ANNUAL REPORT 2018 CONTENT S 01 Our Business 02 Chairman’s Letter 06 Oil & Gas Division 10 LDS Division 14 Financial Report 86 Corporate Directory I S S E N S U B R U O AJ LUCAS GROUP LIMITED AJ Lucas is a leading investor in the exploration, appraisal and commercialisation of oil and gas prospects in the UK, with a long and proven history of returns from conventional and unconventional hydrocarbon resources investments. It is also a leading provider of drilling services in Australia with a primary focus on the coal sector. OPER ATING BU SINESS UNIT INVESTMENT Drilling Services (LDS) Oil & Gas A major drilling provider to the coal sector in Australia for mine degassing and exploration drilling A focused provider of surface to inseam (SIS) coal mine gas extraction and well field services First mover in the exploration for and commercialisation of unconventional hydrocarbon plays in the UK, capitalising on historical exploration and drilling experience Focused on unlocking value in the untapped unconventional onshore oil and gas resources of the UK Delivering intelligent and practical solutions to support Australian mine providers One of the largest onshore shale gas acreage positions in the UK 01 2018 ANNUAL REPORT “the Company looks forward to the program to flow test both exploration wells early in 2019 and to continue the appraisal of the Preston New Road site.” Overview I am pleased to present the 2018 Annual report for AJ Lucas Group Limited. The year in review has been busy and quite productive in shaping the Company for the future. We have witnessed a further chapter in the development of the UK assets with the completion of two horizontal exploration wells at Preston New Road (“PNR”) and government approval to complete hydraulic stimulation of these wells which has commenced in October. Subsequent to this the Company looks forward to the program to flow test both wells early in 2019 and to continue the appraisal of the PNR exploration site. Following upon these initiatives and dependent upon the results Cuadrilla, as the operator, will commence connection of the wells to the national grid and apply for approval for production at the PNR site. 2019 will be a transformational year for our assets in the UK. The Company welcomed the results of a 7 day flow test of a well located in the Balcombe licence in Southern England where our operating partner Angus Energy Plc (“Angus”) reported encouraging but inconclusive results warranting further testing. With respect to the Company’s Australian operations, the Drilling division’s financial performance improved significantly, and current contractual negotiations and soundings from customers indicate that 2019 will also be a strong year. It is pleasing that the divisions superior performance in terms of safety has continued with improvements to a number of safety performance indicators, despite a significant increase in the workforce. Subsequent to year end the Company received an expression of interest in acquiring the Drilling division. The Board considered it had a responsibility to review the market interest in the business and test it against the value it ascribes to the business unit internally. As a result, the Company has engaged Highbury Partnership to undertake a review of the division which will include testing the sale of the division. It is expected this review will be completed by early 2019 and shareholders will be informed of the outcome. As has been reported earlier the Company exited the Engineering and Construction (“E&C”) business and is in the process of monetising assets of this division. The pipeline construction market has not been productive for A J Lucas in recent years and having regard for the overall market prospects in this segment it was decided to exit this business. The Company is in the latter stages of completing remaining contracts and clearing up some legacy issues. The Board continues to monitor the capital funding commitments of the Group and as a result completed a number of initiatives during the year. These included a capital raising in January 2018 which raised a total of $52.8 million after costs, and substantial repayments of finance facilities leading to savings on future interest costs. In addition, subsequent to year end the Company and OCP agreed to amend certain terms of its senior loan note facility including extending the maturity date of the senior loan notes and to provide an additional $US9 million facility. Details of both these initiatives appear below. Australian operations I foreshadowed in the 2017 annual report that the performance of the Drilling division was expected to significantly improve in 2018. Indeed the division’s underlying EBITDA of $19.7 million was even better than expected at the time and a substantial improvement on the previous year of $2.7 million. The improvement was driven by a strategy to refocus on servicing the coal industry, where the division’s core strengths lie, and away from the water and coal seam gas markets. This refocus allowed management to capitalise on opportunities resulting from the increasing demand for de-gasification and exploration drilling services from coal mines on the Australian eastern seaboard. Demand was especially strong in the more specialised service offerings that the Group’s assets are well suited being large diameter and directional drilling. R E T T E L S ’ N A M R A H C I 02 AJ LUCAS GROUP LIMITED Since the balance date the division has been successful in negotiating extensions to a number of existing contracts as well as winning new work. It was pleasing to announce in September 2018 that an agreement had been reached with Anglo American Metallurgical Coal Pty Ltd (“Anglo American”) which extends and solidifies the divisions existing relationship with one of its key customers for a period of 3 years, with options to extend by mutual agreement for a further 2 years. These new and extended existing relationships, together with the expected continued strength in the Australian Coal Industry, is expected to underpin another strong year for the division in 2019. Meanwhile the divestment of the E&C in July 2018 has resulted in additional liquidity being returned to the Group, which will continue over the remaining part of 2018 as existing projects are completed and final claims settled. The Board received a number of proposals for the acquisition of the E&C division during the year and in December 2017 decided to discontinue the E&C. This followed a thorough review of the division’s investment requirements and current and future potential returns. The divestment will allow the Board to focus more on the UK shale gas investments. RIGHT: Water monitoring at Preston New Road Exploration site in Lancashire, UK. 03 2018 ANNUAL REPORT D E U N T N O C I R E T T E L S ’ N A M R A H C I “Since balance date the drilling division has been successful in negotiating extensions to a number of existing contractual relationships as well as winning new work.” UK Shale Gas Investments Our UK shale gas investments, continued its focus on progressing activities at the PNR exploration site in Lancashire , where our 47.4% owned associate Cuadrilla Resources Limited (“Cuadrilla”), the operator of the licence, has approval to drill and flow test up to four horizontal exploration wells. Drilling of a pilot well was completed in January 2018, which was extensively cored and logged, and drilling of two horizontal exploration wells was completed in April 2018 and July 2018 respectively. Consent has been received to hydraulically stimulate both wells. Initial flow testing of both horizontal wells is expected to commence towards the end of calendar 2018, once hydraulic stimulation is completed and run for approximately 6 months. Spirit Energy (a subsidiary of Centrica Plc), is required to fund a further £46.7 million (gross to the licence joint venture) on exploration, appraisal or development operations once gas has been flowing regularly for 6 months from the two wells in order to maintain its 25% interest in the Bowland licence. Cuadrilla continues to evaluate options available for further exploration, appraisal and development activities in the Bowland licence, which will be evaluated following the test results of the PNR wells. In October 2018 the Company announced the results of a seven day flow test of the Balcome-Z2 well located in PEDL 244 in Southern England. The well flowed at 853 Bopd(1) and 1,587 Bopd over a very short interval and whilst encouraging the test results are not conclusive and further analysis and testing is required. The flow testing was fully funded by Angus under the terms of the farm-out agreement between AJ Lucas, Cuadrilla and Angus announced in January 2018. Under the agreement Angus acquired a 25% interest in the Balcombe licence (PEDL 244) pro rata from Cuadrilla and AJ Lucas, and became the operator of the licence. Angus paid a total of £4 million (25% to Lucas and 75% to Cuadrilla) in addition to full funding the flow test of the Balcombe-2z well which was initially drilled by Cuadrilla in 2013. Funding strategy As part of an ongoing review of funding requirements and balance sheet structure the Board reached agreement with note holders to amend certain provisions of its senior loan notes facility (the “OCP Facility”) in December 2017 and again in August 2018. This includes an extension to the maturity of the loan notes to 31 January 2020 with a commitment to reduce the facility principal to US$20 million by 30 June 2019. During 2018 a total of $18.2 million of the senior loan note principal, in addition to $7.9 million in interest, was repaid. As part of the amendments agreed in August 2018 the Group can re-draw US$9 million to fund its UK shale gas activities. Concurrently, Kerogen has also agreed to defer the maturity on its loan facility to 31 July 2020. In January 2018 the Company undertook a capital raising consisting of a placement to new and existing shareholders and a 1 for 6 entitlement offer to existing shareholders which in total raised $51.4 million after raising costs. Kerogen, the Company’s largest shareholder, subscribed for its full entitlement under the entitlement offer of $18.3 million by way of a non-cash partial conversion of its loan facility (the “Kerogen Facility”), including accrued interest. (1) Barrels of oil per day. 04 AJ LUCAS GROUP LIMITED The repayment of the OCP and Kerogen Facilities during 2018 is estimated to reduce annual interest expense by approximately $7 million per annum. People and Safety 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, and the Drilling division’s Total Recordable Injury Frequency Rate (TRIFR) has improved to 5 from 11.4 the previous year, being at the leading edge of safety performance in the industry we operate in. This was achieved during a year where activity has increased substantially requiring a significant increase in new employees, and against a culture which promotes reporting of actual and potential safety incidents. 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, as well as executive remuneration incentives. Senior management continually review performance, implement corrective actions if deficiencies are identified, and regularly report on performance to the Board. Phil Arnall Chairman 05 2018 ANNUAL REPORT We have made significant progress in our UK Bowland joint venture in 2018 and are delighted to be in prime position to be the first license to drill and flow test horizontal exploration wells from onshore shale in the UK. UK Shale Operations The operations at the PNR exploration site located in Lancashire UK have continued to progress with flow testing of two wells expected to commence by the end of 2018. A vertical pilot well was drilled to a depth of 2,700 metre which was completed in January 2018 penetrating both the Upper and Lower Bowland shale rock intervals. Cuadrilla recovered some 112 metres of core samples taken across three separate intervals in the shale. In addition, a very comprehensive suite of wireline logs was completed, recording data across the entire Bowland shale section. Cuadrilla has advised that this represents the most comprehensive data set recovered to date from any shale well drilled in the UK and the quality of the data is excellent. Cuadrilla’s ongoing analysis indicates excellent rock quality for hydraulic fracturing and a high natural gas content in multiple zones within the very thick shale rock interval. This data has enabled Cuadrilla to select the best intervals to drill the lateral wells. This first horizontal well was completed in April 2018 which penetrated the Lower Bowland shale to a depth of approximately 2,300 metres and extended laterally 782 metres. The second horizontal well was completed in July of this year, which penetrated the Upper Bowland shale to an approximate depth of 2,100 metres and extended laterally 743 metres. On 24 July 2018 the UK’s Minister of State for Energy and Clean Growth consented to Cuadrilla’s application to carry out hydraulic stimulation (“HS”) I I I N O S V D S A G & L O I Cuadilla’s ongoing analysis indicates excellent rock quality for hydraulic fracturing and a high natural gas content 06 AJ LUCAS GROUP LIMITED BU SINESS HIG HLIG HT S Bowland license highlights ■ Drilling of a pilot well which was completed in January 2018 to a depth of 2,712 metres which was extensively cored and logged. ■ Two horizontal exploration wells drilled at depths of approximately 2100 and 2300 metres and extending 742 and 782 metres laterally. ■ Consent to fracture the first horizontal well was received in July 2018, and consent for second well received in September 2018. ■ Flow testing expected to begin by the end of the calendar year. Balcombe licence highlights ■ Cuadrilla and Lucas farmed out 25% interest to Angus, a UK AIM listed company. ■ Angus tested the Balcombe well which flowed for a short period of time-the results were encouraging, but further testing is required to fully evaluate the license. Financials and other key data Year ended 30 June 2012 2013 2014 2015 2016 2017 2018 Cuadrilla AJL interest Carrying value ($m) Direct exploration asset Carrying value ($m) Total carrying value ($m) 43.0% 73.6 16.1 89.7 43.7% 95.8 6.3 102.1 45.0% 87.6 10.8 98.4 45.0% 104.0 16.5 120.5 45.1% 106.2 18.3 124.5 47.0% 104.7 20.9 125.6 47.4% 120.5 35.9 156.4 of the first horizontal well which commenced in October 2018. Consent to HS the second horizontal well was received on 19 September 2018. It is planned that the hydraulic stimulation of each well will include up to 45 stages and last approximately three months, after which the wells will be flow tested for a period of up to six months. A new planning inquiry focusing solely on transport issues has was completed for our Roseacre Woods exploration site, which is also in the Bowland license. Cuadrilla now awaits a final decision from the Secretary of State for the Department of Communities and Local Government on our planning appeal. Cuadrilla continues to be dedicated to maintaining high standards of safety and environmental responsibility in our operations and we have implemented a comprehensive site environmental monitoring programme along with stringent health and safety rules and standards. They have also had multiple audits from the Environment Agency, the Health & Safety Executive and local Council. Communication and engagement with the local community remains a priority for Cuadrilla and it runs a monthly Community Liaison Group with representatives from the local area near PNR to ensure they are kept updated on our exploration progress. Cuadrilla maintains a comprehensive website setting out the progress in its exploration licenses which can be accessed at www.cuadrillaresources.com. Cuadrilla supports