of foreign
operations into Australian dollars.
OPTIONS
There are no options over ordinary shares outstanding at
balance date.
DIVIDENDS
No dividends in respect of the 2017 or 2016 financial years have
been declared or paid.
DIVIDEND FRANKING ACCOUNT
The balance of franking credits available to shareholders of the
Company as at 30 June 2017 $60,852,374 (2016: $60,852,374).
5757
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25. FINANCIAL INSTRUMENTS
OVERVIEW
The Group’s activities expose it to the following risks from their use
of financial instruments:
•
•
Credit risk;
Liquidity risk;
• Market risk (including currency and interest rate risks); and
• Operational risk.
RISK MANAGEMENT FRAMEWORK
The Board of Directors has overall responsibility for the
establishment and oversight of the risk management framework.
The Board has established the Audit and Risk Committee, which
is responsible for developing and monitoring risk management
policies. The committee reports regularly to the Board of Directors
on its activities.
Risk management policies are established to identify and analyse
the risks faced by the Group, to set appropriate risk limits and
controls, and to monitor risks and adherence to limits. Risk
management policies and systems are reviewed regularly to reflect
changes in market conditions and the Group’s activities. The Group,
through its training and management standards and procedures,
aims to develop a disciplined and constructive control environment
in which all employees understand their roles and obligations.
The Audit and Risk Committee oversees how management
monitors compliance with the Group’s risk management policies
and procedures and reviews the adequacy of the risk management
framework in relation to the risks faced by the Group.
CREDIT RISK
Credit risk is the risk of financial loss to the Group if a customer
or the counterparty to a financial instrument fails to meet its
contractual obligations, and arises principally from the Group’s
receivables from customers.
Trade and other receivables
The Group’s exposure to credit risk is influenced mainly by the
individual characteristics of each customer. The Group’s customer
base consists of principally major corporations and State and local
governments. The demographics of the Group’s customer base,
including the default risk of the industry and location in which the
customers operate, has less of an influence on credit risk.
New customers are analysed individually for creditworthiness,
taking into account credit ratings where available, financial
position, past experience and other factors. This includes all major
contracts and tenders approved by the Audit and Risk Committee.
In monitoring customer credit risk, customers are grouped by
operating segment, then by their receivable ageing profile.
Ongoing monitoring of receivable balances minimises exposure to
bad debts.
A provision for impairment is recognised when there is objective
evidence that an individual trade receivable is impaired.
Investments
The Group limits its exposure to credit risk by only investing in
liquid securities of short maturity issued by a reputable party or
in readily marketable securities listed on a recognisable securities
exchange. Given these investment criteria, management does not
expect any counterparty to fail to meet its obligations.
Exposure to credit risk:
The carrying amount of financial assets represents the maximum
credit exposure. The maximum exposure to credit risk at the
reporting date was:
Trade and other receivables
Bank balances
2017
$’000
22,494
22,171
2016
$’000
25,754
22,500
44,665
48,254
Maximum exposure to credit risk for loans and receivables at the
reporting date by business segment was:
Drilling
Engineering and construction
Oil and gas
Corporate/unallocated
2017
$’000
9,284
12,296
585
329
2016
$’000
12,250
13,442
4
58
22,494
25,754
5858
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Impairment
The ageing of the Group’s trade and other receivables at the reporting date was:
Not past due
Past due up to 30 days
Past due 31 to 120 days
Past due 121 days to one year
Past due more than one year
Gross
2017
$’000
Impairment
2017
$’000
Gross
2016
$’000
Impairment
2016
$’000
18,914
793
1,075
1,285
427
22,494
–
–
–
–
–
–
24,891
–
863
–
–
25,754
–
–
–
–
–
–
An impairment allowance is recognised against specific customers, identified as being in trading difficulties, or where specific debts are in
dispute. The impairment allowance does not include debts past due relating to customers with a good credit history or where payments of
amounts due under a contract for such customers are delayed due to works in dispute and previous experience indicated that the amount
will be paid in due course.
When the Group is satisfied that no recovery of the amount owing is possible, the amounts considered irrecoverable are written off directly
against the financial asset.
LIQUIDITY RISK
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Liquidity is managed to ensure, as
far as possible, that sufficient funds are available to meet liabilities when they fall due, under both normal and
The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of
netting arrangements:
2017
Non-derivative financial liabilities
Trade and other payables
Senior term loan notes
Loans from related party
Lease liabilities
2016
Non-derivative financial liabilities
Trade and other payables
Senior term loan notes
Loans from related party
Lease liabilities
MARKET RISK
Carrying
amount
$’000
Total
$’000
6 months
or less
$’000
6-12 months
$’000
1-2 years
$’000
2-5 years
$’000
More than
5 years
$’000
Total
29,457
(29,457)
(25,325)
–
(3,371)
56,715
(79,562)
(3,510)
(3,510)
(72,542)
(761)
–
50,523
(80,689)
37
(39)
(897)
(19)
(597)
(20)
(716)
(78,479)
–
–
136,732
(189,747)
(29,751)
(4,127)
(76,629)
(79,240)
–
–
–
–
–
Carrying
amount
$’000
Total
$’000
6 months
or less
$’000
6-12 months
$’000
1-2 years
$’000
2-5 years
$’000
More than
5 years
$’000
Total
30,923
(30,923)
(26,489)
–
–
(4,434)
30,222
(51,845)
(2,020)
(2,020)
(4,040)
(43,765)
75,378
(121,059)
–
(34,581)
(643)
(85,835)
127
(135)
(54)
(42)
(39)
–
136,650
(203,962)
(28,563)
(36,643)
(4,722)
(134,034)
–
–
–
–
–
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s
income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk
exposures within acceptable parameters, while optimising the return.
