A N N U A L R E P O R T About Energy Action Chairman’s Report Chief Executive Officer’s Report Strategy and operations overview Financial Report Corporate Information Share and Shareholder Information Glossary of Terms 4 7 8 10 13 99 100 102 ABOUT ENERGY ACTION Energy Action has supported businesses, government entities and not-for-profit organisations to better understand and manage their energy requirements for over 15 years. Energy Action’s core business strategy and purpose is: “To help our clients understand and take control of their energy needs.” u c e Energy U s e d e R · We provide energy assessments and audits · We track performance of an asset or plant to identify improvement opportunities · We can solve your Power Factor issues · We can tune/upgrade your building for improved building performance · We help identify opportunities to reduce waste Energy Efficiency Services Energy Energy Optimisation Optimisation Lifecycle Lifecycle B u y Energy Energy Procurement · We tailor the right procurement methodology to match your needs – including multi fuels · We advise on the best timing and duration for your procurement · We create competitive tension to ensure you get the best price · We will deliver the best commercial/ contractual outcome for you · We help you manage your energy budget and costs · We save you money by ensuring your bills are correct (validate usage, tariff, late fees etc) · We make it easy for you to meet your reporting obligations internally and externally · Access your data anytime/anywhere · We can manage your Embedded Network Contract Management Onsite Generation M a nage Sup p l y C o sts T o w ard self-s u f fi c i e n cy · We design solutions to help you become more self-sufficient including Solar PV, co-gen, tri-gen etc · We are the Microgrid and Embedded Network experts · Clean Energy Council solar installation award winner 4 | ENERGY ACTION ANNUAL REPORT 2017 Energy Action’s principal activities are providing energy management services to a diverse range of commercial, industrial and small and medium sized business customers. Energy Action core services are designed to help clients: Secure the best price when purchasing energy using a range of procurement methodologies; Manage energy contracts, including account management, liaison with their retailer, bill validation, ensuring the right tariff and monitor their energy usage; Energy Action has the following operational strengths: National coverage, unparalleled technical capability and expert knowledge; Market leading products and services supported by the latest technology; Procurement methodologies that cover the entire gas and electricity market – having worked with a range of businesses from SME’s to some of the largest energy users in Australia; and, Supply and demand side management Reduce energy consumption, manage costs and lower the environmental impact; and, expertise. Become more self-sufficient energy consumers by installing solar or other on-site generation solutions. 5 6 | ENERGY ACTION ANNUAL REPORT 2017 CHAIRMAN’S REPORT focus on the needs of our clients is an enhanced delivery model for our products and services – aligning customer needs with solutions across the energy optimisation lifecycle. We saw this strategic change support a substantial improvement in revenue and profitability in the second half of the 2017 financial year, and remain confident this has established a robust corporate and operational outlook for the financial year ahead. to further growth, we To underpin continue to invest in our people, systems and technology. We also remain committed innovation, building on the digital tools available for our clients, and delivering a number of strategic projects that showcase our expertise and thought leadership locally and offshore, and reaffirm our market position. The Board also remains confident that Energy Action’s agility and proven track record of managing costs means we are well positioned to navigate any challenges resulting from current volatility in the Australian electricity and gas markets. Moreover, we are poised to capitalise on the growing demand for our services. To drive the Company’s strategy and overall operational growth, the Board welcomed Ivan Slavich as Chief Executive Officer in March 2017. Ivan’s deep experience within the Australian energy and utilities sector and track record in executing successful sales strategies will underpin the Company’s commercial and cultural maturation. I would like to take this opportunity to thank Dr Ronald Watts who stepped down from the Board in July 2017. in The 2017 financial year marked a step change in the Energy Action business as we sought to build on our position as a leading provider of energy management solutions. This positive change is based on adopting an acute client focus as part of the Company’s operational and cultural DNA. A focus on providing customers with tailored solutions and best in class service is more critical than ever given today’s increasingly complex energy market environment. Unprecedented market volatility continues to grow as a key risk for our clients, and has brought businesses’ energy costs, demand management and efficiencies into sharp focus. This presents strong commercial opportunities for Energy Action. At the centre of the Company’s new strategic framework and renewed his roles as co-founder, Chairman and Director, the Company has greatly benefitted from his stewardship and guidance from inception to today. We would to welcome like experienced company Director, John Mackay AM, to the Board and look forward to his guidance derived from extensive experience in both the energy and utilities sectors. The Board would also like to thank Scott Wooldridge for his substantial contribution to building the Energy Action business in his four years as Chief Executive Officer. Importantly, we would like to thank shareholders for their ongoing support and commitment. The current energy market environment continues to drive demand for a trusted advisor to help businesses manage their costs and consumption, and this puts Energy Action in a strong market position as we move into the current financial year. Murray Bleach 7 CHIEF EXECUTIVE OFFICER’S REPORT higher margin work, and ongoing cost control. framework Energy Action is already delivering on a strategic that better aligns our products and services with our client’s needs. This strategic plan is designed to improve market penetration, with a range of initiatives already underway or due to commence to support sales growth. the As I have incoming CEO altered our purpose statement to better align with our client’s needs, repositioning the organisation with a value proposition that states: “We help our clients understand and take control of their energy needs.” We do this via four key areas, Procurement, Energy Contract management, Efficiency measures self- sufficiency via Solar. and This includes investing in the latest technology to support our clients, culminating in the launch of the Energy Metrics Platinum service and mobile app to offer data-driven solutions and remotely monitor energy usage and costs. In addition, we have recently implemented a new Over the 2017 financial year, factors such as the closure of the Hazelwood Power Station in Victoria (1600MW) have driven electricity and gas prices up to new heights, with volatility remaining a key feature of the market today. As a result, company boards and management are now viewing energy cost management as a critical risk management priority for their organisations. The cost of energy to a business is a function of two factors – price and volume – and Energy Action is uniquely placed to support our clients in managing both. With regard to price we have an outstanding capability to get the best deal for clients no matter their size and with our contract management service, we ensure that they are on the correct energy tariff and validate their bills. When it comes to volume we are very well placed to provide advice to reduce our client’s consumption via energy efficiency measures, and ultimately to become self-sufficient with solar. We remain the only Australian advisor that can combine deep technical experience with products and services across the entire energy optimisation lifecycle, and this is supporting a growing pipeline of sales opportunities. In response to market conditions and to drive our commercial performance, we have accelerated progress across the business’ key priorities for the 2017 financial year. These priorities include ensuring our operations are aligned with client requirements and expectations, supported by enhanced systems and technology, repositioning the Projects and Advisory Services business to target In my inaugural address as Chief Executive Officer, I am pleased to report that as energy management continues to rise in importance for many businesses, Government and other organisations, Energy Action is moving to further embed its position as the leading energy advisor in the Australian market. 