its local community with the successful “Putting Lancashire First” initiative. With two exploration wells underway the local Lancashire community are already seeing positive economic results. The County has benefited to date from over £10m of investment from Cuadrilla and more than 60 jobs have been created. In addition to their commitments to the County, Cuadrilla is privileged to work alongside local partners including the Community Foundation for Lancashire who are setting up arrangements with local residents to spend the first £100,000 of community benefits from the first exploration well at PNR. Cuadrilla also had a very positive response in relation to the community payment of £100,000 for the second exploration well. 07 2018 ANNUAL REPORT Other UK licences As noted above during the year the Balcombe joint venture, comprising Cuadrilla (75%) and AJ Lucas (25%) farmed out 25% of their respective interest in the PEDL244 license to Angus, in return for Angus funding the cost to test the Balcombe 2z horizontal well, which was previously drill by the joint venture. The well flowed at 853 Bopd(1) and 1,587 Bopd(1) over a very short interval and whilst encouraging the test results are not conclusive and further analysis and testing is required. In Yorkshire, where our total exploration acreage totals approximately 1,270km², net to AJ Lucas, Cuadrilla as the joint venture operator continues to work on desktop studies to assess the geology and potential of the licenses. Last year INEOS Upstream Ltd acquired the 30% share of four licences in the Cleveland Basin previously held by ENGIE E&P Ltd, with Cuadrilla holding the remaining 70%. Cuadrilla remain the sole licensee on all remaining licences we hold in Yorkshire. Further information on a Lucas interest in exploration licences are shown on page 9. Impact of Natural Shale Gas for UK It is estimated that over a third of the UK’s energy production came from natural gas in 20171, with over 85% 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, as set out in the graph below (see graph below). The UK winter of 2018 was one of the coldest on record with an artic cold front known as “the Beast from the East” severely testing gas supply capabilities. As a consequence, the price of gas spiked to one of the highest on record and infrastructure was tested. It highlighted the need for reliable domestic gas supplies. Subsequent to Cuadrilla embarking on this development, there has been a marked increase D E U N T N O C I I I I N O S V D S A G & L O I 08 AJ LUCAS GROUP LIMITED Exploration Licence Interests Licence* Licence Description Lancashire area licences PEDL165 EXL269 Bowland Elswick Yorkshire area licences PEDL276 PEDL288 PEDL346 PEDL287 PEDL342 PEDL347 PEDL290 PEDL333 14th Round 14th Round 14th Round 14th Round 14th Round 14th Round 14th Round 14th Round Southern England licences PEDL244 EXL189 Balcombe Cowden Total Acreage (km2) Lucas Direct Interest Cuadrilla Interest Lucas Total Effective Interest Partners Interest 1064.7 54.5 23.75% 22.06% 51.25% 50.19% 48.04% Spirit Energy (25%) 45.85% Spirit Energy (22.75%) Warwick Energy (5%) 191.5 200 184.6 200 100 156.1 88 151.6 154 45 – – – – – – – – 100% 47.40% N/A 70% 70% 70% 70% 100% 100% 100% 33.18% 33.18% 33.18% 33.18% 47.40% 47.40% 47.40% INEOS (30%) INEOS (30%) INEOS (30%) INEOS (30%) N/A N/A N/A 18.75% 56.25% 45.41% Angus Energy 25% – 100% 47.40% N/A *Cuadrilla is the operator of all licences except PEDL244 in which Angus Energy is the operator 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. Shale Gas remains a national imperative with the UK Government recently underlining this in a new Written Ministerial Statement which described shale gas as a safe and secure energy source, which would also help meet the country’s Climate Change obligations. Our Bowland joint venture welcomed the measures the Government introduced on making the planning process “faster and fairer” and providing additional resources to help local authorities. Widening UK Production-Consumption shortfall3 ) 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.36 BCM pa Forecast 2035 shortfall c.52 BCM 1998 2001 2004 2007 2010 2013 2016 2019 2022 2025 2028 2031 2034 1 BP statistical Review of World Energy, June 2017 2 Department for Business, Energy & Industrial Strategy, “Guidance on fracking: developing shale gas in the UK”, updated October 2018 3 UK OAGA and DECC projections, March 2017 09 2018 ANNUAL REPORT I I degasification and exploration drilling in Australia, and a leading surface to inseam directional driller. Our deep customer interface, strong safety culture and proven project execution capabilities provides our predominantly Tier 1 low cost coal producing customers with an unmatched service offering, and positions us well to continue to benefit from the improved coal industry environment. N The Lucas Drilling division is a market leader in coal mine O S V D S D L Who we are The Drilling division (“Lucas Drilling Services” or “LDS”) provides a comprehensive suite of drilling services which includes exploration, large diameter and directional drilling. LDS also provides a range of engineering services including design of wells, drilling optimisation, professional steering services and specialised equipment for complex drilling programmes. Its full suite of self-performing, turnkey capabilities remains unmatched by any other specialist drilling company in Australia. LDS continues to seek out demand for more specialised and technically challenging services, where possible, for which it has proven capabilities in delivering. This includes large diameter and directional drilling projects for which it’s equipment is well suited, but also extends to projects that require project teams with experience in providing innovative solutions and proven capabilities in the technical aspects of well design. LDS management is continually working on ensuring key elements that contribute to the sustainability of our business is equally balanced through: ■ Considered effort around safe systems of work; I ■ Appropriate resource management; and ■ Focussed strategic growth initiatives. ■ Tight cost management and control; ■ Effective project delivery systems; ■ Focus on creating customer value; Successful alignment on safety, people, plant and innovative drilling solutions 10 AJ LUCAS GROUP LIMITED BU SINESS HIG HLIG HT S Best in class safety performance: Strong Financial Performance: ■ Zero Lost Time Injuries (LTIs) again in 2018. ■ Positive underlying EBITDA contribution throughout the coal mining cycle ■ Reduction in Total Recordable Injury Frequency Rate (TRIFR) which is industry leading. ■ Successful alignment on safety, people, plant and innovative drilling solutions. ■ Improved Australian coal mining conditions have significantly contributed to improved financial performance in 2018. ■ Strong conditions are expected to continue into 2019 ■ Lucas Drilling is well placed to continue to benefit from the strong industry conditions into 2019. Financial performance Year ended 30 June Revenue Underlying EBITDA EBITDA Margin 2011 $’m 185.9 19.1 10.3% 2012 $’m 189.6 14.9 7.9% 2013 $’m 163.4 23.5 2014 $’m 94.2 10.8 14.4% 11.4% 2015 $’m 83.5 6.2 7.4% 2016 $’m 79.6 11.4 2017 $’m 73.4 2.7 2018 $’m 124.7 19.7 14.3% 3.6% 15.8% 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 LDS to establish itself as a preferred drilling services provider to top tier major coal producers. With a CV unmatched by our competitors, and long-term relationships lasting, in some cases over 20+ years, we are proud to support the following top tier customers. ■ Anglo America ■ Glencore ■ Rio Tinto / Kestrel Coal ■ South 32 ■ Whitehaven We also continually look for new and innovative solutions to our customers problems and to improve our own efficiency. An example of this is us working with several customers and suppliers investigating ways in which rig operations can be automated to alleviate the risk of safety incidents as well as general human error. Year in review Safety comes first LDS once again achieved its safety targets for the year proving to its customers that the effectiveness of management and systems coupled with experience has been proven to be a winning formula. The highlights include an impressive zero LTI’s and a reduction in TRIFR despite an increase in the LDS workforce to cater for increasing work volume. The division’s safety culture is strong, with regular monitoring and reporting of safety performance and related KPI’s, which strongly encourages and promotes risk identification, ownership and mitigation. LDS delivers what its customers want which is certainty, stability, a proven project delivery capability and a safety culture that delivers zero incidents. A name that is trusted by the market. Financial Performance Coal prices have continued to increase during the year, and we expect them to stay at elevated levels throughout 2019. The increase in prices has supported increased exploration activity and higher production compared to recent years. This has resulted in higher demand for LDS’s gas drainage services. LDS has focused on capitalising on the increased demand from coal producers, especially in the large diameter and directional drilling services area. LDS chose not to pursue replenishment of projects in the water well and coal seam gas markets which were completed, instead focusing on the Coal industry where margins are higher and where the division has traditionally been most successful. These large diameter and directional drilling projects provide generally higher margins with competition 11 2018 ANNUAL REPORT limited when compared to traditional drilling and explorations services. Health, Safety, Environment & Quality Lucas’ vision is “Injury Free Every Day”. Achieving an injury-free workplace requires a firmly embedded safety culture which permeates the business at all levels. Such a culture is only sustained by willing and able people who understand their role and believe in the vision. 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 Compass Assurance Services to comply with the requirements of ISO9001, ISO14001, OHSAS18001 and AS/NZS4801 as well as certification transition to the latest versions of both ISO9001 and ISO14001. This 3rd party accreditation provides reinforcement that Lucas’ systems are world class. Lucas provides safety leadership training for all field supervisors to better equip them with the skills and knowledge to effectively manage site-based risk. The ongoing development of our field leaders will see us continually improving. A Rig Safety Strategy program has been implemented across all projects in the business, with work crews championing their sites’ continual improvement initiatives. These strategies, supported by on site Rig Managers and other support functions within the business, target site-specific risks on each rig, ensuring the improvement initiatives are relevant, resources are allocated appropriately, and crews are engaged in the delivery of safety improvements. 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. Established health and safety KPIs are embedded in all project plans, are monitored and performance is evaluated monthly. Annual analysis of incident and audit data combined with output from management review of system performance and effectiveness provide the foundation for development of business-wide improvement initiatives. The Lucas Leadership Team provides a leadership role for the achievement of Lucas HSEQ objectives. The 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 quarterly Leadership Forums. Consultative processes are integrated into all levels of the organization, each with communications lines to the Leadership Team. A risk management framework aligned with ISO31000 supports attainment of Lucas business objectives. Comprehensive risk management D E U N T N O C I I I N O S V D S D L I 12 AJ LUCAS GROUP LIMITED RISK MANAG EMENT 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. Lucas 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. 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 the “stop, look, assess and manage” or 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. This approach has delivered improvement in the recordable injury rate, currently 5.0 for the Drilling division1, down from 11.4 in 2016-17. Lucas’ LTIFR is currently at zero which is an exceptional result. This performance maintains Lucas’ position ahead of industry averages in terms of recordable injury rates. 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 3.3 2.6 2.5 2.7 2.4 2.3 2.3 2.3 1.2 1.1 0.0 0.0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 NSW Coal Surface QLD Coal Surface AJ Lucas Fig 1 – Lost time injury rate compared to relative industry sectors (mining and construction). Includes latest published figures from QLD and NSW Mining. 25 20 15 10 5 0 18.0 14.7 14.8 11.4 10.1 8.6 7.6 6.8 5.9 8.4 6.6 7.7 6.9 5.0 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 NSW Coal Surface QLD Coal Surface AJ Lucas Fig 2 – Lucas total recordable injury rate compared to Surface Coal Mining in QLD. 1 Injury rates presented are for the Drilling Division only. As the Group announced the divestment of the Engineering and Construction Division in July 2018, the injury rates from the Engineering and Construction division have been excluded in all periods presented. 13 2018 ANNUAL REPORT CONTENT S 15 Corporate Governance Statement 21 Directors’ Report 33 Auditor’s Independence Declaration 34 Consolidated Statement of Comprehensive Income 35 Consolidated Statement of Financial Position 36 Consolidated Statement of Changes in Equity 37 Consolidated Statement of Cash Flows 38 Notes to the Consolidated Financial Statements 77 Directors’ Declaration 78 Independent Auditor’s Report 84 Australian Securities Exchange Additional Information 86 Corporate Directory T R O P E R L A C N A N I F I 14 AJ LUCAS GROUP LIMITED CORPORATE GOVERNANCE STATEMENT for the year ended 30 June 2018 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; 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 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. Review of Performance The Board continually assesses its performance, the performance of its committees and individual Directors through a structured bi-annual review process. The Board may at times engage the assistance of external consultants to facilitate formal Board performance reviews. The performance of all senior executives is reviewed annually by the Chairman of the Board in consultation with the Human Resources and Nominations Committee. ■ ensuring that significant risks have been identified and appropriate controls put in place; Diversity ■ 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 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 15 2018 ANNUAL REPORT 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 2018 and 2017 Gender Equality Report is shown below: Level Board Executive leadership personnel Other employees TOTAL 2018 2017 Male Female Total Male Female Total 5 3 328 336 – 1 22 23 5 4 350 359 5 3 284 292 – 1 18 19 5 4 302 311 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 and implementation of HR policies and practices to drive workforce participation rates of key diversity segments. STRUCTURING THE BOARD TO ADD VALUE Composition of the Board 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. Director Status 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: Executive leadership Strategy and risk management Financial acumen Health and safety Former CEO Mining services Oil and gas Phillip Arnall John O’Neill Julian Ball Ian Meares Andrew Purcell ✔ ✔ ✔ ✔ ✔ ✔ – ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ – – ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ – ✔ ✔ ✔ 16 AJ LUCAS GROUP LIMITEDCORPORATE GOVERNANCE STATEMENTfor the year ended 30 June 2018 Induction Program Committee member Status 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 duties and offered external training opportunities on an “as required” basis. 