5959
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25.
FINANCIAL INSTRUMENTS (continued)
CURRENCY RISK
The Group operates internationally and is exposed to currency risk on purchases and borrowings that are denominated in a currency other
than the respective functional currencies of Group entities, primarily with respect to the US dollar.
The Group’s foreign currency exposure primarily relates to borrowings, and trust bank deposits denominated in US dollars. This net US
dollar borrowing position is substantially offset by the Group’s investment in its equity accounted investee, Cuadrilla Resource Holdings
Limited, whose functional currency is US dollars, and the directly owned exploration assets held through subsidiaries whose functional
currency is US dollars. However, while exchange gains or losses on borrowings are accounted for through the profit and loss account,
translation gains or losses on the Cuadrilla investment and exploration assets are recorded through the translation reserve in equity
until sold.
The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts in Australian dollars
(in thousands):
In thousands of AUD
Cash balances
Trade and other receivables
Trade payables
Interest-bearing liabilities
Net Financial Instrument exposure
Value of investment in Cuadrilla Resource Holdings Limited
Value of Exploration assets
Net balance sheet exposure
2017
Exposure to
GBP
$’000
2016
Exposure to
GBP
$’000
2017
Exposure to
USD
$’000
2016
Exposure to
USD
$’000
658
–
–
–
658
–
–
658
–
–
–
–
–
–
–
–
11,848
5,844
585
–
(5,352)
(4,815)
(107,238)
(105,600)
(100,157)
(104,571)
104,775
106,209
20,982
25,600
18,314
19,952
At 30 June balance date, had the Australian dollar weakened/strengthened by 10% against the respective foreign currencies with all other
variables held constant, the impact on Group post-tax loss and equity would have been:
AUD/USD
AUD/GBP
Post-tax loss (higher) / lower
Net equity higher / (lower)
The following significant exchange rates applied during the year:
USD
GBP
INTEREST RATE RISK
10% strengthened
10% weakened
2017
2016
2017
2016
0.8461
0.6504
9,045
(2,387)
0.8169
N/A
9,506
(1,814)
0.6923
0.5322
0.6683
N/A
(11,055)
(11,619)
2,918
2,217
Average Rate
Reporting date spot rate
2017
2016
2017
2016
0.7544
0.5953
0.7316
N/A
0.7692
0.5913
0.7426
N/A
The Group’s main interest rate risk arises from borrowings. Borrowings issued at variable rates expose the Group to cash flow interest
rate risk. Borrowings at fixed rates expose the Group to fair value interest rate risk. The majority of the Group’s borrowings are at fixed
rates. The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, therefore a change in
interest rates at the reporting date would not affect profit or loss for the Group.
6060
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Interest rate exposure is detailed as follows:
Fixed rate instruments
Financial liabilities
Variable rate instruments
Financial assets
2017
$’000
2016
$’000
(107,275)
(105,727)
(107,275)
(105,727)
22,171
22,171
22,500
22,500
At reporting date, the Group did not have any variable interest rate borrowings.
FAIR VALUES
Fair values versus carrying amounts
The fair values of financial assets and liabilities, together with the carrying amounts shown in the consolidated statement of financial
position, are as follows:
2017
Bank balances
Trade and other receivables
Trade and other payables
Lease Liabilities
Senior term loan notes (1)
Loans from related party (1)
2016
Bank balances
Trade and other receivables
Trade and other payables
Lease Liabilities
Senior term loan notes (1)
Loans from related party (1)
Carrying
Amount
$’000
Fair value
$’000
22,171
22,171
22,494
22,494
(29,458)
(29,458)
(37)
(37)
(56,715)
(61,732)
(50,523)
(51,692)
(92,068)
(98,254)
Carrying
Amount
$’000
Fair value
$’000
22,500
22,500
25,754
25,754
(30,923)
(30,923)
(127)
(127)
(30,222)
(33,817)
(75,378)
(76,567)
(88,396)
(93,180)
(1) The terms and conditions of the Senior term loan notes and loans from related party were negotiated in June 2016 following a competitive process in which a
number of term sheets were received from various parties. However in accordance with accounting standards the loans are accounted for using the amortised costs
basis under which certain prepaid transactions costs are recognised as an offset to the carrying amount of the liability and are amortised over the life of the loan. As
such the carrying value differs from the fair value.
