2017 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 h 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 % o i t a r e f o e u l a V d n a s n o i t p o s a s t h g i r - n u m e r f o n o i t r o p o r p d % e t a l e r f o n o i t r o p o r P n o i t a r e n u m e r e c n a m r o f r e p l $ a t o T ) $ 4 ( $ s n o i t p o ) e v a e l e c i v r e s t $ i f e n e b $ s t i f e n e b l $ a t o T d n a s t h g i R g n o l ( s t i f e n e b n o i t a n i m r e T n o i t a u n n a m r e t g n o L - r e p u S ) $ 3 ( d e u r c c a ) $ 2 ( d i a p 7 1 0 2 Y F e v i t n e c n I 6 1 0 2 Y F e v i t n e c n I ) $ 1 ( s e e f / y r a l a S d e s a b e r a h S s t n e m y a p r e h t O m r e t g n o l t n e m y o l p m e t s o P m r e t - t r o h S – – – – – 2 . 0 – 7 2 – 8 2 – 7 2 0 8 2 , 9 2 4 6 3 5 , 7 6 5 3 5 9 , 7 5 4 – – – 5 4 2 , 6 6 3 9 6 6 , 3 9 4 – – , 1 2 6 0 9 5 3 3 3 , 1 6 6 5 , 6 8 1 5 , 6 6 4 3 , 6 9 9 2 , 6 4 9 3 , 5 2 5 5 , 5 – – – – – – 0 0 0 , 5 2 4 1 7 , 7 9 3 – – 4 1 7 , 7 9 3 0 0 0 , 5 2 , 8 1 0 6 3 5 6 3 9 , 2 4 1 0 0 0 8 , 2 8 0 , 5 8 3 9 9 1 , 9 1 7 7 1 , 9 1 9 9 1 , 9 1 7 7 1 , 9 1 8 0 4 , 2 3 4 – – 8 0 4 , 2 3 4 2 1 8 , 3 6 5 6 4 3 , 0 5 1 0 0 0 , 5 1 6 6 4 8 9 3 , 2 5 6 , 1 4 3 – – 2 5 6 , 1 4 3 , 0 4 9 8 6 4 3 3 5 , 6 1 1 0 0 0 , 5 1 7 0 4 , 7 3 3 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 s r e c i f f o e v i t u c e x E n i r r e P n e t s u A O F C i k c i n n d e r T t t e r B g n i l l i r D M G E n o s t r e b o R - t r a u t S n h o J s e n i i l e p P – M G E : e r a p u o r G e h t f o ) P M K ( l e n n o s r e p t n e m e g a n a m y e k r e h t o d n a y n a p m o C e h t f o r o t c e r i d e v i t u c e x e h c a e f o n o i t a r e n u m e r f o t n e m e l e h c a e f o t n u o m a d n a e r u t a n e h t f o s l i a t e D n o i t a r e n u m e r ’ s r e c fi f o d n a s ’ r o t c e r i d e v i t u c e x E s r o t c e r i d r e m r o f d n a t n e r r u c r e v o c h c i h w s t c a r t n o c e c n a r u s n i y t i l i b a i l ’ s r e c fi f o d n a ’ s r o t c e r i d f o t c e p s e r n i i i d a p s m u m e r p e c n a r u s n i e d u l c x e s n o s r e p t n e m e g a n a m y e k f o n o i t a r e n u m e r r o f d e s o l c s i d s t n u o m A n o i t a c o l l a h c u s r o f s i s a b e l b a n o s a e r o n t a h t e v e i l e b s r o t c e r i d e h t s a y c i l o p e c n a r u s n i e h t y b d e r e v o c s l a u d i v i d n i e h t o t d e t a c o l l a n e e b t o n s a h t n u o m a s i h T . s e i t i t n e d e l l o r t n o c s t i d n a y n a p m o C e h t f o s r e c fi f o d n a f o n o i t r o p e h t s i d e s o l c s i d e u l a v e h T . e t a d g n i t s e v o t e t a d t n a r g m o r f d o i r e p g n i t r o p e r h c a e o t y l n e v e d e t a c o l l a d n a l e d o m g n i c i r p o l r a C e t n o M a g n i s u d e t a l u c l a c n e e b s a h d e u s s i s n o i t p o e h t f o e u l a v r i a f e h T ) 4 ( . r a e y l a i c n a n fi 7 1 0 2 e h t n i i d a p s a w d n a , s r o t a c i d n I e c n a m r o f r e P y e K l a u d i v i d n i i d n a s t e g r a t g n i t a r e p o n a t r e c f o t n e m e v e i h c a n o d e s a b r a e y l a i c n a n fi 6 1 0 2 e h t g n i r u d d e u r c c a s a w e v i t n e c n i 6 1 0 2 Y F e h T ) 3 ( . t c a r t n o c y c i l o p e h t f o s m r e t e h t i r e d n u d e t i b h o r p s i e r u s o l c s i d h c u s s a n w o h s n e e b t o n e v a h d a p m u m e r p e h t i i f o t n u o m a e h t r o s e i t i l i b a i l e h t f o e r u t a n e h t f o s l i a t e D . s t s i x e . e v a e l l a u n n a d e u r c c a d n a s e c n a w o l l a y n a g n d u l c n i i d e n r a e s e g a w d n a y r a l a S ) 1 ( i . r a e y l a i c n a n fi 6 1 0 2 e h t g n i r u d d a p d n a d r a o B e h t y b d e v o r p p a s a w t a h t e v i t n e c n i y r a n o i t e r c s i d a s a w e v i t n e c n i 5 1 0 2 Y F e h T ) 2 ( . 