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 Ian Meares 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 and Risk Committee Charter which is available in the shareholder information section of the Company’s website. 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 Status John O’Neill 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; ■ Any donations to political parties or charitable donations, for the ■ make recommendations on the appointment of the external 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 The Human Resources and Nominations Committee is responsibilities are documented in the 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: 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 17 2018 ANNUAL REPORT 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 5 yearly 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. 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 updated and redesigned its website during the year to provide more useful and easy to find information about the Company, its directors and management, its operations and investments. 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 completed 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. The result is the company has updated its Business Continuity Plans and believes it is better able to respond to any disruption to its business. 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. 18 AJ LUCAS GROUP LIMITEDCORPORATE GOVERNANCE STATEMENTfor the year ended 30 June 2018 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. The Group’s material exposures to risk, and how the Group responds and manages these risks is detailed below. Material Risk External Risks 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. Business Risks Risk Management Approach 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. 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. 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. The capital raising in the middle 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. 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. With the sale of the Group’s Engineering and Construction assets and the wind down of associated business activity, operational exposure to the pipeline and construction industry is greatly reduced. 19 2018 ANNUAL REPORT Material Risk Risk Management Approach 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. 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. Personnel is disclosed in the remuneration report in the Company’s Annual Report. Effective 1 July 2018 fees for acting as a director will be increased from $90,000 to $100,000, additional fees for being a member of a committee will increase from $5,000 to $10,000 and total fees payable to non-executive directors will increase from $620,000 to $745,000 based on the current structure of the board and its committees. 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. 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. 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 Ian Meares (Chairman) Independent non-executive director 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 Human Resources and Nominations Committee benchmarked the non-executive director remuneration levels paid by the company against a selection of comparable peer company as well as the average and medium remuneration paid by the top 300 ASX listed companies. As a result of this review the level of non-executive director remuneration was altered with effect from 1 July 2018 to be more in line with the average level of ASX 300 companies for the next financial year, having last being set in 2013 in accordance with the recommendations of a remuneration consultants, with the only change since being an increase in the Chairman’s remuneration effective 1 July 2016 to account for additional workload due to the departure and non-replacement of the CEO. 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 20 AJ LUCAS GROUP LIMITEDCORPORATE GOVERNANCE STATEMENTfor the year ended 30 June 2018 DIRECTORS’ REPORT for the year ended 30 June 2018 DIRECTORS 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. NAME APPOINTMENTS Current Directors 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 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 John O’Neill Independent Non-Executive Director since 23 June 2015 Details of the current members of the Board, including their experience, qualifications, special responsibilities and directorships of other listed companies held in the past 3 years 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 previously a Non-Executive director and Chairman of Bradken Limited. 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. JULIAN BALL BA; FCA Mr Ball is a Partner of Kerogen Capital (“Kerogen”), based in Hong Kong, and has more than 30 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 both the Audit and Risk and Human Resources and Nominations Committees. IAN MEARES B Eng (Hons); MEngSc; MBA; MAICD 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 Human Resources and Nominations Committee. 21 2018 ANNUAL REPORT 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. ANDREW PURCELL B Eng; MBA Mr Purcell is an engineer by background and has had a distinguished career in investment banking working with Macquarie Bank and Credit Suisse, the latter both in Australia and Hong Kong. In 2005 he founded Teknix Capital in Hong Kong, a company specialising in the development and management of projects in emerging markets across the heavy engineering, petrochemical, resources and infrastructure sectors. Mr Purcell also has considerable experience as a public company director, both in Australia and in a number of other countries in the region. He is the Chairman of Melbana Energy Limited and has served as a non-executive Director of Metgasco Limited. Mr Purcell is a member of the Audit and Risk Committee. 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; and, was appointed Chairman of the Audit and Risk Committee on 24 July 2015. 22 AJ LUCAS GROUP LIMITEDDIRECTORS’ REPORTfor the year ended 30 June 2018 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: Phillip Arnall Julian Ball Ian Meares Andrew Purcell John O’Neill Board of Directors Audit and Risk Committee Human Resources and Nominations Committee Held Attended Held Attended Held Attended 12 12 12 12 12 12 12 12 11 12 4 4 – 4 4 4 4 – 4 4 2 2 2 – – 2 2 2 – – PRINCIPAL ACTIVITIES The Group is a leading provider of drilling services in Australia in the energy and resources sectors, with its primary focus in the coal sector. Historically, the Group has also been a specialist in the provision of engineering design and construction services, primarily in cross-country pipelines, horizontal drilling and the design and management of smaller engineering projects. However, as announced at the AJ Lucas AGM in November 2017, this is a sector that the Group has been looking to exit. Subsequent to the balance sheet date the fixed assets of the engineering and construction division have been sold and the Group is consequently winding down its activities in this sector and, on completion of several projects on which the division is engaged, the division will be wound up. The Group also is an investor in the exploration, appraisal and commercialisation of oil and gas prospects, originally in Australia, but more recently in the United Kingdom (“UK”), and over time these have become a greater focus for the Group. For the year in review, the Group was 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. Oil and Gas Investments: Commercialisation of unconventional and conventional hydrocarbons in the United Kingdom. Engineering and Construction Division: Historically pipelines and associated construction and civil services, however, these operations are being wound down and will cease in the near future. OPERATING & FINANCIAL REVIEW GROUP PERFORMANCE Total revenue from continuing operations Underlying EBITDA from continuing operations Reported EBITDA from continuing operations EBIT from continuing operations Profit / (loss) before tax from continuing operations Profit / (loss) before tax from discontinued operations Net loss for the year Total assets Net assets Basic loss per share (cents) 2018 Year $’000 124,702 14,916 21,127 15,536 (8,541) (7,730) (16,271) 2018 2nd half $’000 67,363 11,483 14,231 11,585 (2,375) (5,349) (7,724) 2018 1st half $’000 57,339 3,433 6,896 3,951 (6,166) (2,381) (8,547) 2017 Year $’000 73,374 (1,952) (6,762) (11,600) (35,772) 2017/18 Change % 70.0% 864.1% 412.4% 233.9% 76.1% (3,258) (137.3%) (39,030) 266,935 240,223 240,701 240,223 139,110 97,771 87,619 (2.5) (1.1) (1.5) 97,771 (9.7) 58.3% 11.1% 42.3% 44.7% 23 2018 ANNUAL REPORT A reconciliation of the reported EBITDA to the underlying EBITDA is shown in the following table: Drilling $’000 E&C $’000 Oil & gas $’000 Corporate $’000 2018 Year $’000 2017 $’000 Reconciliation: Consolidated loss before income tax Discontinued operations Depreciation and amortisation Finance costs Finance income 14,239 – 5,466 – – EBITDA from continuing operations 19,705 Share of equity accounted investees profit Exploration asset revenue Share of overhead – UK investments Settlement of legal disputes Redundancy costs Net (profit) / loss on sales of assets Other expense Underlying EBITDA – – – – – – – 19,705 (7,730) 7,730 – – – – – – – – – – – – 8,134 (30,914) (16,271) (39,030) – – – – 8,134 (8,201) (2,363) 2,430 – – – – – – 125 7,730 5,591 24,249 24,249 3,258 4,838 24,374 (172) (172) (202) (6,712) 21,127 (6,762) – – – 1,055 749 159 (40) (8,201) (2,363) 2,430 1,055 749 159 (40) 2,717 (619) 2,209 252 299 (140) 92 (4,789) 14,916 (1,952) The non-IFRS financial information presented in this document has not been audited or reviewed in accordance with Australian Auditing Standards. OVERVIEW OF THE GROUP During the year, trading conditions continued to improve due to the upturn in the eastern seaboard coal market. As a result, compared to the previous year, demand for the Drilling division’s gas drainage services was significantly higher due to increased coal production of our coal mining customers. Since December 2017, the Drilling division has had approximately 30 rigs in operation compared to an average of 21 in the 2017 financial year. Furthermore, at the end of the reporting period, the Drilling division has a strong order book as conditions remain buoyant. As announced at the AJ Lucas AGM in November 2017, the Engineering and Construction business was no longer a focus for the Group and one that the Group was actively looking to exit. Nevertheless, during the year the division undertook several smaller projects in the utility infrastructure market, as well as work on two key contracts in the horizontal directional drilling market, one in New Zealand and the other in Indonesia. Subsequent to the balance sheet date, AJ Lucas has sold the fixed assets of its Engineering and Construction division. A few contracts remain as at the balance sheet date and will continue to be completed during the coming months. Once these projects have been completed, the division will be wound up. The Engineering and Construction division is treated for accounting and reporting purposes as a discontinued operation. The results of the division have been separately disclosed from continuing operations, and comparative information has been restated to be reflected consistently. Accordingly, the Group reported an Underlying EBITDA from continuing operations (being all other operations of AJ Lucas) of $14.9 million for the year compared to an underlying EBITDA loss from continuing operations of $2.0 million in the comparative period, reflecting the significant uplift in operational performance of the Drilling division. The above treatment of the Engineering and Construction division resulted in the reported EBIT profit from continuing operations of $15.5 million for the year compared to a loss of $11.6 million in the comparative period. This was again driven by the better performance from the Drilling division coupled with the recognition of a carry profit for our UK investments resulting from the Centrica farm in carry contribution. The total loss before tax for the discontinuing operation was $7.7 million for the year compared to a loss of $3.3 million in the comparative period. 24 AJ LUCAS GROUP LIMITEDDIRECTORS’ REPORTfor the year ended 30 June 2018 DIVISIONAL PERFORMANCE Drilling The results of the Drilling Division are summarised as follows: Revenue Underlying EBITDA EBITDA margin The Drilling division achieved significantly better performance for the year, with revenue up 70% on the comparative period. As a result, Underlying EBITDA of $19.7 million was significantly ahead of the results in the previous financial year. This improvement was driven primarily by a buoyant coal market which lead to higher utilisation of the Group’s rig fleet, coupled during the earlier part of the year with the completion and exit of lower margin legacy contracts in the coal seam gas and water markets. Demand for the division’s services was especially strong in the large diameter and directional drilling within the coal market, which represents a more specialised market within the sector, and one for which the Group’s assets are well suited. Management’s focus on servicing the needs of its key customers, who are positioned low on the international cost curve and who have a pipeline of mine degassing requirements, has allowed the division to capitalise on this higher demand. Management work constantly with its customers, partnering to improve their operational efficiency. For example, currently management is partnering with customers and suppliers to design and construct fully automated rigs, with a dual aim of reducing safety risk and increasing efficiency. The higher demand from the division’s drilling services is expected to continue throughout the next financial year, driven by continued strength in the coal industry. The Drilling division’s superior track record in delivering services in a flexible and safe manner and its relentless focus on partnering with customers to drive efficiency will ensure it is well placed to benefit from the stronger demand in the coal industry. The division’s order book is strong, as is its relationship with key customers, and management have been successful in negotiating with new and existing customers on multi-year preferred drilling contracts. Oil and Gas The Oil & Gas division encompasses the Company’s investments in hydrocarbons in the United Kingdom. The focus during the year has again been on the Bowland licence (“the licence”) in which the Group has an effective 48% interest, comprising a direct licence participation interest of 23.75% and a further indirect interest held through the Group’s 47.45% equity interest in Cuadrilla Resources Holdings Limited (“Cuadrilla”) which owns a 51.25% interest in the licence and is also the operator of the licence. 