Management have assessed that the fair values of cash and short-term deposits, trade receivables, trade payables and other current
liabilities approximate their carrying amounts largely due to the short term maturities of these assets and liabilities.
The fair value of the financial assets and liabilities is included at the amount which could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. The fair value of assets and liabilities are derived with reference to Note 5.
Fair value hierarchy
Management have analysed the financial instruments carried at fair value, by valuation method (as discussed in Note 5). The different levels
have been defined as follows:
•
•
Level 1: quotes prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices); and
6161
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25.
FINANCIAL INSTRUMENTS (continued)
•
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
In order to determine the fair value of derivative financial liabilities, management used a valuation technique (as discussed in Note 5) in
which all significant inputs were based on observable market data.
The following methods and assumptions were used in estimating the fair values of financial instruments:
•
Loans and borrowings, and finance leases – present value of future principal and interest cash flow, discounted at the market rate of
interest at the reporting date; and
•
Trade and other receivables and payables – carrying amount equals fair value.
Capital management
The Board policy is to maintain a capital base so as to provide sufficient financial strength and flexibility to conduct its business and
progress it’s investments in UK shale gas whilst maximising shareholder returns. The Board therefore seeks to have a level of indebtedness
to leverage return on capital having regard to the Company’s cash flow and the ability to service these borrowings.
The Group’s debt to adjusted capital ratio at the end of the reporting period was as follows:
Total liabilities
Less: cash and cash equivalents
Net debt
Total equity
Net debt to equity ratio at 30 June
26. INTERESTS IN JOINT OPERATIONS
2017
$’000
2016
$’000
142,452
142,346
(10,324)
(6,865)
132,128
135,481
97,771
86,790
1.35
1.56
Principal activities
Principal place of business
Southern SeaWater
Alliance
Construction
and operation of
desalination plant
Level 2, 1 Adelaide
Terrace,
East Perth 6004
VSL Australia – AJ Lucas
Operations Joint Venture
Construction of water
related infrastructure
6 Pioneer Avenue,
Thornleigh 2120
AJ Lucas – Spiecapag JV
Project 1
Construction of gas
infrastructure
AJ Lucas – Spiecapag JV
Project 2
Construction of gas
infrastructure
AJ Lucas – Spiecapag JV
Project 3
Construction of gas
infrastructure
616 Boundary Road,
Richlands 4077
616 Boundary Road,
Richlands 4077
616 Boundary Road,
Richlands 4077
Participation interest
Contribution to
operating results
2017
%
2016
%
2017
$’000
2016
$’000
19
50
50
40
40
19
50
50
40
40
1,159
1,972
–
259
476
–
1,081
5,512
(2,140)
1,100
6262
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS All joint operations above are domiciled in Australia.
Included in the assets and liabilities of the Group are the following assets and liabilities employed in the joint operations:
Assets
Current assets
Cash and cash equivalents
Trade and other receivables
Construction work in progress
Other
Total assets
Liabilities
Current liabilities
Trade and other payables
Total liabilities
2017
$’000
2016
$’000
1,351
155
8,005
214
9,725
4,669
2,021
2,356
4
9,050
6,494
6,494
5,937
5,937
6363
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 27. CONSOLIDATED ENTITIES
The financial statements at 30 June 2017 include the following controlled entities. The financial years of all the controlled entities are the
same as that of the parent entity.
Ownership interest
Country of
incorporation
2017
%
2016
%
Parent entity
AJ Lucas Group Limited
Controlled entities
Australian Water Engineering Pty Limited
AJ Lucas Operations Pty Limited
AJ Lucas Plant & Equipment Pty Limited
AJ Lucas Drilling Pty Limited
Lucas Shared Services Pty Limited
AJ Lucas Testing Pty Limited
Lucas Operations (WA) Pty Limited
Lucas Engineering and Construction Pty Limited
AJ Lucas Joint Ventures Pty Limited
AJ Lucas (Hong Kong) Limited
Lucas Drilling Pty Limited
Subsidiaries of Lucas Drilling Pty Limited
Mitchell Drilling Corporation Pty Limited
Lucas Contract Drilling Pty Limited
Subsidiary of Lucas Contract Drilling Pty Limited
McDermott Drilling Pty Limited
Jaceco Drilling Pty Limited
Geosearch Drilling Service Pty Limited
257 Clarence Street Pty Limited
Lucas SARL
Lucas Energy (Holdings) Pty Limited
Subsidiaries of Lucas Energy (Holdings) Pty Limited
Lucas (Arawn) Pty Limited
Lucas Energy (WA) Pty Limited
Lucas Power Holdings Pty Limited
Lucas Cuadrilla Pty Limited
Lucas Holdings (Bowland) Limited
Subsidiaries of Lucas Holdings (Bowland) Limited
Lucas Bowland (UK) Limited
Lucas Bowland (No. 2) Limited
Elswick Power Limited
Lucas Holdings (Bolney) Limited
Subsidiaries of Lucas Holdings (Bolney) Limited
Lucas Bolney Limited
6464
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Hong Kong
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Caledonia
Australia
Australia
Australia
Australia
Australia
England
England
England
England
England
England
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
28. CONTINGENCIES AND COMMITMENTS
CONTINGENCIES
The directors are of the opinion that provisions are not required in respect of the following matters, as it is not probable that a future
sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.