8 | ENERGY ACTION ANNUAL REPORT 2017 Customer Relationship Management (CRM) system and upgraded our online client portal. During the year, Energy Action delivered an Operating Net Profit After Tax (NPAT) of $2.5 million, driven mostly by the growth in the Projects and Advisory Services and Procurement businesses, especially in the second half. from While the group’s revenue performance was down marginally the prior financial year, we have seen a significant rebound in revenue growth in the second half of 2017. We are now well placed to capitalise on a growing pipeline of commercial opportunities across the business, and are confident that this growth will continue into the current financial year. to effectively We have continued manage costs, with only moderate year-on-year operating cost growth of one per cent. This is a key part of ensuring flexibility to deploy resources into areas of the business that will drive greatest growth, and maximise value to shareholders. Beyond the Company’s commercial performance, Energy Action has retained a strong focus on supporting the communities in which its staff and clients are located. This included our ongoing support for Camp Quality as well as a Community Action Volunteer Program with the annual Tree Planting Challenge for World Environment in support of Conservation Day Volunteers Australia. Energy Action has a programme whereby each staff member is able to allocate two days a year towards volunteer work. In the year ahead, the outlook for the business remains positive. We will continue to raise the public profile of Energy Action amongst all stakeholders, advocate for our clients, and reinforce our position as a thought leader on the impact of changing market conditions. In the 2018 financial year, our focus will be predominantly on extending market share through the renewed sales and marketing function. This includes leveraging digital processes the and automation to enhance targeting sales client experience, opportunities in regional and rural Australia, and optimising pricing for our products and services. Energy Action will also take a much more aggressive approach towards building the Company’s profile through the media, business networking events, enhanced social media activity, and targeted B2B advertising to drive sales growth. These pursuits will be assisted by a strong organisational culture of support for our most valuable asset – our people – as we continue to deliver on our objective to “work hard, have fun and do good”. I would like to take this opportunity to thank all shareholders for their ongoing support of the business and staff for their contribution. I look forward to working with all stakeholders as we deliver our corporate and operational objectives in the year ahead. Ivan Slavich CEO 9 STRATEGY AND OPERATIONS OVERVIEW The core objectives of Energy Action’s strategic plan include: Optimise pricing across all products; Target regional opportunities; Improve market share; Leverage IT; and, Enhance the culture of the business overall. To drive accountability and maximise delivery, we have implemented clear KPIs around each of the key objectives outlined in the strategy. To advance our operational priorities over the current financial year, we have realigned our product and service suite to cater for optimisation across all stages of the energy lifecycle. We remain as the only energy consultancy in Australia to offer end-to-end services, covering energy efficiency services, energy procurement, on-site generation, and contract management. This presents opportunities to broaden the scope of work for many existing clients as well as tailor the delivery of our solutions. ENERGY PROCUREMENT During the year, we recorded an increase across all key areas of energy procurement including auction volumes, structured products, tariff tenders. We management and are a leader in the procurement of electricity in the national commercial and industrial sector, and are well placed to leverage this to inject further competitive tension into the procurement process for the benefit of our clients. Volumes through Energy Action’s Australian Energy Exchange (AEX) reverse auction platform have rebounded strongly in the second half of the financial year, after a moderate drop in the first half. We have now experienced consecutive month- on-month growth in volumes since February 2017 with strong volumes continuing into the current year. We have also seen larger corporate clients taking a more active energy management strategy, which has supported an increase in the use of structured products with an active pipeline into the 2018 financial year. CONTRACT MANAGEMENT AND ENVIRONMENTAL REPORTING Energy Action has significantly enhanced its contract management and environmental reporting business through the launch of innovative data and analytics tools for clients. This included launching the Energy Action mobile app, providing clients with remote access to track their energy usage and spend across multiple sites. We also launched the Energy Metrics Platinum service, which now includes weather and forecast load alerts as well as automating the service in Western Australia. During the year, we saw the bill validation and network tariff review service deliver $3 million in savings to our clients, with approximately 14,300 sites now under management. The number of sites under management has decreased over the 2017 financial year largely due a large retail client electing to in-source this functionality. 10 | ENERGY ACTION ANNUAL REPORT 2017 PROJECTS AND ADVISORY SERVICES (PAS) reposition The 2017 financial year saw Energy Action successfully the Projects and Advisory Services (PAS) business to focus on higher margin work. This resulted in a 57 per cent increase in consulting revenues driven by audit work, high value policy projects and commercial building analytical work. In addition, Energy Action now has 11 sites operational for building automated fault detection. The team also progressed or delivered a number of key projects, including environmental upgrade works at the 747 Collins Street, Melbourne office building that has achieved a six star NABERS rating. Energy Action were also instrumental in facilitating the first Energy Upgrade Agreement (EUA) in seven years in Melbourne, to finance an upgrade at the 575 Bourke Street, Melbourne, office building. Upgrade works have also commenced at two key sites in Canberra. STRATEGIC INITIATIVES FINANCIAL RESULTS Energy Action has made substantial progress in advancing strategic projects, with a particular focus on growing its presence in the embedded networks and microgrids space. After 12 months of successful operations we have seen growth in the client base, with 20 embedded networks currently under management. Energy Action recorded revenues of $32.95 million in FY2017, a decline of 3% on the previous year ($33.98 million). Second half performance was much improved with revenues growing 5% the prior corresponding period with a strong rebound in Procurement (25%+) and PAS up 35%. versus We are in the process of attaining accreditation under the Australian Energy Market Operator (AEMO) as an embedded network manager, which will put the business in a good position ahead of new regulations coming into effect in December this year. The outlook remains positive with a growing pipeline of projects with major property and retail groups. Operating Net Profit after Tax (NPAT) for FY2017 was $2.5 million, representing a decline of 28% on the previous year’s result. The results were impacted by a decline in revenue from the Contract Management and Environmental Reporting (“CMER”) of 8%. The Company has available liquidity of $4.8 million that comprises undrawn bank facilities of $2.7 million and cash reserves of $2.1 million. Energy Action has declared a fully franked dividend of 1.4 cents per share for FY2017. 11 12 | ENERGY ACTION ANNUAL REPORT 2017 FINANCIAL REPORT 1 Directors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2 Auditor’s Independence Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3 Remuneration Report (Audited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4 Corporate Governance Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Consolidated Statement of Cash Flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Notes to the Financial Statements for year ended 30 June 2017 . . . . . . . . . . . . . . . . . . . . . 56 Note 1: Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Note 2: Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . 56 Note 3: Significant Accounting Judgements, Estimates and Assumptions . . . . . . . . . . . 66 Note 4: Business Combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Note 5: Segment information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Note 6: Revenue, Other Income and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Note 7: Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Note 8: Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Note 9: Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Note 10: Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Note 11: Trade and Other Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Note 12: Property, Plant and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Note 13: Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Note 14: Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Note 15: Trade and Other Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Note 16: Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Note 17: Provisions and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Note 18: Loans and Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Note 19: Issued Capital and Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Note 20: Capital and Leasing Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Note 21: Cash Flow Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Note 22: Related Party Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Note 23: Financial Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 Note 24: Auditors’ Remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Note 25: Information relating to Energy Action Limited (“the parent entity”). . . . . . . . . . . 