2018 Year $’000 124,702 19,705 15.8% 2018 2nd half $’000 67,363 14,154 21.0% 2018 1st half $’000 57,339 5,551 9.7% 2017 Year $’000 73,374 2,678 3.6% 2017/18 Change % 70.0% 635.8% In January 2018 a vertical pilot well was completed at Preston New Road (“PNR”), having penetrated both the upper and lower Bowland shale rock intervals to a final depth of 2,712 metres. This pilot well was extensively cored and logged. Cuadrilla completed the first horizontal well at PNR in April 2018 which penetrated the Lower Bowland shale to a depth of approximately 2,300 metres and extended laterally approximately 782 metres. The second well was completed in July 2018, which penetrated the Upper Bowland shale to an approximate depth of 2,100 and extended horizontally for some 743 metres. These two wells are the UK’s first ever horizontal shale wells. Hydraulic fracturing of both wells is expected to commence by October 2018. Initial flow tests of both horizontal wells are expected to commence towards year-end and to run for approximately 6 months. On 24 July 2018 the UK’s Minister of State for Energy and Clean Growth consented to Cuadrilla’s application of 21 May 2018, to carry out hydraulic fracturing operations in the first horizontal well. On 3 August 2018 Cuadrilla submitted an application for a similar consent for hydraulic fracturing operations in the second horizontal well. A decision is expected on that application in October 2018, which would be aligned with the above work plan. The UK’s Secretary of State for Communities and Local Government (“SOS”) has advised that he was minded to grant planning consent for a similar application for four horizontal exploration wells at the Roseacre Wood (“RW”) exploration site pending receipt of further evidence on highway safety. A Public Inquiry was held in April 2018 to consider traffic control issues for the proposed RW site and the planning inspector is expected to submit his report to the SOS in the near future. We anticipate a decision from the SOS by year end. Under the agreement with Spirit Energy (a subsidiary of Centrica Plc) covering Spirit’s acquisition of a 25% working interest in the licence, in order for Spirit to maintain its 25% interest, it is required to fund a further £46.7 million (gross to the licence joint venture) for investment on exploration, appraisal or development operations once gas has been flowing regularly for 6 months from two licence wells. Sale of interest in the Balcombe licence In January 2018 the Group announced that it, together with its associate Cuadrilla, had entered into a farm-out agreement with Angus Energy Plc (“Angus”), whereby Angus acquired a 25% interest 25 2018 ANNUAL REPORT in the Balcombe licence on a pro rata basis from each of AJ Lucas and Cuadrilla. Angus paid £4 million upfront in cash (25% to Lucas and 75% to Cuadrilla, in accordance with the farm-out of their respective interest). Angus Energy has assumed operatorship of the exploration licence and pay the costs of flow testing the existing Balcombe-2Z horizontal well, which Cuadrilla drilled in 2013. Planning permission to flow test the Well had already been obtained by Cuadrilla, and flow testing of this well is expected before the end of this calendar year. The Group recognised a total of $1,156,000 as profit on the partial sale of its direct interest which was reflected in other income. The corresponding profit on sale recognised by Cuadrilla, after taking account of adjustments required to bring in line with the Group’s accounting policies, is reflected as part of share of profit / (loss) of equity accounted associate in the comprehensive income statement. Other licences Outside of the Bowland licence Cuadrilla has interests in various UK onshore exploration licences totaling approximately 1,500 km2, many of which target the same Bowland-Hodder shale formations being drilled and tested in Lancashire. Some of these licences are held solely by Cuadrilla, and some in joint venture with INEOS. Furthermore, AJ Lucas also holds a direct interest in both the Elswick and Balcombe licences, in which Cuadrilla has an interest. REVIEW OF FINANCIAL CONDITION In January 2018 the Company undertook a capital raising consisting of a placement of 70,500,050 shares to new and existing shareholders raising $21.6 million, after raising costs, and concurrently a 1 for 6 entitlement offer which raised a further of $29.6 million after raising costs. Proceeds from the placement were utilised to fund future commitments of the Group’s UK investments and, support working capital. The Company’s largest shareholder, Kerogen, subscribed for its full entitlement under the entitlement offer of $18.3 million by way of partial conversion of its loan facility and the remaining proceeds from the entitlement offer of $11.3 million were used to repay the senior loan note facility. In December 2017, the Group entered into a sale and leaseback transaction of a property, consisting of a work shop and laydown yard utilised by our Drilling division, unlocking a further $3m in cash. As part of the review the Board agreed on 29 December 2017 to amend certain provisions of its senior loan notes facility, including a commitment to reduce the principal outstanding to $US 20 million by 30 September 2018 with the repayment of the facility extended to 22 July 2019. The portion of the outstanding Senior Loan Note that is repayable by 30 September 2018, including interest, has been reflected as a current interest-bearing liability as at 30 June 2018. Subsequent to the balance sheet date, the Group reached agreement with its senior loan note holders OCP Asia (Singapore) Pte. Limited to extend the maturity of the facility to 31 January 2020 (from 22 July 2019) and defer the requirement to reduce the facility principal to US$20 million to 30 June 2019 (from 30 September 2018). Under the amendments agreed the Group will have the ability to draw down additional debt of up to US$9 million (A$12.3 million), which if required would be applied to further investment in our UK shale gas activities. Furthermore, Kerogen Investments No 1 (HK) Limited (“Kerogen”) has agreed to extend their loan facility from 31 December 2019 to the earlier of 31 July 2020 or 6 months from full repayment of the senior loan notes facility. During the period, the Board received a number of proposals for the acquisition of the Group’s Engineering and Construction Division from various prospective buyers. The Group subsequently sold the fixed assets of its Engineering and Construction Division, as announced on 20 July 2018, and certain employees have transferred to the acquirer post the balance sheet date. The sale, combined with proceeds from the completion of legacy Engineering and Construction projects and unwind of working capital associated with these projects, is expected to generate cash proceeds for AJ Lucas in excess of $25million over the remainder of the calendar year (1H FY19). OUTLOOK & LIKELY DEVELOPMENTS The Group has a major focus on onshore UK shale gas exploration and appraisal through its investment in a number of UK licences, both directly and as a shareholder in Cuadrilla Resources Holdings Limited (“Cuadrilla”). The strategic focus for Cuadrilla is to successfully drill, fracture and flow-test the Bowland acreage at the Preston New Road site. In Australia the Group has focused its activities in providing drilling services primarily to the coal sector. The post balance sheet date sale of the Group’s Engineering and Construction assets in Australia marks the end of a long history in this sector, but will free up resources to enable the Group to focus on its interests in the onshore UK shale gas exploration and appraisal sector as well as drilling services in Australia. The Lucas Drilling division has a pre-eminent position in the provision of degassing services to East Coast Australian coal mines, principally through surface to inseam drilling services. It boasts a customer list of all major operators in this market. The relentless focus on safety, productivity and lowering cost has resulted in improved returns from the division with the recent upturn in this market over the last 12 months. The Drilling division’s performance has improved significantly over 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 a strong performance during the next financial year and will continue to focus on operational excellence. The Group going forward will continue to support its drilling division and expects to progress the appraisal of its oil and gas investments through the completion of the current two well drilling, fracturing and gas flow testing program. These wells are a significant step towards appraising and ultimately realising value from this investment. 26 AJ LUCAS GROUP LIMITEDDIRECTORS’ REPORTfor the year ended 30 June 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. DIVIDENDS No dividends have been declared by the Company since the end of the previous year. ENVIRONMENTAL REGULATIONS & NATIVE TITLE AJ Lucas is committed to meeting stringent environmental and land use regulations, including native title issues. The Group 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. 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. 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 the balance sheet date are as described in this report and the financial statements and notes thereto. EVENTS SUBSEQUENT TO REPORTING DATE Subsequent to year end the Company sold the fixed assets of the Engineering and Construction division to Spiecapag Australia Pty Ltd, following a decision by the Board earlier in the year to discontinue the business. The sale, combined with proceeds from the completion of remaining Engineering and Construction projects and unwind of working capital is expected to generate proceeds of approximately $25 million over the remainder of the calendar year. As separately announced on 30 August 2018, the Company reached a binding agreement with OCP Asia (Singapore) Pte. Limited to increase the headroom and extend the maturity of its senior loan notes facility. Under the terms of the revised facility, the Company will have the ability to draw down additional debt of up to US$9 million (A$12.3 million) with the facility maturity extended to 31 January 2020 (from 22 July 2019). The previous obligation to reduce the total facility principal to US$20 million by September 2018, which has been reflected in current interest-bearing liabilities at balance sheet date, has also been deferred to 30 June 2019 (from 30 September 2018). Furthermore, Kerogen has agreed to extend the term of their facility from 31 December 2019 to the earlier of 31 July 2020 or 6 months from full repayment of the senior loan notes facility. These amendments will enable the Company to manage the unwind of working capital from the engineering and construction business as we complete an important phase of the program at Preston New Road, and represent a strong vote of confidence from our senior facility providers. Other than as disclosed above, 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: Current Directors Phillip Arnall John O’Neill Andrew Purcell Ordinary shares – 306,250 16,237,595 270,310 Options – – – – Kerogen Investment No 1 (HK) Limited (“Kerogen”) holds 399,942,649 ordinary shares in the Company (equivalent to 53.32% of issued shares). Julian Ball is a Partner and representative of Kerogen and is also a Director of AJ Lucas. INDEMNIFICATION AND INSURANCE OF OFFICERS AND AUDITORS 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. 27 2018 ANNUAL REPORT 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 2019. 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 advice 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 $146,700 (2017: $70,000). LEAD AUDITOR’S INDEPENDENCE DECLARATION The Lead auditor’s independence declaration is set out on page 33 and forms part of the Directors’ Report for the financial year ended 30 June 2018. 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 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 2018. 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 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 benefits apart from statutory superannuation. Options and other forms of equity are not provided to 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 during the year was $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 and non-replacement of the Chief Executive Officer in 2016. In addition, $5,000 per annum was paid to each director serving on each committee of the Board. Where directors perform consulting services to the Group outside of their director duties, additional fees may be 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. 28 AJ LUCAS GROUP LIMITEDDIRECTORS’ REPORTfor the year ended 30 June 2018 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 Year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Board fees including superannuation $ Committee fees including superannuation $ 225,000 225,000 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 Total $ 235,000 235,000 100,000 100,000 95,000 95,000 95,000 95,000 95,000 95,000 EXECUTIVE REMUNERATION Performance linked compensation Performance linked remuneration may include short-term incentives that are 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. Any STI payment is subject to final approval of the Board at its full discretion, and the Board may on a case by case bases decide to award additional discretionary incentives to reward exceptional performance. Policy 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. 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. 29 2018 ANNUAL REPORT Relationship of remuneration to Company performance In considering the Group’s performance and benefits for shareholder value, the Human Resources and Nominations 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 ($'000)(1) Underlying EBITDA(1) 2018 2017 124,702 14,916 73,374 (1,952) 2016 79,633 14,556 2015 2014 145,028 227,894 9,405 204 Net loss after tax attributable to members ($'000) (16,271) (39,030) (19,485) (45,216) (91,693) Loss per share (cents) Dividend per share (cents) Share price at balance sheet date Share price appreciation/(depreciation) STI to KMP in relation to the year's performance ($'000) (2.5) – $0.33 50% 331 (9.7) – $0.22 22% 0 (6.7) – $0.18 (54%) 482 (16.9) – $0.39 (58%) 54 (34.6) – $0.93 (23%) – (1) In 2018 a decision was made to discontinue the Lucas Engineering and Construction division, with the Group having sold the fixed assets of this division subsequent to the balance sheet date. Total revenue and Underlying EBITDA includes only results from continuing operations from FY 2017 and onwards. Refer Note 15 to the financial statements for further details in regard to the disposal of the Lucas Engineering and Construction division. The Group’s underlying EBITDA exceeded the target, having substantially improved from the comparative period. This was despite the decision to discontinue the Engineering and Construction business in December 2017 preventing new contracts being sought to replenish work. As such, and noting the achievement of certain individual key performance indicators, bonuses totaling $330,500 for key management personnel were accrued. These will be paid in the 2019 financial year following the release of the 30 June 2018 audited Annual Financial Statements. 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 bonuses were paid or accrued to KMP in respects of the 2017 financial year. No loans were made at any time during the year and no loans remain outstanding to any key management personnel (2017 nil). 30 AJ LUCAS GROUP LIMITEDDIRECTORS’ REPORTfor the year ended 30 June 2018 f o e u l a V d n a s n o i t p o n o i t r o p o r P % n o i t a r s a s t h g i r n o i t r o p o r p - e n u m e r f o % d e t a l e r e c n a m r o - e n u m e r f o - f r e p n o i t a r – – – – – – 8 0 0 . 0 0 0 . 6 3 . 0 0 0 0 . 8 0 0 . 