(i) Under various joint operations (see Note 26), the relevant AJ Lucas Group company is jointly and severally liable for all the liabilities
incurred by the joint operation. As at 30 June 2017, the assets of the joint operation were sufficient to meet such liabilities. The
liabilities of the joint ventures not included in the consolidated financial statements amounted to $9,359,000 (2016: $12,573,000).
(ii) During the normal course of business, entities within the Group may incur contractor’s liability in relation to their performance
obligations for specific contracts. Such liability includes the potential costs to carry out further works and/or litigation by or against
those Group entities. Provision is made for the potential costs of carrying out further works based on known claims and previous
claims history, and for legal costs where litigation has been commenced. While the ultimate outcome of these claims cannot be reliably
determined at the date of this report, based on previous experience, amounts specifically provided, and the circumstances of specific
claims outstanding, no additional costs are anticipated. Certain claims and counterclaims are outstanding but not detailed on the basis
that further disclosure may seriously prejudice the Group’s position in regards to these matters.
(iii) Under the terms of the Class Order described in Note 32, the Company has entered into approved deeds of indemnity for the cross-
guarantee of liabilities with participating Australian subsidiary companies.
(iv) Under a purchase agreement for the Group’s interest in the Elswick licence, the Company has a further contingent liability to pay the
seller US$1,900,000 ($2,470,098) provided Centrica, a holder of a 25% interest in the Bowland and Elswick licences, does not exercise
its options to put back its interest to Cuadrilla and AJ Lucas for a nominal amount, as it is entitled to under a sale and purchase
agreement entered into in June 2014.
COMMITMENTS
At 30 June 2017, the Group had no commitments contracted but not provided for and payable within one year (2016: nil) for the purchase of
new plant and equipment.
29. PARENT ENTITY DISCLOSURES
As at 30 June 2017 and 2016, and throughout the financial years then ended, the parent entity of the Group was AJ Lucas Group Limited.
Results of the parent entity
Loss for the year
Total loss for the year
Financial position of the parent entity at year end
Current assets
Total assets
Current liabilities
Total liabilities
Total equity of the parent entity comprises:
Share capital
Employee equity benefit reserve
Accumulated losses
Total equity
Parent entity commitments and contingencies
2017
$’000
2016
$’000
(43,431)
(15,091)
(43,431)
(15,091)
11,847
15,634
207,376
193,294
3,456
35,557
109,605
106,504
416,443
362,031
4,670
4,670
(323,342)
(279,911)
97,771
86,790
The parent entity has guaranteed, to various unrelated parties, the performance of various subsidiaries in relation to various contracts. In
the event of default, the parent entity undertakes to meet the contractual obligations of the relevant subsidiary.
PARENT ENTITY GUARANTEES IN RESPECT OF DEBTS OF ITS SUBSIDIARIES
The Company has entered into a Deed of Cross Guarantee, as disclosed in note 32, with the effect that the Company guarantees debts in
respect of its subsidiaries, and the subsidiaries may provide financial assistance to the Company.
6565
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
30. RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES
(a) Reconciliation of cash
For the purposes of the consolidated statement of cash flows, cash includes cash at bank, cash on hand and
bank overdrafts.
Cash and cash equivalents
Cash in trust
Total cash
(b) Reconciliation of cash flows from operating activities
Loss for the year
Adjustments for:
Interest on capitalised leases
Interest payable settled through equity raising
Amortisation of borrowing costs (included in interest-bearing liabilities)
Accrued interest capitalised into borrowings
Increase / (decrease) in accrued interest
(Profit) / loss on sale of non-current assets
Share based payment expense
Loss on foreign currency loans
Exchange rate changes on the balance of cash held in foreign currencies
Fair value adjustment in derivative liability
Share of profit of equity accounted investees
Revenue recognied on farm-in
PEL investment transferred in satisfaction of loan
Recovery of receivable from equity accounted investees
Corporate advisory fees
Decommissioning liability on exploration assets
Depreciation and amortisation
Operating loss before changes in working capital and provisions
Change in receivables
Change in other current assets
Change in inventories
Change in payables
Change in provisions for employee benefits
Change in tax balances
Net cash used in operating activities
2017
$’000
2016
$’000
10,324
11,847
6,866
15,634
22,171
22,500
(39,030)
(19,485)
7
7,094
3,070
–
9,761
(140)
–
13
11,441
1,422
2,524
(6,923)
102
27
(3,229)
2,085
131
–
2,717
(619)
(500)
–
–
148
6,202
(14,388)
3,260
190
(14,806)
(1,466)
24
–
(138)
(31)
6,751
(227)
–
(525)
1,547
(307)
14,901
13,177
1,112
(19)
(2,602)
(6,486)
705
(30,481)
(27,186)
(24,594)
(c) Non-cash financing and investment activities
Kerogen’s subscription under the entitlement offer, as disclosed in note 24, and sub-underwriting arrangement was satisfied partly in cash
and the conversion of interest due and payable under the Kerogen senior debt facility of $37,225,334 (2016: $13,012,727). The amount
converted is not shown in the cash flow statements.