90 Note 26: Events After the reporting period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 6 Director’s Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 7 Independent Audit Report to Members of Energy Action Limited . . . . . . . . . . . . . . . . . . 92 13 DIRECTORS’ REPORT Your Directors present their report, together with the financial statements for Energy Action Limited (the “Company”) and its consolidated entities (the “Group”), for the financial year ended 30 June 2017. DIRECTORS The names and details of the Company’s Directors in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. . . . . . . . . . . . . Murray Bleach (Non-Executive Chairman) Qualifications – Bachelor of Arts (Financial Studies) and Master of Applied Finance - Macquarie University, Institute of Chartered Accountants, Graduate Australian Institute of Company Directors. Experience – Board Member since 2012, Chairman since 2015 Special Responsibilities – Member of each of the Audit & Risk Management, Nomination and Remuneration Committees Directorships held in other listed entities currently and during the three prior years to the current year: Carlton Investments Ltd – Independent Non-Executive Director (appointed 2 December 2014) Other Directorships and interests – Chairman of Suicide Prevention Australia, Partner in Alfred Street Investment Partners, Member of Advisory Board for Derwent Executive, Non-Executive Director of IFM Investors, Chairman of AddVenture Fund. . . . . . . . . . . . . Dr. Ronald Watts (Non-Executive Director – resignation effective 30 June 2017) Qualifications – Bachelor Science (Hons I), University of New South Wales, Dip Management (Applied Finance), PhD (Molecular physics) – Cambridge Experience – Board member since 2003, Chairman 2003 – 2015 Special Responsibilities – Member of Nomination Committee Directorships held in other listed entities currently and during the three prior years to the current year: nil Other Directorships and interests – Non-executive Director of Biosceptre International, a cancer research company. Trustee, The Wenkart Foundation, a medical research fund. . . . . . . . . . . . . Paul Meehan (Non-Executive Director) Qualifications – Diploma of Law (SAB), University of Sydney Experience – Board member since 2003 Special Responsibilities – Member of each of the Audit & Risk Management, Nomination and Remuneration Committees. Directorships held in other listed entities currently and during the three prior years to the current year: nil Other Directorships and interests – Director of Meehans Solicitors Pty Ltd, Non-executive Director of Commercial First Realty Pty Ltd T/as LJ Hooker Commercial Macarthur. . . . . . . . . . . . . 14 | ENERGY ACTION ANNUAL REPORT 2017 Nitin Singhi (Independent Non-Executive Director) Qualifications – Bachelor of Economic and Master of Laws – University of Sydney, Member Australian Institute of Company Directors Experience – Board Member since 2015 Special Responsibilities – Chairman of each of the Audit & Risk Management and Nomination Committees and a member of the Remuneration Committees. Directorships held in other listed entities currently and during the three prior years to the current year: nil Other Directorships and interests – Managing Director of Horizon Private Capital Partners, Director of TiE Sydney, Director of Sport and Leisure Education Group Pty Limited. . . . . . . . . . . . . Mark de Kock (Non-Executive Director) Qualifications – Bachelor of Science (First Class Honours) in Electronic Engineering from University College London, Executive MBA from the Australian Graduate School of Management, Member of the Institution of Engineering and Technology. Experience – Nominee Director since 2015, appointment recommended by Microequities Asset Management. Special Responsibilities – Member of Remuneration Committee Directorships held in other listed entities currently and during the three prior years to the current year: nil . . . . . . . . . . . . John Mackay AM (Independent Non-Executive Director – appointed 30 June 2017) Qualifications – Bachelor of Arts Administration / Economics from University of Canberra, Honourary Doctorate from University of Canberra. Experience – Board Member since July 2017 Special Responsibilities – Member of each of the Audit & Risk Management and Nomination Committees and Chair of the Remuneration Committee. Directorships held in other listed entities currently and during the three prior years to the current year: Speedcast International – Independent Non-Executive Chairman (appointed to the Board in 2013 and as Chairman in 2014), formerly Director of CIC Australia (now part of Peet Limited) Other Directorships and interests – Chairman of the National Arboretum Foundation, Director of Total Energy Pty Limited . . . . . . . . . . . . 15 Interests in the shares and options of the Company and related bodies corporate As at the date of this report, the interests of the directors in the shares and options of Energy Action Limited were: Number of ordinary shares Number of options over ordinary shares Murray Bleach Dr. Ronald Watts Paul Meehan Nitin Singhi Mark de Kock John Mackay AM COMPANY SECRETARY 1,881,645 1,732,389 4,798,993 3,000 - 32,660 - - - - - - The following person held the position of Company Secretary at the end of the financial year: Anna Sandham (appointed 21 June 2017) – Bachelor of Economics, University of Sydney, Graduate Diploma of Applied Corporate Governance, Governance Institute of Australia, Chartered Secretary Carolyn West (resigned 21 June 2017) – Bachelor of Economics, Monash University, Certified Practising Accountant, Governance Institute of Australia (Cert) Dividends Dividends recommended: Ordinary shares Final 2017 dividend recommended to be paid 21 September 2017 Interim 2017 dividend Final 2016 dividend recommended to be paid 21 September 2016 Appointment of new Chief Executive Officer (CEO) Cents per share $ 1.40 - 3.52 363,358 - 913,585 The Board appointed Ivan Slavich as the Company’s CEO effective 3 April 2017. Ivan has substantial experience in the energy sector and has a proven track record of business turnaround with a focus on commercial outcomes and sales and marketing. Operating and Financial Review The Board presents the 2017 Operating and Financial Review, which has been designed to provide shareholders with a clear and concise overview of Energy Action’s operations, financial position, business strategies and prospects. The review also provides contextual information, including the impact of key events that have occurred during the financial year 2017 and material business risks faced by the business so that shareholders can make an informed assessment of the results and prospects of the Group. The review complements the financial report and has been prepared in accordance with the guidance set out in ASIC’s Regulatory Guide 247: Effective Disclosure in an operating and financial review. Our business model Energy Action’s core business strategy and purpose is: “To help our clients understand and take control of their energy needs.” Energy Action’s principal activities are providing integrated energy management services to a diverse range of commercial, industrial and small and medium sized business customers. Energy Action provides the following services: Help clients get the best energy deal in the current market using a range of procurement methodologies; 16 | ENERGY ACTION ANNUAL REPORT 2017 Manage client energy contracts, including account management, liaison with their retailer, validating their bill, ensuring the right tariff and helping them to understand how they are using energy; Help clients reduce their energy consumption, which is good for their bottom line and good for the environment; and, Help clients become more self-sufficient with their energy needs by installing solar or other on-site generation solutions. Initially founded in 2000 Energy Action has grown significantly and since 2009 the Company has procured more than $7 billion worth of electricity on behalf of its clients. The Company listed on the Australian Securities Exchange on 13 October 2011. 