5 1 0 2 r e b m e c e D n i d e s p a l n w o h s s n o i t p o e h T . n w o h s d o i r e p g n i t r o p e r e h t o t d e t a c o l l a s n o i t p o e h t f o e u l a v r i a f e h t o t y t i l i b a e h t s a h d r a o B e h T . r a e y o t i r a e y d e fi d o m e r a s l e v e l s n o i t a r e n u m e r w o h e b i r c s e r p t o n s e o d t u b n o i t a r e n u m e r f o s t n e n o p m o c s e n i l t u o h c i h w l t c a r t n o c r e d n u d e y o p m e e r a l e n n o s r e p t n e m e g a n a m y e k l l A s t n e m e e r g a e c i v r e S o t r a e y y r e v e d e w e i v e r e r a s l e v e l n o i t a r e n u m e R j j . s t c e o r p r o a m o t n o i t a l e r n i , e l p m a x e r o f , s t c a r t n o c e s e h t f o s m r e t e h t r e d n u s m a r g o r p e v i t n e c n i g n i t s i x e e d i s t u o l l a f y a m h c i h w s t fi e n e b y r a n o i t e r c s i d e d i v o r p . e c n a m r o f r e p s ’ p u o r G e h t d n a y c i l o p n o i t a r e n u m e r e h t f o s e l p i c n i r p e h t t e e m o t d e r i u q e r s e g n a h c y n a , d e m r o f r e p e l o r e h t f o e p o c s e h t n i e g n a h c y n a , s e g n a h c g n i v i l f o t s o c t n u o c c a o t n i e k a t n a h t i w d o i r e p e c i t o n e h t t i e f r o f o t e s o o h c n a c y n a p m o C e h T . y n a p m o C e h t y b e c i t o n s h t n o m 6 o t p u h t i i w d e t a n m r e t e b n a c s r e c fi f o e v i t u c e x E h t i w s t c a r t n o c l l A . m r e t n i d e t i m i l n u e r a s t c a r t n o c e c i v r e s e h T . n o i t a r e n u m e r l e n n o s r e p t n e m e g a n a m y e k s ’ p u o r G e h t d e k r a m h c n e b t n a t l u s n o c l a n r e t x e n a , r a e y l a i c n a n fi e h t g n i r u D 29 l . e e y o p m e e h t o t e l b a y a p n o i t a s n e p m o c f o t n u o m a t n e l a v i u q e e c i v d a t n a t l u s n o c n o i t a r e n u m e r l a n r e t x 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 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; A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 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; A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 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 LimitedCiticorp Nominees PTY Limited CS Fourth Nominees PTY Limited Amalgamated Dairies Investments No 2 Limited HSBC Custody Nominees (Australia) Limited – A/C 2 Toolebuc Investments PTY LTD Amalgamated Dairies Limited HSBC Custody Nominees (Australia) Limited Milson Investments PTY Limited J P Morgan Nominees Australia Limited ADEMSA PTY LTD HSBC Custody Nominees (AUSTRALIA) Limited-GSCO ECA Brispot Nominees PTY LTD Forsyth Barr Custodians LTD Mr Ross Alexander Macpherson Ingrid Miriam Seton Laudick Investments PTY LTD Patersons Securities Limited SUBSTANTIAL SHAREHOLDERS Name Kerogen Investments No. 1 (HK) Limited Mr Paul Fudge VOTING RIGHTS Ordinary shares – Refer to note 24 of the financial statements. Options – These are no options outstanding. 7878 AJ LUCAS GROUP LIMITED 2017 ANNUAL REPORTADDITIONAL INFORMATION CORPORATE DIRECTORY Directory COMPANY SECRETARY Marcin Swierkowski – BA Com, CA, MBA (exec) Registered office: 1 Elizabeth Plaza NORTH SYDNEY NSW 2060 Tel +61 2 9490 4000 Fax +61 2 9490 4200 SHARE REGISTRY Computershare Investor Services Pty Limited Level 5, 115 Grenfell Street ADELAIDE SA 5000 GPO Box 1903 ADELAIDE SA 5001 Enquiries within Australia: Enquiries outside Australia: +61 3 9615 5970 Email: web.queries@computershare.com.au Website: www.computershare.com 1300 556 161 STOCK EXCHANGE The Company is listed on the Australian Securities Exchange with the code ‘AJL’. The Home Exchange is Sydney. AUDITORS Ernst & Young 200 George Street SYDNEY NSW 2000 QUALITY CERTIFIERS (AS/NZS ISO 9001:2008) Bureau Veritas Australia Pty Limited AUSTRALIAN BUSINESS NUMBER 12 060 309 104 OTHER INFORMATION AJ Lucas Group Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. Designed and producted by FCR www.fcr.com.au 797979 www.lucas.com.au