A further $500,000 in funding provided by Kerogen was satisfied through the transfer of all rights and obligations of the Group arising
under an earlier agreement with Lawndale Group to purchase three Petroleum Exploration Licences (the PEL’s) in New South Wales, as
disclosed under transactions with Lawndale Group in Note 31. No profit or loss was recognized on this transaction.
As a result of the extension and restructure of the related party loans in June 2016, US$1,868,000 interest that was due and payable under
the previous facility and not repaid under the entitlement offer launched in March 2016 was capitalised into the principal balance under the
restructured facility in the comparative financial year.
The Company issued advisor shares, as disclosed in Appendix 3B’s lodged with the Australian Stock Exchange on 2 November 2016 and
24 June 2016. These shares were issued in part satisfaction of advisory fees incurred. The amount satisfied by the shares issued was
$84,400 and $105,000 respectively and is not presented in the cash flow statements.
6666
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(d) Financing arrangements
Refer to Note 21.
31. RELATED PARTIES
ENTITY WITH CONTROL
Kerogen Investments No. 1 Limited (Kerogen) participated in the accelerated entitlement offer announced by the Company on 18 May 2017
by subscribing for its pro rata entitlement and providing sub underwriting support. In total $37,225,000 was raised from Kerogen and
settled by the part conversion of tranche 1 of the related party loan facility as disclosed in Note 21, including outstanding interest. This
satisfied a condition of the restructure of the related party loan notes agreed in June 2016 which required a minimum of US $25 million to
be repaid through an entitlement offer.
A further $500,000 in funding provided by Kerogen was satisfied through the transfer of all rights and obligations of the Group arising
under an earlier agreement with Lawndale Group to purchase three Petroleum Exploration Licences (the PEL’s) in New South Wales. No
profit or loss was recognized on this transaction.
Kerogen also participated in the accelerated entitlement offer announced by the company on 17 March 2016, by also subscribing for its pro
rata entitlement and providing sub underwriting support. In total $13,811,727 was raised from Kerogen, of which $13,011,727 was settled by
the conversion of interest due and payable under the Kerogen senior debt facility.
Kerogen has provided financing facilities throughout the year as described in Note 21. Interest and borrowing costs incurred on those loans
totaled $13,867,000 (2016: $13,486,000), balances outstanding at balance date are disclosed in Note 21.
Julian Ball is a representative of Kerogen and a Director of the Company.
KEY MANAGEMENT PERSONNEL COMPENSATION
The key management personnel compensation comprised:
Short-term employee benefits
Other long-term benefits
Post-employment benefits
Termination benefits
Share based payments
2017
$
2016
$
1,791,774
2,517,488
18,306
63,398
–
–
9,351
77,704
259,000
1,333
1,873,478 2,864,876
Information regarding individual director and executives’ compensation disclosures and some equity instrument disclosure, as required by
the Corporations Act chapter 2M, is provided in the Remuneration Report section of the Director’s Report.
Apart from the details disclosed in this note, no director has entered into a material contract with the Group since the end of the previous
financial year and there were no material contracts involving directors’ interests existing at year end.
KEY MANAGEMENT PERSONNEL TRANSACTIONS WITH THE COMPANY OR ITS CONTROLLED ENTITIES
A number of key management persons, or their related parties, hold or held positions in other entities that result in them having control or
significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company or
its subsidiaries in the reporting period. The terms and conditions of the transactions with management persons and their related parties
were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to unrelated
entities on an arm’s length basis.
Services were provided through the contracting entity. Such services were provided in the ordinary course of business and on normal terms
and conditions in all instances. The amount payable for these services is included in the amounts disclosed in the Remuneration Report.
6767
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 31.
RELATED PARTIES (continued)
The aggregate amounts recognised during the year relating to key management personnel and their related parties, were as follows:
Key Management person
Contracting entity
Transaction
2017
$’000
2016
$’000
Phillip Arnall
Julian Ball
Ian Meares
Andrew Purcell(1)
Felix Ventures Pty Ltd
Non-Executive director services
235,000
145,000
Kerogen Capital Limited
Non-Executive director services
100,000
100,000
Autonome Pty Ltd
Lawndale Group
Lawndale Group
Non-Executive director services
95,000
95,000
Non-Executive director services
95,000
95,000
Other consulting services
–
84,098
(1) See below for further details of transactions with Lawndale Group.
Transactions with Lawndale Group
The agreement with Lawndale Group, a company controlled by Andrew Purcell, for the provision of project management and consulting
services had concluded in the comparative period. $84,098 was paid in the comparative year under the agreement which were considered
to be arm’s length and below market rates.