0 0 0 . $ l a t o T 5 3 2 , 3 3 5 0 8 2 , 9 2 4 , 4 2 4 0 0 7 3 5 9 , 7 5 4 5 6 9 , 1 3 4 5 4 2 , 6 6 3 $ – – – – – – s n o i t p o $ ) e v a e l 0 9 7 , 6 6 6 5 , 6 5 6 5 , 9 6 4 3 , 6 7 7 1 , 6 4 9 3 , 5 $ – – – – – – t fi e n e b d n a s t h g i R e c i v r e s g n o l ( n o i t a n i s t fi e n e b m r e t g n o L - m r e T 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 $ - r e p u S s t fi e n e b n o i t a u n n a $ l a t o T $ 8 1 0 2 Y F e v i t n e c n I ) 2 ( d e u r c c a $ ) 1 ( s e e f / y r a l a S 0 0 0 , 5 2 0 0 0 , 5 2 8 4 0 0 2 , 9 9 1 , 9 1 5 4 4 , 1 0 5 0 0 9 4 4 , 5 4 5 , 6 5 4 4 1 7 , 7 9 3 – 4 1 7 , 7 9 3 , 1 1 8 0 7 6 0 0 0 0 5 2 , , 1 1 8 0 2 4 8 0 4 , 2 3 4 – 8 0 4 , 2 3 4 8 4 0 0 2 , 0 4 7 , 5 0 4 0 0 6 , 5 3 0 4 1 , 0 7 3 9 9 1 , 9 1 2 5 6 , 1 4 3 – 2 5 6 , 1 4 3 8 1 0 2 7 1 0 2 8 1 0 2 7 1 0 2 8 1 0 2 7 1 0 2 s r e c fi 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 O E C n o s t r e b o R - t r a u t S n h o J i g n i r e e n g n E – M G E n o i t c u r t s n o C d n a 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 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 s r o t c e r i d r e m r o f d n a d e s a b e r a h S g n o l r e h t O s t n e m y a p m r e t t n e m y o l p m e t s o P m r e t - t r o h S : 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 i 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 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 . 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 r e d n u . 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 ( g n i l l i r D O E C e h t o t e v i t n e c n i f o n o i t p e c x e e h t h t i w , s t n e m e t a t s l a i c n a n fi d e t i d u a l a u n n a 8 1 0 2 e h t f o e s a e l e r c i l b u p e h t r e t f a , r a e y l a i c n a n fi 9 1 0 2 e h t n i i d a p e b o t d e t c e p x e s i e v i t n e c n i e h t j f o y t i r o a m e h T . 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 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 i 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 8 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 8 1 0 2 Y F e h T ) 2 ( . y n a p m o c e h t h t i w e e y o l p m e n a g n n a m e r o t i i j t c e b u s 9 1 Y F f o d n e e h t l i t n u d e r r e f e d e b l l i , w 0 0 0 0 0 1 $ h c i h w f o s t n e m e e r g a e c i v r e S 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 t c a r t n o c r e d n u d e y o l 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 j . s t c e o r p r o a m o t n o j 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 o t y t i l i b a e h t s a h d r a o B 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 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 . 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 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 . e e y o l 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 n a h t i w d o i r e p e c i t o n . e t a d t a h t t a p u o r g h t i w t n e m y o l p m e d e u n i t n o c o t j t c e b u s 9 1 0 2 r e b m e t p e S 0 3 n o e l , b a y a p 0 0 0 0 0 2 $ f o t n e m y a p n o i t n e t e r a o t d e l t i t n e s i r e c fi f O l a i i c n a n F f e i h C e h T 31 2018 ANNUAL REPORT External remuneration consultant advice During the financial year Korn Ferry Hay Group Pty Limited, an independent external consultant benchmarked the Group’s key management personnel remuneration and provided access to a remuneration database. Fees for this service were $15,200. Options over equity instruments granted as compensation No options over ordinary shares in the Company were granted as compensation to key management personnel 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: 2018 Director Phillip Arnall Andrew Purcell John O'Neill Executives Brett Tredinnick John Stuart-Robertson Austen Perrin Held at 30 June 2017 Purchased Pro rata rights issue(1) Net other changes Held at 30 June 2018 262,500 – 82,347 149,348 13,917,940 345,722 33,972 150,000 – – – 43,750 38,615 2,319,655 – – 37,182 – – – – – – 306,250 270,310 16,237,595 345,722 33,972 187,182 (1) Pro rata rights issue represents entitlement shares subscribed for under the 1 for 6 accelerated non-renounceable entitlement offer announced by the Company on 19 January 2018. Kerogen participated in the 1 for 6 accelerated non-renounceable entitlement offer referred and increased its holdings in ordinary shares in the Company from 342,807,985 (58.58% of the then issued shares) to 399,942,649 (53.32% of the current issued shares). Julian Ball is a Partner 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 2018 32 AJ LUCAS GROUP LIMITEDDIRECTORS’ REPORTfor the year ended 30 June 2018 AUDITOR’S INDEPENDENCE DECLARATION for the year ended 30 June 2018 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 As lead auditor for the audit of AJ Lucas Group Limited for the financial year ended 30 June 2018, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of AJ Lucas Group Limited and the entities it controlled during the financial year. Ernst & Young Ryan Fisk Partner 31 August 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 33 2018 ANNUAL REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Continuing operations 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 gain / (loss) of equity accounted investees Loss before income tax Income tax expense Loss for the period from continuing operations Discontinuing operations Loss for the period from discontinued operation Loss for the period from continuing and discontinued operations 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 (Continuing operations): Basic (loss)/earnings per share (cents) Diluted (loss)/earnings per share (cents) Earnings per share (Continuing and discontinued operations): 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 2018 $’000 2017 $’000 6 124,702 124,702 2,363 73,374 73,374 619 (105,515) (70,695) 8 8 7 17 10 (4,271) (5,591) (4,353) 7,335 (24,077) 8,201 (4,631) (4,838) (2,712) (8,883) (24,172) (2,717) (8,541) (35,772) – – (8,541) (35,772) 15 (7,730) (3,258) (16,271) (39,030) 6,300 6,300 6,300 (9,971) (9,971) (1.3) (1.3) (2.5) (2.5) (4,398) (4,398) (4,398) (43,428) (43,428) (8.9) (8.9) (9.7) (9.7) 11 11 11 11 34 AJ LUCAS GROUP LIMITEDFINANCIAL STATEMENTSfor the year ended 30 June 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2018 Current assets Cash and cash equivalents Cash in trust Trade and other receivables Inventories Non current assets held for sale 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 2018 $’000 2017 $’000 12 12 13 14 15 16 18 17 20 21 23 21 23 24 24 9,422 426 27,234 40,838 4,138 729 10,324 11,847 22,494 30,853 – 1,098 82,787 76,616 27,693 35,914 37,850 20,982 120,541 104,775 184,148 163,607 266,935 240,223 36,791 17,185 5,335 59,311 29,457 1,126 4,884 35,467 67,651 106,149 863 836 68,514 106,985 127,825 142,452 139,110 97,771 467,753 416,443 35,527 29,227 (364,170) (347,899) 139,110 97,771 35 2018 ANNUAL REPORT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Share capital $’000 Translation reserve $’000 Option reserve $’000 Employee equity benefits reserve $’000 Accumulated losses $’000 Total equity $’000 Balance 1 July 2017 416,443 24,557 637 4,033 (347,899) 97,771 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 Total contributions by and distributions to owners Balance 30 June 2018 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 Issue of ordinary shares, net of transaction costs Total contributions by and distributions to owners – – – 51,310 51,310 – 6,300 6,300 – – – – – – – – – – – – (16,271) (16,271) – (16,271) 6,300 (9,971) – – 51,310 51,310 467,753 362,034 30,857 28,955 637 637 4,033 4,033 (364,170) 139,110 (308,869) 86,790 – – – – (4,398) (4,398) 54,409 54,409 – – – – – – – – – – – – (39,030) (39,030) – (4,398) (39,030) (43,428) – – 54,409 54,409 Balance 30 June 2017 416,443 24,557 637 4,033 (347,899) 97,771 The accompanying notes are an integral part of these consolidated financial statements 36 AJ LUCAS GROUP LIMITEDFINANCIAL STATEMENTSfor the year ended 30 June 2018 CONSOLIDATED STATEMENT OF CASH FLOWS Note 2018 $’000 2017 $’000 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash used in operations Interest received Interest and other costs of finance paid Net cash used in operating activities Cash flows from investing activities Payments for equity accounted investees Proceeds from partial sale of interest in exploration licences Payments for interest in exploration assets Acquisition of plant and equipment Proceeds from sale of plant and equipment Net cash used in investing activities Cash flows from financing activities Repayment of borrowings Proceeds from borrowings Transaction costs on borrowings Proceeds from issue of shares Transaction costs on issue of shares Payment of finance lease liabilities Net cash from / (used in) 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. 17 150,182 123,198 (152,792) (144,478) (2,610) (21,280) 172 202 (10,676) (6,108) (13,114) (27,186) (2,705) 1,837 (12,334) (3,465) 3,160 (5,153) – (2,732) (5,116) 228 (13,507) (12,773) (18,215) – (902) 34,488 (1,461) – 13,910 (12,711) 388 22,171 9,848 – 24,381 (1,630) 18,201 (1,101) (90) 39,761 (198) (131) 22,500 22,171 37 2018 ANNUAL REPORT INDEX 1. REPORTING ENTITY 2. 3. 4. 5. 6. 7. 8. 9. BASIS OF PREPARATION SIGNIFICANT ACCOUNTING POLICIES NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED DETERMINATION OF FAIR VALUES OPERATING SEGMENTS FINANCE INCOME AND FINANCE COSTS OTHER EXPENSES 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. DISCONTINUED OPERATIONS 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 THE BALANCE SHEET DATE 38 38 40 46 47 47 49 50 50 51 51 52 52 52 53 53 54 56 57 59 59 61 61 62 63 68 69 70 71 72 73 74 76 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 2018 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 the UK. 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 2018. (B) BASIS OF MEASUREMENT The consolidated financial statements have been prepared on the historical cost basis. (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 from continuing operations for the period of $8.5 million primarily as a result of non-cash depreciation and amortisation charges from continuing operations of $5.6 million and net finance costs of $24.1 million, partially offset by a share of profit of equity accounted investees of $8.2 million; ■ The Group’s near-term future financial performance will be driven by demand for its drilling services, which in turn will be impacted by various factors which are outside its control. While the Drilling Division has experienced a significantly strengthened order book driven by this increased demand, forecasting business performance carries an inherent degree of uncertainty; 38 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 ■ The amendments to the senior loan notes facility agreed with OCP Asia (Singapore) Pte. Limited subsequent to the balance sheet date as disclosed in Note 33. Under the revised facility the company will have the ability to draw down an additional US$9 million and the obligation to reduce the principal outstanding to $US20 million has been extended to 30 June 2019, with repayment of the remaining balance extended to 31 January 2020. In addition, the maturity of the Kerogen loan facility has also been extended and is now repayable on the earlier of 31 July 2020 or 6 months from the full repayment of the senior loan notes facility. ■ The Company has a 47.45% 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 up to 4 exploration wells in the licence was received from the UK Government and drilling activity has commenced. A number of legal challenges to the validity of the UK Government’s planning permission have since been brought, each of which has been dismissed. Most recently on 12 January 2018, the Court of Appeals in the UK dismissed each of two appeals against the High Court’s decision in April 2017 to uphold the validity of the UK Government’s planning permission; 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 by the capital raising disclosed in Note 24 Capital and Reserves, where the Company raised $52.8 million of which approximately $29.6 million was applied to repay interest bearing liabilities; ■ The Group’s near-term future financial performance and cash flows will be driven by improved demand for its drilling services, which in turn will be impacted by various factors which are outside its control. As such, forecasting carries an inherent degree of uncertainty; ■ The arrangement summarised at Note 18 Exploration asset under which Spirit Energy (“Spirit”), A subsidiary of Centrica Plc, has provided certain commitments to fund exploration expenditure in respect of the Bowland and Elswick prospects subject to certain milestones. This funding totalling £46.7 million gross to the joint venture together with the proceeds of the capital raising completed in February 2018 and potential operating cashflows from the business, is expected to fund the drilling and hydraulic stimulation of the planned two wells at Preston New Road ahead of commercialisation of the tenement if the two wells are successful; ■ The continuing support of Kerogen Investments No. 1 (HK) Limited (“Kerogen”), both as a substantial debtholder and shareholder of the Company as recently evidenced by its participation in the capital raising completed in February 2018 for its full pro rata entitlement in the Entitlement Offer through a debt to equity conversion; ■ 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. However, if the entity is unable to re-finance its senior loan note liabilities or raise additional capital, 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 Corporations instrument. (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 15 – Discontinued operations ■ Note 17 – Carrying value of equity accounted investments 39 2018 ANNUAL REPORT 2. BASIS OF PREPARATION (continued) ■ 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. 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. 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 A joint operation is an 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. 40 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 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 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. Cash and cash equivalents Comprise cash balances and call deposits with original maturities of three months or less. Cash in trust Comprises cash balances held in trust under the terms of the senior term loan notes. 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. (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. 41 2018 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (continued) 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. (F) REVENUE Services rendered 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. 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. 42 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 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. 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 43 2018 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (continued) software that is integral to the functionality of the related equipment is capitalised as part of that equipment. (N) INTANGIBLE ASSETS Other intangible assets 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. Other intangible assets that are acquired by the Group are measured at cost less accumulated amortisation and accumulated impairment losses. Sale of non-current assets Subsequent expenditure 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 and amortisation Depreciation and amortisation 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 and amortisation 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. Estimated useful lives for the current and comparative periods are as follows: Buildings Plant and equipment Leased plant and equipment Enterprise development Years 10-40 3-15 3-15 6 The residual value, useful life and depreciation and amortisation method applied to an asset are adjusted if appropriate at least annually. 