2017 financial performance The Group generated a statutory net profit after tax of $1.77 million for the year ended 30 June 2017 compared to a statutory net loss of $0.45 million for the year ended 30 June 2016. Statutory net profit after tax of $1.77 million is after deferred consideration related to the Energy Advice acquisition of $0.39 million (FY16 $3.8 million) and restructuring costs of $0.36 million (FY16 $0.1 million) after tax. All deferred consideration accounting has now ceased and no further expense will be incurred in relation to this item. Operating profit after tax for the year ended 30 June 2017 was $2.52 million, a 28% reduction from the prior year Operating Profit of $3.52 million. Despite growth in Procurement revenues and good cost control, the decline in Contract Management and Environmental Reporting (CMER) revenues resulted in a decrease in Operating Profit. This is discussed further in the Operating Review section. A reconciliation of the Group’s Statutory to Operating Net Profit and EBITDA is shown in the table below: $ NPAT 30 June 2016 30 June 2017 Variance 30 June 2017 EBITDA 30 June 2016 Variance Statutory results 1,772,970 (449,399) 494.5% 4,731,322 2,524,681 87.4% Add back Significant Items after tax: Deferred consideration* Restructuring costs** 392,811 3,850,327 -89.8% 392,811 3,850,327 -89.8% 355,408 118,579 199.7% 507,725 169,399 199.7% Operating profit after tax / Operating EBITDA 2,521,189 3,519,507 -28.4% 5,631,858 6,544,407 -13.9% * Deferred consideration relating to the acquisitions of Exergy & Energy Advice required to be expensed for accounting purposes. **Costs associated with restructuring including redundancies. Key Financial Metrics Revenue Operating EBITDA Operating EBITDA margin Operating NPAT Operating Cashflow1 Statutory NPAT Earnings per share (Operating)1 Earnings per share (Statutory) Dividend per share full year FY17 $32.96m $5.63m 17.1% $2.52m $3.6m $1.77m 9.71c 6.83c 1.40cps FY16 $33.98m $6.54m 19.3% $3.52m $6.6m $(0.45m) 13.56c -1.73c 6.32cps Variance -3.0% -13.9% -11.3% -28.4% -45.5% 494.3% -28.4% 494.5% -77.8% 1 Operating Cash Flow is defined as Operating Cash Flow before Interest, Tax and Significant Items. Although revenue declined by 3% over the year, revenue growth of 5% was achieved in the second half driven by higher 17 procurement and PAS revenues. Further details are outlined in the Operating review. Statutory NPAT increased by 494% as accounting for deferred consideration for prior period acquisitions ceased in August 2016. Operating Cash Flow was $3.6 million down 45.5% compared to the prior period and was predominantly impacted by the timing of invoicing for a number of PAS projects. Operating Cash Flow improved in the second half of with a continued focus on working capital management. Operating Cash Flow before interest, tax and significant items was 64% of Operating EBITDA. Financial position Net assets increased from $12.0 million at 30 June 2016 to $12.5 million at 30 June 2017 mainly as a result of the Statutory Profit generated of $1.77 million and the payment of dividends of $0.9 million. The Group has a five year, $12 million multi-option facility agreement that expires in October 2019. Funds can be provided under the facility as loans, bank guarantees or as letters of credit. As at 30 June 2017, the Company had utilised $9.3 million of the facility comprising a loan of $9.2 million and bank guarantees of $0.1 million. The Group had $2.1 million of cash at bank at 30 June 2017, resulting in net available funding of $4.8 million. Reconciliation of Operating Cash Flow before interest, tax and significant items Statutory operating cash flow Add back: Taxes paid Interest paid / received Cash flows related to significant items Other Operating cash flow before interest, tax and significant items Operating EBITDA Operating cash flow as % of Operating EBITDA 30 June 2017 (1,416,108) 30 June 2016 946,283 1,116,918 418,816 3,481,958 - 3,601,584 5,631,858 64% 1,093,603 299,062 4,311,399 (6,173) 6,644,174 6,544,407 102% A second half fully franked dividend of 1.40 cents per share was declared on 25 August 2017, bringing total fully franked dividends for the year to 1.40 cents per share, a decrease of 77.8% compared to FY16. The FY17 dividend reflects a payout ratio of 16.8% of the statutory net profit after tax adjusted as follows: Statutory profit Add back deferred consideration on acquisitions expensed for accounting purposes Operating review and highlights Although financial results for FY17 are disappointing, results have improved markedly in the second half of the year. Revenue growth has resumed, profits increased and cash flow also improved. Volatile energy markets and persistent high prices have created a need amongst clients for solutions to the energy challenges facing Australian businesses and Energy Action is well placed to provide these solutions. Energy Action has been actively increasing sales and marketing activities in recent months including via traditional and social media. Following these initiatives, Energy Action has recorded strong growth in Procurement and PAS in the second half, as discussed further in the following sections. 18 | ENERGY ACTION ANNUAL REPORT 2017 Revenues Revenue by Product line is set out in the table below: Revenue $ Procurement CMER PAS Other revenue Total Revenue FY17 8,079,593 16,695,501 7,788,714 393,295 FY16 7,586,787 18,059,913 7,930,792 401,216 vs FY16 $ 492,806 (1,364,412) (142,078) (7,921) 32,957,103 33,978,708 (1,021,605) vs FY16 % 6% -8% -2% -2% -3% Revenue and other income for the full year decreased by $1.02 million (or 3%) from $33.98 million to $32.96 million. However, revenue growth resumed in the second half, up 5% vs the prior corresponding period as show in the table below: Revenue $ FY17 FY16 % change FY17 FY16 % change First Half Second Half Procurement 3,791,043 4,152,725 CMER PAS Other Total 8,593,398 8,571,478 2,979,226 4,376,587 232,996 263,452 15,596,663 17,364,242 -9% 0% -32% -12% -10% The highlights per Product line as outlined below: Procurement 4,288,550 3,434,062 8,102,103 9,488,435 4,809,488 3,554,205 160,299 137,764 17,360,440 16,614,466 25% -15% 35% 16% 5% Procurement revenues accelerated markedly in the second half of the financial year resulting in full year growth of 6% over FY16. Growth in the second half year was 25% with increased auction volumes, reversing the trend of the past two years. Average $/MWh increased over 50%, also lifting growth. In addition to auctions, growth was also recorded in tariffs, tenders and structured products. Contract Management & Environmental Reporting (CMER) Overall CMER revenue declined 8% versus FY16 with a decline in the number of active core Energy Metrics / Bureau sites of 824 sites to 12,109 as at 30 June 2017. The reduction in site numbers is predominantly due to the loss of one large client and a number of smaller clients who chose not to renew their contracts. Considerable sales and marketing efforts are now being directed towards addressing the competitiveness and positioning of this service. Energy Action established an embedded network business in FY17 and currently has approximately 750 tenancies under management and is deploying additional resources to grow this business segment. Project & Advisory Services (PAS) PAS revenues declined by 2% vs FY16. However, growth accelerated to 35% in the second half. Following the decision taken mid-year to focus on the higher margin consulting business, this segment grew strongly, up 16% versus FY16. Project work declined by 26% due to the decision to focus on the higher margin consulting business and the irregular nature of project work. Operating expenditure Strong cost management actions limited cost increases to less than 1% over FY16. $15.7 million (or 68% of total operating costs) related to employee costs which were approximately $0.5 million lower than in FY16 due to lower sales commissions and share based payments expense. 19 Forward revenue Forward revenue has reduced from $66.7 million as at June 30 2016 to $54.5 million at the end of FY17. The reduction is largely in CMER due to the reduction in site numbers noted above. Traditionally, Energy Metrics was sold on a five year term. However, in recent periods, clients are looking to align the contract length of Energy Metrics contracts with their retail electricity contract, resulting in a shortening in average contract lengths. This has contributed to the lower forward revenue at year end. Operational Key Performance Indicators Future contracted revenue Procurement No. of successful AEX auctions Average AEX contract duration (months) TWhs sold via Auction (annualised equivalent) Average $/MWh Total Auction bid value1 No. of electricity tender events No. of gas tender events FY17 $54.5m 1,306 20.3 1.57 $85.52 $227m 40 67 FY16 $66.7m 1,550 22.6 1.89 $54.16 $192m 29 70 Contract Management & Energy Reporting (CMER) 30 June 2017 31 Dec 2016 % change -18% -16% -2.3 mths -17% +58% +18% +37% -4% No. -824 -317 -1,141 -3.1 months 12,109 2,203 14,312 47.0 12,933 2,520 15,453 50.1 $4.6m $6.1m -25% Sites under current contract2 Energy Metrics/ Bureau services Data only contracts (MP / MDA) Total sites under contract Average contract duration (months) Projects & Advisory Services Contracted future orders 1 Electricity component of contract only, i.e. excluding network and other charges 2 Does not include contracts which are signed, but yet to commence service delivery. 