In the 2015 financial year the company entered into a separate agreement with Lawndale Group, to purchase three Petroleum Exploration
Licences (the PEL’s) in New South Wales as well as an interest in drilling and exploration equipment for $2.5 million, which Lawndale Group
had agreed to purchase from Dart Energy Limited. The AJ Lucas paid a deposit of $500,000 directly to Dart Energy Limited.
The purchase was funded by a loan facility provided by Kerogen No.1 Limited (“the PEL loan”).
In September 2015 the Company reviewed its investment in the PEL’s and decided that it was not in the strategic interest of the Group at
the time. As provided under the PEL loan, the Company therefore transferred its rights and obligations under the original agreement to
Kerogen No.1 Limited in full satisfaction of the PEL loan. No profit or loss was recognized on this transaction.
OTHER RELATED PARTIES
The Group has a related party relationship with its subsidiaries (see Note 27) and joint operations (see Note 26). These entities trade with
each other from time to time on normal commercial terms. No interest is payable on inter-company balances.
32. DEED OF CROSS GUARANTEE
On 16 June 2008, several of the entities in the Group entered into a Deed of Cross Guarantee. Pursuant to ASIC Class Order 98/1418 (as
amended) dated 13 August 1998, the Group’s wholly owned subsidiaries entering into the Deed are relieved from the Corporations Act 2001
requirements to prepare, have audited and lodge financial reports, and directors’ reports.
The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any
of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the
Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar
guarantees in the event that the Company is wound up.
The subsidiaries subject to the Deed are:
Name of entity
AJ Lucas Operations Pty Limited
Jaceco Drilling Pty Limited
Lucas Engineering & Construction Pty Limited
Geosearch Drilling Service Pty Limited
AJ Lucas Plant & Equipment Pty Limited
Lucas Energy Holdings Pty Limited
AJ Lucas Drilling Pty Limited
Lucas Shared Services Pty Limited
AJ Lucas Testing Pty Limited
Lucas Operations (WA) Pty Limited
AJ Lucas Joint Ventures Pty Limited
Lucas Drilling Pty Limited
Lucas Energy (WA) Pty Limited
Lucas (Arawn) Pty Limited
Lucas Power Holdings Pty Limited
Mitchell Drilling Corporation Pty Limited
McDermott Drilling Pty Limited
Lucas Contract Drilling Pty Limited
A consolidated summarised statement of comprehensive income and consolidated statement of financial position, comprising the Company
and controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, at
30 June 2017 are set out below:
6868
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SUMMARISED STATEMENT OF COMPREHENSIVE INCOME
Loss before income tax
Income tax expense
Loss after tax
Accumulated losses at the beginning of the year
Accumulated losses at end of the year
SUMMARISED STATEMENT OF FINANCIAL POSITION
CURRENT ASSETS
Cash and cash equivalents
Cash in trust
Trade and other receivables
Inventories
Other assets
Total Current Assets
NON-CURRENT ASSETS
Trade and Other Receivables
Property, plant and equipment
Total Non-Current assets
Total Assets
CURRENT LIABILITIES
Trade and other payables
Interest bearing loans and borrowings
Employee benefits – current
Total Current Liabilities
NON-CURRENT LIABILITIES
Interest bearing loans and borrowings
Employee benefits
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Share capital
Reserves
Retained earnings
Total Equity
2017
$’000
2016
$’000
(14,858)
(10,605)
–
–
(14,858)
(10,605)
(308,514)
(297,909)
(323,372)
(308,514)
2017
$’000
2016
$’000
9,655
11,847
21,909
30,853
1,098
6,841
15,634
25,749
16,047
1,288
75,362
65,559
121,610
37,849
90,886
39,024
159,459
129,910
234,821
195,469
24,055
1,126
4,884
25,860
34,743
4,759
30,065
65,362
106,149
70,979
836
937
106,985
71,916
137,050
137,278
97,771
58,191
416,443
362,034
4,700
4,671
(323,372)
(308,514)
97,771
58,191
33. EVENTS SUBSEQUENT TO BALANCE DATE
There has not arisen in the interval between the end of the financial year and the date of this report any item, transaction or event of a
material or unusual nature likely, in the opinion of the directors of the Company, to affect significantly the operations of the Group, the
results of those operations, or the state of affairs of the Group, in future financial years.
6969
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Directors’ Declaration
1
In the opinion of the directors of AJ Lucas Group Limited (the Company):
(a) the consolidated financial statements and notes, that are contained in pages 32 to 69 and the Remuneration Report included in the
Directors’ Report, set out on pages 15 to 30, are in accordance with the Corporations Act 2001, including:
(i) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its performance for the financial year
ended on that date; and
(ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations
Regulations 2001; and
(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
2 There are reasonable grounds to believe that the Company and the group entities identified in Note 27 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 between the Company
and those group entities pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785.
3 The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chairman and Chief
Financial Officer, for the financial year ended 30 June 2017.
4 The directors draw attention to note 2(A) to the consolidated financial statements, which includes a statement of compliance with
International Financial Reporting Standards.