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 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. 44 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 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. 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 Groups 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. (Q) EMPLOYEE BENEFITS 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. Other long-term employee benefits The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned 45 2018 ANNUAL REPORT 3. SIGNIFICANT ACCOUNTING POLICIES (continued) in return for their service in the current and prior periods 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. the risks specific to the liability. The unwinding of the discount is recognised as finance cost. Onerous contracts 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. 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. (R) PROVISIONS A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and 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. Based on initial impact assessment, the new standard is not expected to significantly impact the classification or measurement of financial instruments. 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. 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 46 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 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. 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. 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. While the Board continues to monitor and review financial information for the E&C division separately the division has been classified as a discontinued operation and accordingly the results from this segment have been separately reported in the comprehensive income statement as results from discontinued operations. As such reconciling items exist between reportable segment results and results disclosed from continuing operations, which are reflected in the table below as reclassified. See Note 15 Discontinued Operations. 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. 47 2018 ANNUAL REPORT 6. OPERATING SEGMENTS (continued) 2018 Reportable segment revenue Drilling $’000 E&C $’000 Oil & gas $’000 Reportable segments $’000 Corporate/ unallocated $’000 Reclassified $’000 Total $’000 Revenue – services rendered 124,702 – Revenue – construction contracts Total consolidated revenue EBITDA Depreciation, amortisation and impairment Finance income Finance cost – 124,702 19,705 (5,466) – – 25,997 25,997 (6,936) (794) – – – – – – – – 124,702 25,997 150,699 8,134 20,903 (6,260) – – – – 124,702 (25,997) – (25,997) 124,702 (6,712) (125) 6,936 794 21,127 (5,591) – – 172 (24,249) – – 172 (24,249) Reportable segment profit / (loss) 14,239 (7,730) 8,134 14,643 (30,914) 7,730 (8,541) 2017 Reportable segment revenue Drilling $’000 E&C $’000 Oil & gas $’000 Reportable segments $’000 Corporate/ unallocated $’000 Reclassified $’000 Total $’000 Revenue – services rendered 73,374 – Revenue – construction contracts – 48,596 Total consolidated revenue 73,374 48,596 EBITDA Depreciation, amortisation and impairment Finance income Finance cost 2,678 (4,817) (1,894) (1,364) – – – – – – – (4,307) – – – 73,374 48,596 121,970 (3,523) (6,181) – – – – 73,374 (48,596) – (48,596) 73,374 (5,133) (21) 1,894 1,364 – – 202 (24,374) – – (6,762) (4,838) 202 (24,374) Reportable segment profit / (loss) (2,139) (3,258) (4,307) (9,704) (29,326) 3,258 (35,772) 48 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 June 2018 Segment assets Segment liabilities Share of profit of equity accounted investees Equity accounted investments Capital expenditure June 2017 Segment assets Segment liabilities Share of loss of equity accounted investees Drilling $’000 E&C $’000 Oil & gas $’000 Reportable segments $’000 Corporate/ unallocated $’000 Total $’000 73,527 33,921 157,500 264,948 1,987 266,935 (20,742) (11,605) (8,687) (41,034) (86,791) (127,825) – – 2,895 66,631 – – – 8,201 8,201 120,541 120,541 – 2,895 – – 570 8,201 120,541 3,465 33,259 127,002 226,892 13,331 240,223 (13,465) (12,379) – – – – (5,393) (2,717) (2,717) 104,775 104,775 (31,237) (111,215) (142,452) – – 624 (2,717) 104,775 5,116 Equity accounted investments 3,067 1,425 – 4,492 GEOGRAPHICAL INFORMATION Australia Europe 7. FINANCE INCOME AND FINANCE COSTS Interest income Finance income Interest expense Amortisation of prepaid fees on debt facilities Net foreign exchange gain / (loss) Finance costs Net finance costs recognised in profit and loss Revenues Non-current assets 2018 $’000 2017 $’000 2018 $’000 124,702 73,374 27,693 – – 156,455 2017 $’000 37,849 125,758 124,702 73,374 184,148 163,607 2018 $’000 172 172 (17,252) (4,597) (2,400) 2017 $’000 202 202 (24,533) (3,070) 3,229 (24,249) (24,374) (24,077) (24,172) 49 2018 ANNUAL REPORT 8. OTHER EXPENSES Depreciation and amortisation from continuing operations Depreciation and amortisation from discontinued operations Total depreciation and amortisation UK investment overhead costs Settlement of historical legal disputes Redundancy costs Net (profit) / loss on sales of assets * Other (income) / expense Total non operating expenses * After transaction costs 9. AUDITOR’S REMUNERATION Auditors of the Company — EY Australia and other network firms Audit and review of AJ Lucas Group financial reports Audit of subsidiary financial reports Other professional services Other professional services related to general tax advisory services and other services. 2018 $’000 (5,591) (794) 2017 $’000 (4,838) (1,364) (6,385) (6,202) 2,430 1,055 749 159 (40) 2,209 252 299 (140) 92 4,353 2,712 2018 $’000 2017 $’000 280,682 293,000 30,000 146,700 – 70,000 457,382 363,000 50 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 10. INCOME TAX Recognised in profit or loss Current tax benefit Current year Tax losses not recognised and temporary differences derecognised in current year 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 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 Non-deductible finance cost 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 attributable to operating loss 11. EARNINGS PER SHARE Basic earnings per share 2018 $’000 2017 $’000 (1,252) 3,956 2,704 (8,405) 5,861 (2,544) (2,704) 2,544 442 (442) – 767 (767) – (16,272) (39,030) (4,882) (11,709) – (1,998) (408) 76 3,256 (442) 1,252 2,704 442 – (328) 725 760 12 4,352 (767) 8,404 (2,216) 767 – The calculation of basic earnings per share at 30 June 2018 was based on the loss after tax attributable to ordinary shareholders of $16,271,000 (2017: loss after tax $39,030,000) and a weighted average number of ordinary shares outstanding of 652,135,936 (2017: 402,515,181) 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 2018 Number 2017 Number 585,188,730 381,110,165 37,974,583 13,626,466 28,972,623 7,778,550 652,135,936 402,515,181 51 2018 ANNUAL REPORT 11. EARNINGS PER SHARE (continued) Diluted earnings per share There were no dilutive potential ordinary shares outstanding at 30 June 2018 or 30 June 2017, therefore no adjustments have been made to basic earnings per share to arrive at diluted earnings per share. 12. CASH, CASH EQUIVALENTS AND CASH IN TRUST Bank balances Share of Joint Operations cash Total cash and cash equivalents Cash in trust Total cash in trust Share of Joint Operations cash 2018 $’000 9,202 220 9,422 426 426 2017 $’000 8,974 1,350 10,324 11,847 11,847 Represents the Group’s share of joint operation cash balances. These cash balances are available to be utilised within the joint operation until such time as the partners resolve to distribute the cash. Cash in trust Represents cash drawn under the senior loan notes facility disclosed in Note 21 that remains un-utilised at the balance sheet date. These cash balances are available to be utilised in accordance with the senior loan note facility primarily for the purpose of furthering the Group’s investments in the Bowland licence. 13. TRADE AND OTHER RECEIVABLES Current Trade receivables (net of impairment losses) Deposits supporting bank guarantees 2018 $’000 2017 $’000 21,510 5,724 13,771 8,723 27,234 22,494 No new impairment provisions were recognised against trade receivables and other receivables at 30 June 2018 or 30 June 2017. 14. INVENTORIES Materials and consumables Construction work in progress Total inventories 52 2018 $’000 2,966 37,872 2017 $’000 3,926 26,927 40,838 30,853 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 15. DISCONTINUED OPERATIONS At 31 December 2017 the Board was considering a number of, at the time incomplete, proposals for the acquisition of the Group’s Engineering and Construction Division (“the Division”) assets from various prospective buyers. The division was classified as a discontinued operation in the 31 December 2017 interim financial statements as a result of its likely sale. The Board continued to consider and negotiate with a number of prospective buyers until an agreement was entered with Spiecapag Australia Pty Ltd on 20 July 2018. The assets sold have been classified as held for sale and separately disclosed in current assets in the balance sheet. The Group will continue to perform its remaining contracts, including one in each of New Zealand and Indonesia, and wind down existing working capital over the remainder of the calendar year. The Division has been classified as a discontinued operation. Financial performance for the year related to the discontinued operation is set out in the table below. The assets and liabilities of the division are disclosed in Note 6 Operating segments. Revenue Expenses Depreciation Loss before income tax Income tax expense Loss for the period from discontinued operations 2018 $’000 2017 $’000 25,997 48,596 (32,933) (50,490) (794) (7,730) – (1,364) (3,258) – (7,730) (3,258) The discontinued operations generated a net operating cash outflow of $14.9 million during the reporting period. 16. PROPERTY, PLANT AND EQUIPMENT 30 June 2018 At cost Accumulated depreciation/amortisation/impairment Carrying amount at 30 Jun 2018 30 June 2017 At cost Accumulated depreciation/amortisation/impairment Land & buildings $’000 Plant & equipment $’000 Enterprise development $’000 Total $’000 – – – 3,912 (888) 131,415 12,549 143,964 (104,838) (11,433) (116,271) 26,577 1,116 27,693 146,971 11,939 162,829 (112,800) (11,284) (124,979) Carrying amount at 30 Jun 2017 3,024 34,171 655 37,850 53 2018 ANNUAL REPORT 16. PROPERTY, PLANT AND EQUIPMENT (continued) RECONCILIATIONS Reconciliations of the carrying amounts for each class of property, plant and equipment are set out below: Carrying amount at 1 July 2017 Additions Disposals Reclassified as held for sale Depreciation and amortisation Carrying amount at 30 June 2018 Carrying amount at 1 July 2016 Additions Disposals Depreciation and amortisation Carrying amount at 30 June 2017 Land & buildings $’000 Plant & equipment $’000 Enterprise development $’000 3,024 – (2,975) – (49) – 34,171 2,855 (124) (4,138) (6,187) 26,577 655 610 – – (149) 1,116 Land & buildings $’000 Plant & equipment $’000 Enterprise development $’000 3,120 – – (96) 3,024 35,853 4,492 (88) (6,086) 34,171 51 624 – (20) 655 Total $’000 37,850 3,465 (3,099) (4,138) (6,385) 27,693 Total $’000 39,024 5,116 (88) (6,202) 37,850 An independent expert was engaged to perform an independent valuation of the Group’s rig fleet at 30 June 2018. 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 profit / (loss) of equity accounted investees Balance at 30 June 2018 2018 $’000 2017 $’000 104,775 106,209 2,705 4,860 8,201 5,153 (3,870) (2,717) 120,541 104,775 The Group’s share of profit of equity accounted investees is $8,201,000 (2017 share of loss: $2,717,000). 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 2018, 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. 54 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 The following summarises the changes in the Group’s ownership interest in associates: Name of investee Ownership Carrying value Jun 2018 % Jun 2017 % Jun 2018 $’000 Jun 2017 $’000 Cuadrilla Resources Holdings Limited (associate) Marais-Lucas Technologies Pty Limited (joint controlled entity) 47.45% 50.00% 47.40% 50.00% 120,541 104,775 – – 120,541 104,775 Summary financial information for the equity accounted investees, applying the Group’s accounting policies and not adjusted for the percentage ownership held by the Group, is as follows: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Income Expenses Profit / (Loss) 2018 Cuadrilla Resources Holding Ltd $’000 Marais-Lucas Technologies Pty Ltd $’000 2017 Cuadrilla Resources Holding Ltd $’000 Marais-Lucas Technologies Pty Ltd $’000 Total $’000 15,638 256,683 272,321 591 75 666 12,135 225,237 237,372 (9,328) (7,035) 15,047 256,608 271,655 (9,560) (7,852) Total $’000 12,743 225,387 238,130 608 150 758 (6,308) (15,868) 0 (7,852) (6,327) (15,655) – (7,035) (17,412) (6,308) (23,720) (16,363) (6,327) (22,690) 24,744 (7,461) 17,283 0 (73) (73) 24,744 (7,534) 17,210 – (5,781) (5,781) – (103) (103) – (5,884) (5,884) 55 2018 ANNUAL REPORT 18. EXPLORATION ASSETS Cost Bowland exploration asset Elswick exploration asset Bolney exploration asset 2018 $’000 2017 $’000 27,837 5,601 2,476 12,734 5,131 3,117 35,914 20,982 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 % 2018 % 2017 % 24.32 23.82 26.69 23.75 22.06 18.75 48.07 45.88 45.44 48.04 45.85 60.55 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 licences contain conditions relating to achieving certain milestones on agreed deadlines. Where milestones are not achieved within agreed deadlines, the terms of the licence may require partial relinquishment of the licence area or be withdrawn. Applications can be made to alter or extend exploration licence conditions. Cuadrilla has to date met all of its milestones in respect of UK licences. 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”). The interest in the joint venture has been transferred to a Centrica subsidiary, Spirit Energy. Under the terms of the sale agreement Spirit is required to fund a further £46.7 million investment on exploration, appraisal or development operations (gross to the licence joint venture) once gas has been flowing regularly for 6 months from two licence wells. Planning approvals to drill and fracture wells Following the completion of a vertical pilot well drilled to a depth of 2,712 metres at Preston New Road (“PNR”), which penetrated both the upper and lower Bowland shale rock intervals and which was extensively cored and logged, Cuadrilla completed two of the UK’s first ever shale gas horizontal wells. The first horizontal well was completed in April 2018 which penetrated the Lower Bowland shale at a depth of approximately 2,300 metres and extended laterally approximately 782 metres. The second well, completed in July 2018, which penetrated the Upper Bowland shale at an approximate depth of 2,100 and extended horizontally for some 743 metres. Hydraulic fracturing of both wells is expected to commence by October 2018. Initial flow tests of both horizontal wells are expected to by year-end and last approximately 6 months. Cuadrilla received final consent on 24 July 2018 from the UK’s Secretary of State for the Department for Business, Energy and Industrial Strategy to conduct hydraulic fracturing operations in the first horizontal well, following an application submitted on 21 May 2018. On 3 August 2018 Cuadrilla submitted an application for similar consent to conduct hydraulic fracturing operations of the second horizontal well, on which a decision is expected by the end of October 2018. UK Secretary of State for Communities and Local Government (“SOS”) has advised that he was minded to grant planning consent for a similar application for four horizontal wells at the Roseacre Wood (“RW”) exploration site pending receipt of further evidence on highway safety. A Public Inquiry was held in April 2018 to consider traffic control issues and the planning inspector is expected to submit his report to the SOS in the near future. 