20 | ENERGY ACTION ANNUAL REPORT 2017 Business strategy and prospects for future financial years Energy Action’s purpose is to “Help our clients understand and take control of their energy needs.” Energy Action has strengths in the following areas: Procurement methodologies that cover the whole business client gas and electricity segments, from SME’s to some of the largest energy users in Australia; Supply and demand side expertise; Expert capability and knowledge; and, National reach and, market leading products and services. The current economic conditions and external environment of high energy prices is positive for Energy Action, with increasing demand from clients for solutions to mitigate the impact of high energy prices. Energy Action is unique amongst our competitors in being able to deliver not only a competive energy cost outcome to cleints, but also using our in-house expertise to assist clients to reduce consumption and thus costs. Energy Action’s immediate focus is to further improve our sales and marketing capability to deliver our market leading solutions to a broader range of clients. Focused effort is being directed towards lifting the profile of the organisation. This has resulted in a considerable increase in media coverage. The Company is also adopting a more pro-active approach on social media. The combination of these activities has resulted in an increase in in-bound inquiries in recent months. The Group remains focussed on organic growth, with the main priority being acquiring and retaining customers aligned to core activities. However, should suitable M&A opportunities aligned to the core strategy become apparent, these will be considered subject to meeting Energy Action’s financial hurdle rates. u c e Energy U s e d e R · We provide energy assessments and audits · We track performance of an asset or plant to identify improvement opportunities · We can solve your Power Factor issues · We can tune/upgrade your building for improved building performance · We help identify opportunities to reduce waste Energy Efficiency Services Energy Energy Optimisation Optimisation Lifecycle Lifecycle B u y Energy Energy Procurement · We tailor the right procurement methodology to match your needs – including multi fuels · We advise on the best timing and duration for your procurement · We create competitive tension to ensure you get the best price · We will deliver the best commercial/ contractual outcome for you · We help you manage your energy budget and costs · We save you money by ensuring your bills are correct (validate usage, tariff, late fees etc) · We make it easy for you to meet your reporting obligations internally and externally · Access your data anytime/anywhere · We can manage your Embedded Network Contract Management Onsite Generation M a nage Sup p l y C o sts T o w ard self-s u f fi c i e n cy · We design solutions to help you become more self-sufficient including Solar PV, co-gen, tri-gen etc · We are the Microgrid and Embedded Network experts · Clean Energy Council solar installation award winner 21 Risks to achieving financial outcomes in relation to future prospects Energy Action identifies major risks using an enterprise wide risk program. Energy Action faces a wide variety of risks due to the nature of the industry it which it operates. In relation to each risk, Energy Action has in place actions to reduce the likelihood of the risk eventuation and / or to reduce, as far as practicable, the adverse consequences of the risk should it occur. Many of the risks are influenced by factors external to, and beyond the control of Energy Action. Details of Energy Action’s main risks and the related mitigations are set out below: Risk Risk Description Potential consequences and mitigation strategies Regulatory risk The risk of unforeseen changes in government policy or regulation impacting ongoing operations. Failure to deliver against customer obligations. The risk that Energy Action is unable to meet its contractual obligations to customers for the delivery of services. Increasing competition The risk that Energy Action is unable to differentiate from competitors. Earnings and Cash Flow The risk of failing to maintain adequate earnings and funding to finance growth objectives and to generate adequate returns for shareholders. Occupational Health & Safety (OH&S) The risk of not operating safely and in accordance with relevant legislation leading to an employee injury. Employee engagement and performance The risk of failing to attract and retain the best talent available. Legal risk – Competition and consumer law or terms of the company’s AFS licence. Cyber Security Risk The risk of legal action following a breach of the Competition and Consumer Act or the terms of Energy Action’s Australian Financial Services Licence. Potential earnings impacts of unpredicted policy or regulatory changes to be mitigated by ongoing monitoring of the political/regulatory environment. Potential earnings and reputational impact from failure to deliver contracted services mitigated by review of service delivery capabilities, development of risk management plans and implementation of continuous improvement programmes. Potential earnings impact from lost sales countered by expanded product offerings from procurement through to energy monitoring and energy efficiency projects. Potential earnings impact mitigated by improved operational performance, timely and transparent market disclosures and maintenance of strong relationships with banks and shareholders Potential for employee injury and Company reputation addressed by OH&S systems and practices giving particular prominence to site works undertaken by the Project and Advisory Services group. To be mitigated by ongoing training and updates to OH&S policies. Impacts on performance due to unavailability of talent mitigated by staff development plans, succession plans and remuneration strategies. Likelihood of breaches reduced by training of all outward facing staff in Consumer and Competition Law requirements. AFSL Compliance system in place. Procedures in place for monitoring and reporting of breaches and potential breaches. Cyber attack or similar event involving unauthorised access to EAX’s IT systems leading to denial of systems and/or corruption of data. EAX has concluded a security review of key systems and processes. Implementation of recommendations commenced late calendar 2016 to be completed by late calendar 2017. Environmental issues The Group’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a state or territory. Energy Action Ltd is committed to environmental best practice, and to the continual improvement of its environmental performance, recognising its obligations both locally and globally, to the present and succeeding generations. Energy Action aims to lead in defining best environmental practice, and will set its own demanding standards where none exist. Energy Action is committed to implementing the requirements of all applicable Commonwealth, State and local environmental legislation and regulations and, where possible, exceeding any relevant minimum requirements. Energy Action aims to raise the environmental awareness of the public, governments, industry, and the general community by promoting the concept of ecological sustainability and by openly recognising the ongoing need to move toward an ecologically sustainable future. 22 | ENERGY ACTION ANNUAL REPORT 2017 Meetings of Directors The number of meetings of Directors (including meetings of committees of Directors) held during the year and the number of meetings attended by each Director was as follows: Board Meeting Audit & Risk Committee Remuneration Committee Nomination Committee No. Eligible to attend No. Attended No. Eligible to attend No. Attended No. Eligible to attend No. Attended No. Eligible to attend No. Attended Murray Bleach Ronald Watts Paul Meehan Nitin Singhi Mark de Kock John Mackay 11 11 11 11 11 0 11 11 10 11 11 0 4 0 4 4 0 0 INDEMNIFYING OFFICERS OR AUDITOR 4 0 3 4 0 0 3 0 3 3 3 0 3 0 3 3 3 0 1 1 1 1 0 0 1 1 1 1 0 0 During or since the end of the financial year, the Company has given an indemnity or entered into an agreement to indemnify, or paid or agreed to pay insurance premiums as follows: The Company has paid premiums to insure each of the Directors against liabilities for costs and expenses incurred by them in defending legal proceedings arising from their conduct while acting in the capacity of Director of the Company, other than conduct involving a wilful breach of duty in relation to the Company. To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young, 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 & Young during or since the financial year. PROCEEDINGS ON BEHALF OF COMPANY No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceeding during the year. NON-AUDIT SERVICES The Board of Directors, in accordance with advice from the audit and risk management committee, is satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons: all non-audit services are reviewed and approved by the audit committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and, the nature of the services provided does not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. The following fees were paid or payable to Ernst & Young for non-audit services provided during the year ended 30 June 2017: Tax compliance Other services Total $ 6,075 - 6,075 23 AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration for the year ended 30 June 2017 has been received and can be found on the following page of the financial report. 24 | ENERGY ACTION ANNUAL REPORT 2017 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 Energy Action Limited As lead auditor for the audit of Energy Action Limited for the financial year ended 30 June 2017, 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 Energy Action Limited and the entities it controlled during the financial year. Ernst & Young Ryan Fisk Partner 22 August 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation REMUNERATION REPORT (AUDITED) The directors present the Remuneration Report for Energy Action Limited (“Company”) and its consolidated entities (“Group”) for the year ended 30 June 2017. 