Signed in accordance with a resolution of the directors:
Phillip Arnall,
Director
31 August 2017
7070
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTDIRECTORS’ DECLARATION 200 George Street
Sydney NSW 2000 Australia
GPO Box 2646 Sydney NSW 2001
Tel: +61 2 9248 5555
Fax: +61 2 9248 5959
ey.com/au
Independent Auditor's Report to the Members of AJ Lucas Group Limited
Report on the Audit of the Financial Report
Opinion
We have audited the financial report of AJ Lucas Group Limited (the Company) and its subsidiaries
(collectively the Group), which comprises the consolidated statement of financial position as at 30 June
2017, the consolidated statement of comprehensive income, consolidated statement of changes in equity
and consolidated statement of cash flows for the year then ended, notes to the financial statements,
including a summary of significant accounting policies, and the directors' declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act
2001, including:
a)
b)
giving a true and fair view of the consolidated financial position of the Group as at 30 June 2017
and of its consolidated financial performance for the year ended on that date; and
complying with Australian Accounting Standards and the Corporations Regulations 2001.
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 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 (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.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for
our opinion.
Material Uncertainty Related to Going Concern
Without qualifying our opinion, we draw attention to Note 2c in the consolidated financial report which
describes the principal conditions that raise doubt about the entity’s ability to continue as a going
concern.
These conditions along with other matters set forth in Note 2c, indicate the existence of a material
uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern and
therefore, the Group may be unable to realise its assets and discharge its liabilities in the normal course
of business without the ongoing financial support of its major shareholder and financiers.
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7171
INDEPENDENT AUDITOR’S REPORT
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our
audit of the financial report of the current year. These matters were addressed in the context of our audit
of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate
opinion on these matters. In addition to the matter described in the Material Uncertainty Related to Going
Concern section, we have determined the matters described below to be the key audit matters to be
communicated in our report. For each matter below, our description of how our audit addressed the
matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the
Financial Report section of our report, including in relation to these matters. Accordingly, our audit
included the performance of procedures designed to respond to our assessment of the risks of material
misstatement of the financial report. The results of our audit procedures, including the procedures
performed to address the matters below, provide the basis for our audit opinion on the accompanying
financial report.
1. Recognition and Measurement – Revenue from services rendered and construction contracts
Refer to Note 6 Operating Segments
Why significant
How our audit addressed the key audit matter
Revenue from services rendered is recognised in
the profit or loss in proportion to the stage of
completion of the transaction at reporting date.
We assessed whether the methodology used to
recognise revenue met the requirements of
Australian Accounting Standards;
28 to 32
Construction contracts revenue includes the
initial amount agreed in the contract plus any
variations in contract work, claims and incentive
payments to the extent it is probable that they
will result in revenue that can be measured
reliably.
Revenue recognition involves estimation due to
the nature and extent of varying contract
conditions, which are unique to each contract
and can be complex.
The accurate recording of revenue is highly
depend on the following factors:
Appropriate knowledge of individual
contract characteristics and status of work.
Key characteristics would be the industry
and/or geography of the project and length
and type of contract (lump sum basis or
time and materials basis);
We tested the effectiveness of the Group’s
controls in the following areas:
-
-
Initiation, processing and approval of setting
up a customer and/or contract;
review and approval of project costs incurred;
- authorisation of project variations;
-
-
review and assessment of significant changes
in work in progress balances; and
review of unapproved variations and claims.
We selected a sample of contracts based on
qualitative and quantitative factors and
performed the following procedures:
-
reviewed contract terms and conditions and
assessed whether the individual
characteristics of each contract were
appropriately accounted for;
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7272
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT
Why significant
How our audit addressed the key audit matter
Determination of variations and claims
provided to customers including an
assessment of when the Group believes it is
probable that amounts will be approved and
can be recovered from the customer; and
- assessed the Group’s ability to deliver
budgeted contract margins by analysing the
historical accuracy of forecasting margins and
the relationship of contract cost versus billing
status;
Determination of claims received from
customers, including an assessment of when
the Group believes it is probable that such
claims will result in an outflow of economic
resources.
This matter has been considered as a Key Audit
Matter given the complexity of the contracts, the
level of judgement required to estimate the value
of revenue recognized and the materiality of
revenue to the financial statements.
- agreed material contract revenue and cost
variations and claims to information provided
by 3rd party’s; and
-
for contracts accounted for using the
percentage of completion method we assessed
the forecast cost to complete calculations.
We also assessed the effect of contract
performance in the period since year end to the
date of this report on year-end revenue
recognition; and
We evaluated the adequacy of the related
disclosures in the financial report including those
made with respect to judgements and estimates.
2. Valuation of equity accounted investments
Refer to Note 17 Investments in Equity Accounted Investees
Why significant
How our audit addressed the key audit matter
The Group’s equity accounted investment in
Cuadrilla Resources Holdings Limited
(“Cuadrilla”) of $104.7m as at 30 June 2017,
represents 43% of total assets.
Subsequent to initial recognition at cost, the
value of the investment in the consolidated
financial statements includes the Group’s share
of profit or loss and other comprehensive income
of the equity accounted investment, adjusted to
align to the accounting policies of the Group.