56 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 Outside of the Bowland licence Cuadrilla has interests in onshore UK exploration licences totaling approximately 1,500 km2, many of which target the same Bowland-Hodder shale formations currently being tested in Lancashire, and some of which are held in joint venture with INEOS. AJ Lucas also holds a direct interest in the Elswick and Balcombe licences, in which Cuadrilla has an interest. Sale of interest in the Balcombe licence In January 2018 the Group announced that it, together with its associate Cuadrilla, entered into a farm-out agreement with Angus Energy Plc (“Angus”). As a result of this agreement Angus acquired 25% from each of Cuadrilla and AJ Lucas’ interest in the Balcombe licence, and Angus has become the operator of the licence. In consideration Angus has paid a total of £4,000,000 shared 25% to Lucas and 75% to Cuadrilla, in accordance with the farm-out of their respective interest. Angus Energy will also pay all of the costs of flow testing the existing Balcombe-2Z horizontal well, which Cuadrilla drilled in 2013. Planning permission to flow test the well has already been obtained by Cuadrilla and flow testing is expected before the end of the year. The Group recognised a total of $1,156,000 as profit on sale which was reflected in other income. The corresponding profit on sale recognised by Cuadrilla, after taking account of adjustments required to bring in line with the Group’s accounting policies, is reflected as part of share of profit / (loss) of equity accounted associate in the comprehensive income statement. 19. DEFERRED TAX ASSETS AND LIABILITIES Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Tax assets Tax liabilities 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Net 2018 $’000 Consolidated Inventories Equity accounted investments – – – – (890) (2,613) (1,177) (2,613) Property, plant and equipment 8,708 11,085 Impairment of trade debtors 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) – 1,892 86 366 4,757 (730) (11,576) 3,503 (3,503) – – 1,815 205 710 738 (1,450) (9,313) 3,790 (3,790) – – – – – – – – – – – – – – – – – (3,503) (3,790) 3,503 – 3,790 – (890) (2,613) 8,708 – 1,892 86 366 4,757 (730) (11,576) – – – 2017 $’000 (1,177) (2,613) 11,085 – 1,815 205 710 738 (1,450) (9,313) – – – 57 2018 ANNUAL REPORT 19. DEFERRED TAX ASSETS AND LIABILITIES (continued) Movement in temporary differences during the year: 2018 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 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 Unrecognised deferred tax assets Balance 01 Jul 17 $’000 Recognised directly in equity $’000 Recognised in profit and loss $’000 Balance 30 Jun 18 $’000 (1,177) (2,613) 11,086 1,815 205 710 738 (1,451) (9,313) – – – – – – – – – – – 287 – (2,378) 77 (119) (344) 4,019 721 (890) (2,613) 8,708 1,892 86 366 4,757 (730) (2,263) (11,576) – – Balance 01 Jul 17 $’000 Recognised directly in equity $’000 Recognised in profit and loss $’000 Balance 30 Jun 18 $’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) – As at 30 June 2017, the Group had not recognised deferred tax assets of $54,149,271 (2017: $51,474,406) in relation to income tax losses. 58 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 20. TRADE AND OTHER PAYABLES Current Trade payables Other payables and accruals Provisions 2018 $’000 2017 $’000 11,502 20,702 4,587 36,791 12,463 12,862 4,132 29,457 Other payables and accruals represents costs incurred but not yet invoiced from suppliers, accrued payroll and taxation expenses and certain rehabilitation costs on exploration tenements. 21. INTEREST-BEARING LOANS AND BORROWINGS Current Lease liabilities Senior loan notes Loans from related party Non-current Senior loan notes Loans from related party 2018 $’000 2017 $’000 – 17,185 – 17,185 27,399 40,252 67,651 37 156 933 1,126 56,559 49,590 106,149 (a) Loans and borrowing terms and maturities Senior loan notes The senior loan notes are denominated in US dollars and are fully drawn and secured by a first ranking fixed and floating security interest over the Company and each of its operating and investment subsidiaries. Interest is charged at 18% of the drawn amount, with 12% payable quarterly in arrears and 6% accruing until termination, repayment or part repayment of the principal facility. The loan notes terminate in July 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. During the financial year the Company agreed to reduce the outstanding principal of the Senior loan notes to US$20.0 million by 30 September 2018, with the balance of the principal repayable in July 2019. A total US$15.8 million ($20.5 million) of principal and interest in excess of the normal quarterly interest payment obligations was repaid from a mixture of existing cash reserves, proceeds of a capital raising completed in February 2018, and other capital initiatives during the year. The total amount of principal and interest accrued as at 30 June 2018 repayable by 30 September 2018 has been classified as a current liability. 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 Kerogen Investments No 1 (HK) Limited (Kerogen), which hold 53.32% of the issued shares of the Company have lent the Company $40.3 million. These loans terminate in December 2019, with interest payable able to be deferred until maturity at the discretion of the 59 2018 ANNUAL REPORT 21. INTEREST-BEARING LOANS AND BORROWINGS (continued) 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. Principal at 30 June 2018 Interest rate Tranche 1 Tranche 2 – US$30m 20% initially increasing to 21% from June 2018 16% initially increasing to 18% from June 2018 The Company completed a capital raising with total proceeds of $52.6 million. The capital raising consisted of a 1 for 6 entitlement offer and a placement. Kerogen participated for its full pro rata entitlement in the Entitlement offer of $18.3 million which was satisfied by part conversion of the loans provided by Kerogen, including accrued interest. The repayment applied to repaying the tranche1 loan in full, with the remainder applied against the tranche 2 loan. Additional transaction costs, including restructure fees payable to Kerogen, are amortised over the expected term of the loan facility. (b) Available finance 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 sheet date: Lease liabilities Senior term loan notes Loans from related party Total facilities not utilised at balance sheet date: Senior term loan notes (ii) The Group has access to the following Bond and facilities provided by surety entities Bank indemnity guarantee Amount utilised Unused facilities 2018 $’000 2017 $’000 – 44,584 40,252 37 56,715 50,523 84,836 107,275 – 44,584 40,252 37 56,715 50,523 84,836 107,275 – – 5,722 (5,722) – – – 8,723 (8,723) – 60 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 22. OPERATING LEASES 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 2018 $’000 2017 $’000 1,371 1,828 3,199 1,001 1,720 2,721 During the financial year $1,306,000 (2017: $750,000) 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 2018 $’000 2017 $’000 5,335 863 6,198 4,884 836 5,720 SUPERANNUATION PLANS 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 $3,762,000 (2017: $3,583,000). 61 2018 ANNUAL REPORT 24. CAPITAL AND RESERVES Reconciliation of movement in capital and reserves attributable to equity holders of the parent is detailed below. SHARE CAPITAL – ORDINARY SHARES Details of the share placements, entitlements, exercise of options and associated costs recognised directly in equity are as follows: 2018 On issue at 1 July 2017 Placement Entitlement offer Transaction costs incurred On issue at 30 June 2018 2017 On issue at 1 July 2016 November 2016 placement May 2017 placement Entitlement offer Transaction costs incurred On issue at 30 June 2017 Issue price per share $ No. of shares $’000 585,188,730 416,443 70,500,050 94,408,450 0.32 0.32 N/A 22,560 30,211 (1,461) 750,097,230 467,753 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 In January 2018 the Company launched a placement and a 1 for 6 accelerated non-renounceable entitlement offer which completed in February 2018. A total of 164,908,500 ordinary shares were issued at $0.32 per share raising approximately $52.8 million of which $29.6 million was applied to repay interest bearing liabilities in accordance with the Senior Loan note and Kerogen Loan facilities. Kerogen participated for its full pro rata entitlement raising $18.2 million which was satisfied by the conversion of the related party loans owned to Kerogen, including accrued interest. In the comparative period the Company undertook a pro rata Entitlement Offer and Placement at a price of $0.275 In May 2017. A total of $37.2 million, 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 loans agreed in June 2016 which required a minimum of US$25 million 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. 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 historic employee management rights incentive plans. There are no equity-settled compensation plans currently in operation, and not rights outstanding under previous 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. 62 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 OPTIONS Trade and other receivables There are no options over ordinary shares outstanding at the balance sheet date. DIVIDENDS No dividends in respect of the 2018 or 2017 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 2018 $60,852,374 (2017: $60,852,374). 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. 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 Cash, cash equivalents and cash in trust 2018 $’000 27,234 9,848 2017 $’000 22,494 22,171 37,082 44,665 Maximum exposure to credit risk for trade and other receivables at the reporting date by business segment was: Drilling Engineering and construction Oil and gas Corporate / unallocated 18,667 7,664 632 271 9,284 12,296 585 329 27,234 22,494 63 2018 ANNUAL REPORT 25. FINANCIAL INSTRUMENTS (continued) 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 2018 $’000 Impairment 2018 $’000 22,542 1,786 29 398 2,479 27,234 – – – – – – Gross 2017 $’000 18,914 793 1,075 1,285 427 22,494 Impairment 2017 $’000 – – – – – – 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 stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting arrangements: 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 2018 Non-derivative financial liabilities Trade and other payables 36,791 (36,791) (32,559) – (2,956) (1,276) Senior term loan notes 44,584 (52,692) (19,366) (1,642) (31,684) Loans from related party 40,252 (54,074) (401) (479) (53,194) – – 121,627 (143,557) (52,326) (2,121) (87,834) (1,276) – – – – 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 2017 Non-derivative financial liabilities Trade and other payables Senior term loan notes Loans from related party Lease liabilities 64 29,457 56,715 50,523 37 (29,457) (25,325) – (3,371) (79,562) (3,510) (3,510) (72,542) (761) – (80,689) (39) (897) (19) (597) (20) (716) (78,479) – – 136,732 (189,747) (29,751) (4,127) (76,629) (79,240) – – – – – AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 MARKET RISK Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. CURRENCY RISK The Group 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 financial instruments exposed to movements in foreign currency 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. The carrying value of these investments is primarily impacted by movements in the US to AU Dollar exchange rate, notwithstanding that explorations expenditure is primarily incurred in EUR and GBP. Cuadrilla incur some exploration expenditure in GBP despite having their functional currency as USD. 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 the balance sheet date was as follows, based on notional amounts in Australian dollars (in thousands): Cash balances Trade and other receivables Trade payables Interest-bearing liabilities Net Financial Instrument exposure Value of investment in Cuadrilla Resource Value of Exploration assets Net balance sheet exposure – 789 (651) – 138 – – 138 – – – – – – – – 2018 Exposure to NZD $’000 2017 Exposure to NZD $’000 2018 Exposure to GBP $’000 2017 Exposure to GPB $’000 2018 Exposure to USD $’000 2017 Exposure to USD $’000 11,848 585 433 632 (8,963) (5,352) (84,836) (107,238) 406 658 – – – – – – 406 658 (92,734) (100,157) – – – – 406 658 120,541 35,914 63,721 104,775 20,982 25,600 At 30 June, 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 AUD/NZD Post-tax loss (higher) / lower Net equity higher / (lower) 10% strengthened 10% weakened 2018 0.8130 0.6197 1.1993 8,381 2017 2018 2017 0.8461 0.6504 N/A 9,045 0.6652 0.5071 0.9813 0.6923 0.5322 N/A (10,243) (11,055) (5,842) (2,387) 7,141 2,918 65 2018 ANNUAL REPORT 25. FINANCIAL INSTRUMENTS (continued) The following significant exchange rates applied during the year: USD GBP NZD INTEREST RATE RISK Average rate Reporting date spot rate 2018 0.7753 0.5758 1.0852 2017 2018 0.7544 0.5953 N/A 0.7391 0.5634 1.0903 2017 0.7692 0.5913 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. Interest rate exposure is detailed as follows: Fixed rate instruments Financial liabilities Variable rate instruments Financial assets At reporting date, the Group did not have any variable interest rate borrowings. 2018 $’000 2017 $’000 (84,836) (107, 275) (84,836) (107,275) 9,848 9,848 22,171 22,171 66 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 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: 2018 Bank balances Trade and other receivables Trade and other payables Senior term loan notes(1) Loans from related party(1) 2017 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 9,848 27,234 9,848 27,234 (36,791) (36,791) (44,584) (46,983) (40,252) (40,670) (84,545) (87,362) 22,171 22,494 22,171 22,494 (29,458) (29,458) (37) (56,715) (50,523) (37) (61,732) (51,692) (92,068) (98,254) (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 ■ Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). 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. 67 2018 ANNUAL REPORT 25. FINANCIAL INSTRUMENTS (continued) 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, cash equivalents and cash in trust Net debt Total equity Net debt to equity ratio at 30 June 26. INTERESTS IN JOINT OPERATIONS 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 AJ Lucas – Spiecapag JV Project 1 AJ Lucas – Spiecapag JV Project 2 AJ Lucas – Spiecapag JV Project 3 Construction of water related infrastructure 6 Pioneer Avenue, Thornleigh 2120 Construction of gas infrastructure Construction of gas infrastructure Construction of gas infrastructure 616 Boundary Road Richlands 4077 616 Boundary Road Richlands 4077 616 Boundary Road Richlands 4077 All joint operations above are domiciled in Australia. 