1. REMUNERATION FRAMEWORK 1.1. Role of the Remuneration Committee The Remuneration Committee ensures that the remuneration of directors and senior executives is consistent with market practice and sufficient to ensure that the Group can attract, develop and retain the best individuals. The committee review directors’ fees, and remuneration of the CEO and senior executives against the market, Group and individual performance. The committee consisted of four non-executive directors, namely Nitin Singhi (Chairman), Murray Bleach, Mark de Kock and Paul Meehan. The committee charter is available on the Group’s website. The committee oversees governance procedures and policy on remuneration including: General remuneration practices, Performance management, Sales commission schemes, and Recruitment and termination. Through the committee, the board ensures the company’s remuneration philosophy and strategy continues to be designed to: Attract, develop and retain Board and executive talent, Create a high performance culture by driving and rewarding executives for achievement of the Group’s strategy and business objectives, and Link incentives to the creation of shareholder value. In undertaking its work, the committee seeks advice as required. 1.2. Key Management Personnel Key Management Personnel (“KMP”) are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director of the Company or subsidiaries. The following persons were KMPs during the financial year. Unless otherwise indicated, they were KMPs for the entire year. 1.2.1. Non-Executive directors Murray Bleach Dr Ronald Watts Paul Meehan Nitin Singhi Mark de Kock John Mackay AM Non-Executive Chairman Non-Executive Director (resigned effective 30 June 2017) Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director (appointed 30 June 2017) 26 | ENERGY ACTION ANNUAL REPORT 2017 1.2.2. Senior executives (not directors of the board) Scott Wooldridge Ivan Slavich Chief Executive Officer (resigned effective 18 November 2016) Chief Executive Officer (appointed 3 April 2017) Michael Fahey Chief Operating Officer & Chief Financial Officer 1.3. Remuneration Consultants Where necessary, the Board seeks advice from independent experts and advisors including remuneration consultants. Remuneration consultants are used to ensure that remuneration packages are appropriately structured and are consistent with comparable roles in the market. Remuneration consultants are approved by, and recommendations provided directly to, non-executive directors (the remuneration committee). When remuneration consultants are engaged, the remuneration committee ensures that the appropriate level of independence exists from the Group’s management. No remuneration consultants were used this year. 1.4. Long term incentive scheme Purpose and type of equity awarded The Group operates a long term incentive scheme (LTI) for its senior executives. The LTI is governed by the Performance Rights and Options Plan (PROP), under which performance rights (not options) are granted to participants. Each performance right entitles the participant to one share in Energy Action for nil consideration at the time of vesting subject to meeting the conditions outlined below. The LTI aligns key employee awards with sustainable growth in shareholder value over time. It also plays an important role in employee recruitment and retention. Number of instruments awarded As at 30 June 2017, the PROP accounted for 1.6% (FY16 3.6%) of issued securities of the Group, made up of 415,456 (FY16 928,302) performance rights. Valuation The fair value of any LTI grant is a determined by an external valuation at the time of the grant. Performance hurdles For the 2017 LTI allocation, the two performance hurdles that apply to the Performance Rights for vesting were: an Earnings Per Share (EPS) component (75% weighting) achieved by comparing the Company’s Actual Operating EPS for the year ending on the relevant test date to the Company’s Budget Operating EPS ending on the relevant test date. Fifty percent of the performance right that is subject to the relative performance hurdle vests if the actual Operating EPS meets 95% of the Budgeted Operating EPS. One hundred percent will vest if the actual performance meets or exceeds the Budgeted Operating EPS. If the actual EPS is between 95% and 100% of Budgeted Operating EPS, the percentage that will vest is determined on a linear basis. a Total Shareholder Return (TSR) component (25% weighting) achieved by comparing the Company’s total compounded return to the total compounded return of the S&P/ASX300 (Index) for the year ending on the relevant test date. Fifty percent of the performance right that is subject to the relative performance hurdle vests if the EAX total compounded return is equal to the total compounded return of the Index over the vesting period. One hundred percent will vest if EAX achieves a total compounded return of 1.10 times the total compounded return of the Index over the vesting period. If EAX’s total return is in between the total compounded return of the Index and 1.10 times the total compounded return of the Index, the percentage that will vest will be determined on a linear basis. LTI Outcomes Neither the TSR nor EPS hurdles were met for the year ending 30 June 2017. The Energy Action TSR for the period 1 July 2016 to 30 June 2017 was (36.4%) compared to the benchmark ASX300 index which returned positive 8.79%. Accordingly, no rights will vest in 2017. 27 2. REMUNERATION 2.1. Fees payable to non-executive directors Fees paid to non-executive directors reflect the demands which are made on, and the responsibilities of, directors. Directors’ fees are reviewed annually by the board. Directors who chair or are members of a committee do not receive fees for these services. The board considers the advice of independent remuneration consultants to ensure directors’ fees are appropriate and in line with the market. The chairman’s fees are determined independently to the fees of directors and are based on comparative roles in the market. The chairman is not present at any discussion relating to the determination of his remuneration. Directors’ fees are determined within an aggregate fee pool limit approved by shareholders. This is currently set at $400,000 per annum. The annual fee structure for non-executive directors for the year ended 30 June 2017, including superannuation, was as follows: Base fee Non-Executive Chairman Non-Executive Directors $ 75,000 60,000 The above fees include committee membership. The tables at the end of this remuneration report provide details of fees paid during the financial year to each non-executive director. The non-executive directors elected to voluntarily reduce their FY 2017 fees by approximately 15% compared to FY16. 2.2. Senior executives The framework for the remuneration of senior executives consists of a mix of fixed and variable remuneration. The components are: Base remuneration package and benefits, inclusive of superannuation (Total Fixed Remuneration) Short-Term Incentive – based on the Group’s, team and individual performance and results delivered against pre- determined Key Performance Indicators (KPIs) Long Term Incentive – governed by the Performance Rights and Options Plan (PROP) The combination of the above components comprises the executive’s total remuneration. The Group undertakes a market benchmarking analysis and provide recommendations. The market analysis considers the target total remuneration opportunity as well as its core components and the mix of those components. In addition, the information also contains a view on market and emerging trends in executive remuneration structures and the mix of fixed and performance based remuneration arrangements. The agreed remuneration mix for the CEO and CFO for the year ended 30 June 2017 was: Fixed Component Bonus Component LTI Component Chief Executive Officer (Scott Wooldridge) Chief Executive Officer (Ivan Slavich) Chief Financial Officer 79% 61% 72% 0% 39% 13% 21% N/A 14% Ivan Slavich commenced as CEO on 3 April 2017. His remuneration reflects the three month period to 30 June 2017. Short-Term Incentive (STI) The STI is based upon performance against the Group balanced scorecard and results from the Group’s performance review process. Mid-year and final year performance reviews measure performance against established KPI’s and criteria which are compiled in a matrix comprising Group and individual components. The specific company measures include profitability, revenue growth and customer satisfaction. Individual measures are developed having regard to functional plans and targets, aligned to the company balanced scorecard. 28 | ENERGY ACTION ANNUAL REPORT 2017 The outcome of the performance review process is a rating, applied to each of these three components for an individual, culminating in a percentage (capped at 125%). The final percentage allocated to each person is then applied to the STI potential to determine the actual STI payment to be made to an individual. The performance matrix used to determine actual STI earnings against the STI potential for the CEO and CFO is: Chief Executive Officer (Scott Wooldridge) Chief Executive Officer (Ivan Slavich) Chief Financial Officer Company 70% 70% 70% Individual 30% 30% 30% The Board is responsible for assessing the performance of the CEO. The CEO is responsible for assessing the performance of other executives. Bonus payments are made annually, where applicable, in September in relation to the preceding year. The actual percentage of STI potential and LTI potential earned by the CEO and CFO for the year ended 30 June 2017 was: Ivan Slavich Scott Wooldridge Michael Fahey % of Bonus Potential % LTI Potential 100% 0% 58% N/A 0% 0% The STI potential for each individual is set at the beginning of the year, having regard to service agreement terms and conditions, and relates to the appropriate extent of the at-risk component of the executive’s remuneration. The broader company performance criteria ensure that an overall management focus is maintained by the executives, however the inclusion of individual criteria is also necessary to ensure that each person is recognised and rewarded for their individual contribution and efforts. Payment of any individual KPI achievement is conditional on the Group meeting a minimum threshold Operating Profit. 