We recalculated the share of equity accounted
losses during the year and movements in
foreign currency translation recognised in
equity for the Group’s investment in Cuadrilla. In
doing so, we assessed the Group’s adjustments
to align the accounting policies of Cuadrilla with
those of the Group;
We met with responsible representatives of
Cuadrilla so as to understand the current drilling
program and whether there are any risks of the
commercial drilling at the investment site;
We assessed whether the methodology used by
the Group to identify indicators of impairment
met the requirements of Australian Accounting
Standard AASB 136 Impairment of Assets;
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7373
INDEPENDENT AUDITOR’S REPORT
As disclosed in the financial report, the
Directors’ assess the Group’s equity accounted
investment for indicators of impairment at each
balance date. This involves assessment of any
potential indications of impairment including (but
not limited to) significant changes to market,
economic or the legal environment in which AJ
Lucas and Cuadrilla Resources Limited
(“Cuadrilla”) operates. This assessment
determines whether a full impairment
assessment is required.
This is considered a Key Audit Matter due to the
magnitude of the balance in the statement of
financial position, and the significant judgments
and assumptions involved in the assessment of
indicators of impairment.
We evaluated the Group’s assessment of
indicators of impairment at year-end by
validating the assumptions made by
management. Our procedures included
discussions with representatives from Cuadrilla
and the Group, including the directors as well as
evaluating the impact of Cuadrilla receiving final
planning consent from the United Kingdom
Government by way of the UK Secretary of
State for Departments and Local Government
on 6 October 2016;
We also considered market announcements
made by the Group and Board meeting minutes
of both the Group and Cuadrilla throughout the
year and through to the date of this report for
any facts or circumstances that would indicate
any indicators of impairment; and
We evaluated the adequacy of the related
disclosures in the financial report including
those made with respect to judgements and
estimates.
Information Other than the Financial Report and Auditor’s Report
The directors are responsible for the other information. The other information comprises the information
included in the Company’s 2017 Annual Report, but does not include the financial report and our
auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not
express 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, 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.
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.
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7474
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT
In preparing the financial report, the directors are responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters relating 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 this financial report.
As part of an audit in accordance with the Australian Auditing Standards, we exercise professional
judgment and maintain professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial report, whether due to fraud
or error, design and perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a
material misstatement resulting from fraud is higher than for one resulting from error, as fraud
may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the directors.
Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the financial report or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our
auditor’s report. However, future events or conditions may cause the Group to cease to continue as
a going concern.
Evaluate the overall presentation, structure and content of the financial report, including the
disclosures, and whether the financial report represents the underlying transactions and events in a
manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Group to express an opinion on the financial report. We are
responsible for the direction, supervision and performance of the Group audit. We remain solely
responsible for our audit opinion.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
7575
INDEPENDENT AUDITOR’S REPORT
We communicate with the directors regarding, among other matters, the planned scope and timing of the
audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may
reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated to the directors, we determine those matters that were of most
significance in the audit of the financial report of the current year and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should
not be communicated in our report because the adverse consequences of doing so would reasonably be
expected to outweigh the public interest benefits of such communication.
Report on the Audit of the Remuneration Report
Opinion on the Remuneration Report
We have audited the Remuneration Report included in pages 19 to 22 of the directors' report for the year
ended 30 June 2017.
In our opinion, the Remuneration Report of AJ Lucas Group Limited for the year ended 30 June 2017,
complies with section 300A of the Corporations Act 2001.
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.
Ernst & Young
Ryan Fisk
Partner
Sydney
31 August 2017
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
7676
AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTADDITIONAL INFORMATION
Australian Securities
Exchange Additional
Information
DISTRIBUTION OF ORDINARY SHARES (AS AT 30 SEPTEMBER 2017)
Securities held
1 – 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 and over
Total
939 shareholders held less than a marketable parcel of shares as at 30 September 2017.
Number of
shareholers
Number of
shares
614
767
306
512
135
304,265
2,135,083
2,391,594
17,767,997
562,589,791
2,334
585,188,730
7777
ADDITIONAL INFORMATION Number of
ordinary
shares held
% of Issued
shares
342,807,985
58.58
46,115,863
34,277,448
23,330,846
17,527,450
11,990,000
11,016,702
8,133,442
6,379,348
5,824,689
5,523,248
2,697,506
2,433,417
2,081,919
1,856,254
1,514,889
1,443,750
1,318,904
1,310,229
1,258,150
7.89
5.86
3.99
3.00
2.05
1.88
1.39
1.09
1.00
0.94
0.46
0.42
0.36
0.32
0.26
0.25
0.23
0.22
0.21
528,842,039
90.40
Number of
ordinary
shares held
% of issued
shares
320,806,301
46,115,863
54.82
7.89
TWENTY LARGEST ORDINARY SHAREHOLDERS
Name
Kerogen Investments No. 1 (HK) Limited
Mr Paul Fudge
CS Third Nominees Pty Limited
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