2018 $’000 2017 $’000 127,825 142,452 (9,848) (22,171) 117,977 139,110 0.85 120,281 97,771 1.23 Participation interest 2018 % 2017 % 19 50 50 40 40 19 50 50 40 40 68 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 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 Contribution to operating results 2018 $’000 2017 $’000 220 87 2,691 214 3,212 5,560 5,560 1,351 155 8,005 214 9,725 6,494 6,494 Loss for the period included in discontinued operations 4,035 245 27. CONSOLIDATED ENTITIES The financial statements at 30 June 2018 include the following controlled entities. The financial years of all the controlled entities are the same as that of the parent entity. Name of entity 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 Ownership interest Country of incorporation 2018 % 2017 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Hong Kong Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 69 2018 ANNUAL REPORT 27. CONSOLIDATED ENTITIES (continued) Name of entity 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 Country of incorporation Australia Australia Australia Australia Australia New Caledonia Australia Australia Australia Australia Australia England England England England England England Ownership interest 2018 % 100 2017 % 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 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 2018, the assets of the joint operation were sufficient to meet such liabilities. The liabilities of the joint operations not included in the consolidated financial statements amounted to $7,368,000 (2017: $9,359,000). (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. 70 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 (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 (AU $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 2018, the Group had no commitments contracted but not provided for and payable within one year (2017: nil) for the purchase of new plant and equipment. 29. PARENT ENTITY DISCLOSURES As at 30 June 2018 and 2017, 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 2018 $’000 2017 $’000 (125,980) (43,431) (125,980) (43,431) 426 11,847 108,548 207,376 17,797 85,448 3,456 109,605 467,753 416,443 4,670 4,670 (449,323) (323,342) 23,100 97,771 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. 71 2018 ANNUAL REPORT 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) Borrowing costs paid Increase / (decrease) in accrued interest (Profit) / loss on sale of non-current assets Loss on foreign currency loans Exchange rate changes on the balance of cash held in foreign currencies Share of profit of equity accounted investees Other income PEL investment transferred in satisfaction of loan 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 Net cash used in operating activities 2018 $’000 2017 $’000 9,422 426 9,848 10,324 11,847 22,171 (16,271) (39,030) 2 1,436 4,597 (902) 7,021 159 2,400 (388) (8,201) (2,363) – (445) 6,385 7 7,094 3,070 – 9,761 (140) (3,229) 131 2,717 (619) (500) 148 6,202 (6,570) (14,388) (4,740) 369 3,260 190 (9,985) (14,806) 7,334 478 (1,466) 24 (13,114) (27,186) (c) Non-cash financing and investment activities Kerogen’s subscription to an equity raising in January 2018, as disclosed in note 24, was satisfied by the conversion of $18,272,000 of the related party loans owned to Kerogen, including accrued interest. Kerogen’s subscription under the entitlement offer in May 2017, as disclosed in note 24, was satisfied by the conversion of $37,225,000 of the related party loans owned to Kerogen, including accrued interest. (d) Financing arrangements Refer to Note 21. 72 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 (e) Reconciliation of liabilities arising from financing activities As at 1 July 2017 $’000 Cash flow(1) $’000 Debt for equity(2) $’000 Non-cash Finance costs(3) $’000 Other $’000 As at 30 June 2018 $’000 Interest bearing liabilities 107,275 (26,983) (18,272) 23,217 (401) 84,836 (1) Includes repayment of borrowings of $18,215,000, transaction costs on borrowings of $902,000, and Interest and other costs of finance paid of $7,866,000 (which excludes interest withholding tax paid of $2,810,000). (2) As disclosed in note 30(c) above. (3) Includes interest expense accrued of $16,220,000 (which excludes interest withholding tax accrued of $1,032,000) Amortisation of prepaid fees on debt facilities of $4,597,000 and net foreign exchange loss of $2,400,000 as disclosed in Note 7. 31. RELATED PARTIES ENTITY WITH CONTROL Kerogen Investments No. 1 Limited (Kerogen) participated in the accelerated entitlement offer announced by the Company in January 2018 for its full pro rata entitlement. In total $18,272,000 was raised from Kerogen and settled by the part conversion of tranche1 of the related party loan facility as disclosed in Note 21, including outstanding principal and interest. Kerogen also participated for its full entitlement in the accelerated entitlement offer announced by the Company in May 2017. In total $37,225,000 was raised from Kerogen and settled by the part conversion of tranche 1 of the related party loan facility, including outstanding interest. A further $500,000 in funding provided by Kerogen was satisfied in June 2017 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 has provided financing facilities throughout the year as described in Note 21. Interest and borrowing costs incurred and recognized as an expense during the period totaled $8,477,201 (2017: $13,867,000), with balances outstanding at the balance sheet 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 2018 $ 2017 $ 2,197,996 1,791,774 22,532 65,096 18,306 63,398 – – – – 2,285,624 1,873,478 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. 73 2018 ANNUAL REPORT 31. RELATED PARTIES (continued) 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. 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 2018 $ 2017 $ Phillip Arnall Julian Ball Ian Meares Andrew Purcell Felix Ventures Pty Ltd Non-Executive director services 235,000 235,000 Kerogen Capital Limited Non-Executive director services 100,000 100,000 Autonome Pty Ltd Lawndale Group Non-Executive director services Non-Executive director services 95,000 95,000 95,000 95,000 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 Corporations (Wholly-owned Companies) Instrument 2016/785, 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 74 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 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 2018 are set out below: 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 the end of the year SUMMARISED STATEMENT OF FINANCIAL POSITION CURRENT ASSETS Cash and cash equivalents Cash in trust Trade and other receivables Inventories Asset classified as held for sale 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 – non current Total Non-Current Liabilities Total Liabilities Net Assets 2018 $’000 2017 $’000 (50,660) (14,858) – – (50,660) (14,858) (323,372) (308,514) (374,032) (323,372) 2018 $’000 2017 $’000 8,997 426 26,602 40,838 4,138 729 81,730 108,122 27,693 135,815 217,545 28,092 17,185 5,335 9,655 11,847 21,909 30,853 – 1,098 75,362 121,610 37,849 159,459 234,821 24,055 1,126 4,884 50,612 30,065 67,651 863 68,514 119,126 98,419 106,149 836 106,985 137,050 97,771 75 2018 ANNUAL REPORT 32. DEED OF CROSS GUARANTEE (continued) EQUITY Share capital Reserves Retained earnings Total Equity 2018 $’000 2017 $’000 467,752 416,443 4,700 4,700 (374,033) (323,372) 98,419 97,771 33. EVENTS SUBSEQUENT TO THE BALANCE SHEET DATE Subsequent to year end the Company sold the fixed assets of the Engineering and Construction business to Spiecapag Australia Pty Ltd, following a decision by the Board earlier in the year to discontinue the business. The sale, combined with proceeds from the completion of remaining Engineering and Construction projects and unwind of working capital is expected to generate proceeds in excess of $25 million over the remainder of the calendar year. As separately announced on 30 August 2018, the Company reached a binding agreement with OCP Asia (Singapore) Pte. Limited to increase the headroom and extend the maturity of its senior loan notes facility. Under the terms of the revised facility, the Company will have the ability to draw down additional debt of up to US$9 million (A$12.3 million) with the facility maturity extended to 31 January 2020 (from 22 July 2019). The previous obligation to reduce the total facility principal to US$20 million by September 2018, which has been reflected in current interest-bearing liabilities at balance sheet date, has also been deferred to 30 June 2019 (from 30 September 2018). Furthermore, the maturity of the facility with Kerogen has been extended from 31 December 2019 to the earlier of 31 July 2020 or 6 months from full repayment of the senior loan notes facility. These amendments will enable the Company to manage the unwind of working capital from the engineering and construction business as we complete an important phase of the program at Preston New Road, and represent a strong vote of confidence from our senior facility providers. Other than as disclosed above, 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. 76 AJ LUCAS GROUP LIMITEDNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSfor the year ended 30 June 2018 DIRECTORS’ DECLARATION for the year ended 30 June 2018 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 34 to76 and the Remuneration Report included in the Directors’ Report, set out on pages 28 to 32, 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 2018 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 2018. 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, Chairman 31 August 2018 77 2018 ANNUAL 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 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 2018, 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) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2018 and of its consolidated financial performance for the year ended on that date; and b) 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 of the 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 78 AJ LUCAS GROUP LIMITEDINDEPENDENT AUDITOR’S REPORTfor the year ended 30 June 2018 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 of 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; 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 and estimated percentage of completion, which are unique to each contract and can be complex. The accurate recording of revenue is highly dependent 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 new customers and/or contracts; 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 79 2018 ANNUAL REPORT 1. Recognition and Measurement of revenue from services rendered and construction contracts (continued) 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 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 and the level of judgement required to estimate the value of revenue recognised. - - - 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; agreed material contract revenue and cost variations and claims to information provided by customers and other relevant third parties; and for contracts accounted for using the percentage of completion method we assessed the costs incurred to date as a percentage of total costs and forecast cost to complete calculations, and their impact on recognising revenue in the period. We also assessed the effect of contract performance in the period since year end to the date of this report on revenue recognised at year end; 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 $120.5m as at 30 June 2018, represents 45% of total assets. Subsequent to its 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; A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 80 AJ LUCAS GROUP LIMITEDINDEPENDENT AUDITOR’S REPORTfor the year ended 30 June 2018 2. Valuation of equity accounted investments (continued) Why significant How our audit addressed the key audit matter 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 was considered a Key Audit Matter due to the value of the investment relative to total assets and the significant judgments and assumptions involved in the assessment of indicators of impairment. We assessed whether the methodology used by the Group to identify indicators of impairment met the requirements of Australian Accounting Standards; We evaluated the Group’s assessment of indicators of impairment at year-end. Our procedures included discussions with representatives from Cuadrilla and the Group, including the directors; 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 2018 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, with the exception of the Remuneration Report and our related assurance opinion. 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 81 2018 ANNUAL REPORT Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 82 AJ LUCAS GROUP LIMITEDINDEPENDENT AUDITOR’S REPORTfor the year ended 30 June 2018 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. 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 28 to 32 of the directors' report for the year ended 30 June 2018. In our opinion, the Remuneration Report of AJ Lucas Group Limited for the year ended 30 June 2018, 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 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 83 2018 ANNUAL REPORT DISTRIBUTION OF ORDINARY SHAREHOLDERS (AS AT 30 SEPTEMBER 2018) Securities held 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total 649 shareholders held less than a marketable parcel of shares at 31 July 2018. Name Kerogen Investments No. 1 (HK) Limited CS Third Nominees Pty LimitedMr Paul Fudge RodDCO Property Holdings Limited Citicorp Nominees PTY Limited Amalgamated Dairies Limited CS Fourth Nominees PTY Limited HSBC Custody Nominees (Australia) Limited – A/C 2 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Toolebuc Investments PTY LTD Milson Investments PTY Limited National Nominees Limited ADEMSA PTY LTD HSBC Custody Nominees (AUSTRALIA) Limited-GSCO ECA Ingrid Miriam Seton Mr Ross Alexander Macpherson Mr Robert Alexander Hoad + Ms Jacquelyn Maria Hoad Maw Projects Pty Ltd LA & SJ Roach Holdings Pty Ltd Number of shareholders Number of shares 584 743 284 564 180 279,178 2,072,215 2,210,038 19,560,126 725,975,673 2,355 750,097,230 Number of ordinary shares held % of issued shares 399,942,649 53.32 54,110,979 53,801,840 40,500,050 21,613,958 21,430,906 13,976,062 13,419,528 13,087,505 11,858,353 9,489,015 6,443,789 4,814,029 3,168,688 2,428,905 1,903,403 1,801,629 1,600,000 1,501,019 1,400,000 7.21 7.17 5.40 2.88 2.86 1.86 1.79 1.74 1.58 1.27 0.86 0.64 0.42 0.32 0.25 0.24 0.21 0.20 0.19 678,292,307 90.43 84 AJ LUCAS GROUP LIMITEDAUSTRALIAN SECURITIES EXCHANGE ADDITIONAL INFORMATIONfor the year ended 30 June 2018 SUBSTANTIAL SHAREHOLDERS Name Kerogen Investments No. 1(HK) Limited Mr Paul Fudge RodDCO Property Holdings Limited OCP Asia (Singapore) Pte Limited Number of ordinary shares held 399,942,649 53,801,840 40,500,050 21,290,536 % of issued shares(2) 53.32 7.17 5.40 NA(3) 2) The percentage of issued share is recalculated by dividing the number of ordinary shares held as reported in the most recent substantial shareholder notification by the total number of shares on issue today. 3) The percentage of issued share is based on the number of shares held in the most recent substantial shareholder notice dated 4 November 2017 when the company had 390,512,165 shares on issue. A new substantial shareholder notice is only required to be lodged when an interest changes by 1% or more. While the Company has not received any more recent substantial shareholder notifications from OCP Asia (Singapore) Pte Limited, the current total number of share on issue has increased to 750,097,230. VOTING RIGHTS Ordinary shares – Refer to note 24 of the financial statements. Options – There are no options outstanding. 85 2018 ANNUAL REPORT 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: 1300 556 161 Enquiries outside Australia: +61 3 9615 5970 Email: web.queries@computershare.com.au Website: www.computershare.com 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 9001:2015) Compass Assurance Services 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. 86 AJ LUCAS GROUP LIMITEDCORPORATE DIRECTORYfor the year ended 30 June 2018 Designed and produced by FCR www.fcr.com.au www.lucas.com.au