3. SERVICE AGREEMENTS On appointment, all non-executive directors enter into an agreement which outlines obligations and minimum terms and conditions. Remuneration and other terms of employment for the CEO and other key management personnel are formalised in employment agreements. Each of these agreements specify the components of remuneration to which they are entitled and outline base salary, eligibility for incentives and other benefits including superannuation. Key terms for the CEO and CFO are as follows: Name Term of agreement Termination* Ivan Slavich On-going (no fixed term) Michael Fahey On-going (no fixed term) 3 months base salary termination by company or 3 months termination by executive 12 weeks base salary termination by company or 12 weeks termination by executive * Termination benefits are payable at the option of the company in lieu of notice, other than termination for cause. 29 4. REMUNERATION TABLES 4.1. Remuneration table for the year ended 30 June 2017 Details of remuneration of directors and KMP of the Group for the 2017 financial year are set out in the following table. The KMP are considered to be the CEO and CFO only. $ Short Term Benefits Long term Benefits Post- employment Benefits Total Share Based Payments Cash salary and fees Additional fees Cash bonus Non- monetary benefits Termination benefits Long service leave Performance rights Non-executive directors Murray Bleach Paul Meehan Ronald Watts1 Nitin Singhi Mark de Kock 68,493 54,495 55,995 54,795 54,795 Sub-total 288,573 Executives Scott Wooldridge2 131,036 Ivan Slavich3 Michael Fahey Sub-total Total Notes 74,219 313,290 518,545 807,118 - - - - - - - - - - - - - - - - - - 50,0004 35,000 85,000 85,000 - - - - - - - - - - - Super 6,507 5,206 5,320 5,205 5,205 27,443 - - - - - - 9,084 4,904 19,616 165,000 - - 33,604 165,000 61,047 165,000 - - - - - - - - - - - Total 75,000 59,701 61,315 60,000 60,000 316,016 - - - - - - 18,281 323,401 - - 129,123 367,906 18,281 820,430 18,281 1,136,446 1 Ronald Watts resigned 30 June 2017. 2 Scott Wooldridge resigned 18 November 2016. Performance rights that had met performance hurdles in previous years were vested and allocated to Mr Wooldridge upon leaving the Company. Ivan Slavich appointed 3 April 2017. Ivan Slavich bonus subject to satisfactory completion of probation in October 2017. 3 4 30 | ENERGY ACTION ANNUAL REPORT 2017 4.2 Remuneration table for the year ended 30 June 2016 Details of remuneration of directors and KMP of the Group for the 2016 financial year are set out in the following table. The KMP are considered to be the CEO and CFO only. $ Short term benefits Post employment benefits Long term benefits Long term benefits Share based payments Total Termination benefits Long service leave Performance rights Cash salary and fees Additional fees Cash bonus Non- monetary benefits Murray Bleach Paul Meehan Ronald Watts Nitin Singhi3 Valerie Duncan1 Mark de Kock2 78,153 68,493 75,730 60,721 11,416 59,931 Sub-total 354,444 Executives Scott Wooldridge 342,052 Michael Fahey Sub-total Total Notes 270,867 612,919 967,363 - - - - - - - - - - - - - - - - - - 39,225 38,000 77,225 77,225 - - - - - - - - - - - 1 Valerie Duncan resigned effective 31 August 2015. 2 Mark de Kock appointed 17 August 2015. 3 Nitin Singhi appointed 12 August 2015. Super 7,424 6,507 7,194 5,769 5,694 1,084 33,672 19,308 19,308 38,616 72,288 - - - - - - - - - - - - - - - - - - - - - - Total 85,577 75,000 82,924 66,490 17,110 61,015 388,116 - - - - - - - 54,522 455,107 26,549 354,724 81,071 809,831 81,071 1,197,947 31 Relative Proportion of Remuneration The relative proportion of remuneration of KMP that was linked to performance and those that were fixed are as follows: Name Fixed Remuneration At Risk – Cash Bonus/Other At Risk – Securities 2017 % 2016 % 2017 % 2016 % 2017 % 2016 % Murray Bleach Dr. Ronald Watts Paul Meehan Nitin Singhi Mark de Kock Executives Scott Wooldridge^ Ivan Slavich^^ Michael Fahey 100 100 100 100 100 79 61 72 100 100 100 100 100 67 - 74 - - - - - - 39 13 - - - - - 19 - 14 N/A N/A N/A N/A N/A 21 N/A 14 N/A N/A N/A N/A N/A 14 - 12 ^ Resigned as a Chief Executive Officer effective 18 November 2016. ^^ Commenced as Chief Executive Officer effective 3 April 2017. Performance holdings of key management personnel The following table lists any Performance Rights which are still to vest, or have yet to expire: Series Grant date Number Date vested and exercisable Expiry date Exercise price Value per Performance Right at grant date Series F 16 October 2015* 14,000 31 August 20171 N/A $0.00 $0.99 * Denotes Performance Rights for which no consideration is payable on exercise. 1 Performance Rights Series F which were granted to Michael Fahey. Fair value of Performance Rights The fair value of each Performance Right is estimated on the date the Performance Rights are granted using a Monte Carlo Simulation valuation model. The following assumptions were considered in the valuation of Performance Rights issued during the year ended June 30, 2017: Grant date share price ($) Exercise price ($) Dividend yield Expected volatility Risk-free interest rate Life of Option1 $1.10 $0.00 6.32c per share, growing at 10% per year 50% 1.82% 3 years 1 Performance Rights will be exercised immediately upon vesting as there is no exercise price. All Performance Rights granted for the benefit of the Chief Executive Officer have a four-year vesting period. All Performance Rights granted for the benefit of other employees vest in equal proportions on an annual basis over either two or three years. The Performance Rights are exercisable immediately at vesting date, subject to achievement of the relevant performance hurdles. 32 | ENERGY ACTION ANNUAL REPORT 2017 The following tables outline the movements in Performance Rights balances of Directors and the KMP during the 2017 financial year, and those Performance Rights which have vested at the year-end. No performance rights were issued to KMP during the 2017 financial year. Total value of performance rights issued: 30 June 2017 Balance at 1 July 2016 Granted Grant Date Options exercised Options cancelled/ forfeited/ other Options expired without exercise Net change Balance at end of period $ S. Wooldridge 174,541 M. Fahey Total 70,483 245,024 $ - - - $ $ (58,590) (115,951) - (56,683) (58,590) (172,634) $ - - - $ (174,541) (56,683) (231,224) $ - 13,800 13,800 Total number of performance rights issued: 30 June 2017 Balance at 1 July 2016 Granted Grant Date Options exercised Options cancelled/ forfeited/ other Options expired without exercise Net change Balance at end of period S. Wooldridge M. Fahey Total 80,060 70,000 150,060 No. - - - No. No. No. No. (23,810) (56,250) - (56,000) (23,810) (112,250) - - - (80,060) (56,000) (136,060) No. - 14,000 14,000 Amount vested at June 30, 2017 $ - - - Amount vested at June 30, 2017 No. - - - 33 Shareholdings of key management personnel Balance 1 July 2016 Net change Balance 30 June 2017 30 June 2017 Directors Murray Bleach Dr. Ronald Watts Paul Meehan Nitin Singhi Mark de Kock John Mackay AM Executives Ivan Slavich Michael Fahey Total 273,155 1,730,371 4,798,993 3,000 - - - - 6,805,519 1,608,490 2,018 - - - 32,660 219,214 - 1,862,382 1,881,645 1,732,389 4,798,993 3,000 - 32,660 219,214 - 8,667,901 Shareholdings of key management personnel Balance 1 July 2015 Net change Balance 30 June 2016 30 June 2016 Directors Murray Bleach Dr. Ronald Watts Paul Meehan Nitin Singhi Mark de Kock Executives Scott Wooldridge Michael Fahey Total 74,380 1,696,739 4,749,134 - - - - - 198,775 33,632 49,859 3,000 - - - - 273,155 1,730,371 4,798,993 3,000 - - - - 6,520,253 285,266 6,805,519 34 | ENERGY ACTION ANNUAL REPORT 2017 Transactions with related parties Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. Outstanding balances at year end are unsecured and interest free. No guarantees have been provided or received. The following transactions occurred with related parties: Key Management Personnel Meehan’s Solicitors Pty Ltd – Legal services rendered Derwent Executive – recruitment services rendered 4.4 Company Performance Consolidated Group 2017 $ - 84,150 2016 $ 1,668 - The Group results for the financial year ended 30 June 2017 was a Statutory Profit after tax of $1.8 million compared to a loss of $0.4 million in the prior year. Revenue & other income ($000’s) Net profit / (loss) after tax ($000’s) Operating profit after tax ($000’s) FY17 32,957 1,773 2,521 FY16 33,978 (449) 3,520 FY15 32,049 (2,148) 2,395 FY14 25,655 3,512 4,504 FY13 22,166 4,376 4,867 Earnings per share – Operating 9.71 cents 13.56 cents 9.22 cents 17.29 cents 19.48 cents Market capitalisation Closing share price $19.5m $0.75 $30.6m $1.18 $23.9m $0.92 $81.3m $3.15 $76m $3.00 This director’s report is signed in accordance with a resolution of the Board of Directors. Murray Bleach Director Dated: 22 August 2017 35 CORPORATE GOVERNANCE STATEMENT Energy Action Limited (“Energy Action”) is committed to the achievement of superior financial performance and long- term prosperity, while meeting stakeholders’ expectations of sound corporate governance practices. The Energy Action Board determines the corporate governance arrangements. As with all its business activities, Energy Action is proactive in respect of corporate governance and puts in place those arrangements which it considers are in the best interests of shareholders, and consistent with its responsibilities to other stakeholders. This statement: reports against the 3rd edition of the ASX Corporate Governance Council’s Principles and Recommendations (ASX Principles) and the practices detailed in this Statement are current as at 22 August 2017; and has been approved by the Board and is available of Energy Action’s website at http://www.energyaction.com.au/about/corporate-governance The table at the end of this statement provides cross references between the disclosures and statements in this Corporate Governance statement and the relevant ASX Principles. 1. THE BOARD OF DIRECTORS The Board operates in accordance with the general principles set out in its Charter which can be viewed in the Corporate Governance section of the Company’s website. 1.1 Role of the Board The role of the Board is to create sustainable shareholder wealth in a manner consistent with the Company’s constitution and principles of good corporate governance. The Board achieves this by representing the interests of shareholders in setting and overseeing the company’s values, direction, strategies, financial objectives and performance within a framework of prudent and effective controls for the assessment and management of risk. The Board has adopted a formal charter of Directors’ functions and matters that are delegated to management, having regard to the recommendations in the Principles. An outline of the Board’s responsibilities under the charter is set out below: Strategic Direction Oversight of the strategic direction for Energy Action and endorsing Energy Action’s strategy developed by the Chief Executive Officer (CEO); Decision making in relation to matters of a sensitive or extraordinary nature; Providing advice and counsel to management on a periodic and ad hoc basis; and, Ensuring management implement the policies and decisions of the Board. Governance Undertaking all reasonable measures to ensure best practice corporate governance; Monitoring the performance of the CEO and approving senior management remuneration policies and practices; Reporting to shareholders. Compliance Undertaking all reasonable measures to ensure that appropriate compliance frameworks and controls are in place and are operating effectively; and, Approving and monitoring the effectiveness of and compliance with policies governing the operations of Energy Action. 36 | ENERGY ACTION ANNUAL REPORT 2017 Risk Management Monitoring the integrity of internal control and reporting systems; and, Monitoring strategic risk management systems, including the review of processes for identifying areas of significant business risk, monitoring risk management policies and procedures, monitoring insurance coverage and oversight of internal controls and review of major assumptions used in the calculation of significant risk exposure. Operating Performance Approving decisions concerning the capital of Energy Action, including capital restructures; Reviewing and approving the annual operating budget, the annual and half-yearly statutory financial statements and monitoring the financial results on an on-going basis; and, Determining dividend policy and approving dividends. Operational Development The appointment of the CEO and the approval of the succession plan; and, Endorsing the appointment of the CEO’s direct reports. The Energy Action Constitution The Energy Action Constitution is Energy Action’s key governance document. The Board ensures that it and Energy Action complies with the provisions of the Constitution. Compliance with Laws Energy Action recognises that it must comply with the Corporations Act, as well as all other applicable laws. The ASX Listing Rules are also applicable. Examples of applicable areas of regulation include: AFSL Compliance; Occupational health and safety legislation; Employment related laws; Environmental protection legislation; Anti-discrimination legislation; Taxation legislation; and, Competition and Consumer Act 2010. As a company which is planning to operate in other jurisdictions, Energy Action recognises that it must ensure that it is aware of and complies with all applicable laws in those jurisdictions. At least once each year, the Directors will review this Charter and approve any required amendments including those required to comply with the ASX Principles. 1.2 Composition of the Board It is intended that the Board should comprise a majority of non-executive Directors with a broad range of skills, expertise and experience, consistent with the Energy Action Diversity & Inclusion Policy. The appointment and removal of Directors is governed by Energy Action’s Constitution. Under Energy Action’s Constitution the Board must comprise of a minimum of three (3) Directors. The Board is responsible for selecting and approving its own candidates to fill any casual vacancies that may arise on the Board with the assistance of the Nomination Committee. Directors who have been appointed to fill casual vacancies must offer themselves for re-election at the next annual general meeting of Energy Action. In addition, at each annual general meeting, at least one Director must be a candidate for re-election and no Director shall serve more than three years without being a candidate for re-election. Dr Ron Watts resigned as a Director of the Company on 30 June 2017 and John Mackay AM was appointed as an independent Non-executive Director on 30 June 2017. Profiles of these Directors, including details of their skills, experience and expertise can be found in the Directors’ report. 37 The composition post the above Director changes is a five member Board comprising 5 non-executive Directors of which 2 are independent (Nitin Singhi and John Mackay). This is in line with the Board seeking to sustain and improve shareholder value by adding independent Directors progressively. The Company Secretary is accountable directly to the Board, through the Chairman, on all matters to do with the proper functioning of the Board. 1.3 Independence The independence of Directors is determined by objective criteria acknowledged as being desirable to protect investor interests and optimise the financial performance and returns to investors. The Board regularly assesses the independence of its Directors. In determining the status of a Director, Energy Action considers that a Director is independent when he or she is independent of management and free of any business or other relationship that could materially interfere with, or could reasonably be perceived to interfere with the exercise of unfettered and independent judgement. Energy Action’s criteria for assessing independence is in line with standards set by the Principles. The Board requires each Director to disclose any new information, matter or relationship which could, or could reasonably be perceived to, impair the Director’s independence, as soon as these come to light. All material personal interests are verified at each Board meeting under a standing agenda item. Mr Nitin Singhi and Mr John Mackay AM are considered to be independent directors under the guidelines in ASX Principle 2. Mr Paul Meehan is not regarded as independent under the guidelines in ASX Principle 2 nor the criteria adopted by the Company, as he is a substantial shareholder and has been a director of the company since inception in 2003. During the financial year, as announced to the ASX, Mr Murray Bleach ceased to be independent under the guidelines in ASX Principle 2 and the criteria adopted by the Company, as he became a substantial shareholder. Mr Mark de Kock is not regarded as independent under the guidelines in ASX Principle 2 and the criteria adopted by the Company, as he is a Nominee Director whose appointment was recommended by one of Energy Action’s major shareholders, Microequities Asset Management. Prior to his appointment, the Board considered Mr de Kock’s experience and believe he can contribute to the company’s strategy and growth. Accordingly the Company does not meet Recommendations 2.4 the ASX Principles, insofar as the majority of the Board are not independent directors. Despite this, the Board considers that its composition is appropriate for the size and scale of the Company and its activities, and that the Company benefits from the skills, knowledge and experience of Mr Bleach, Mr Meehan, and Mr de Kock. Mr Bleach and Mr Meehan also consider that they bring quality independent judgement to bear on all relevant issues falling within the scope of non-executive directors, notwithstanding their substantial interests in shares of the Company. Mr de Kock is subject to the same duty of care and diligence as other non-executive directors to discharge his duties in good faith in the proper interests of the company as a whole and for a proper purpose. Mr de Kock is required not to place himself in a position where a potential conflict of interest could occur. All directors are required to excuse themselves from any discussions in which a potential conflict of interest is perceived. The Chairman and Independent Chairman of the Audit and Risk Management Committee will resolve and make the final decision on any conflict of interest matter. The Company does not meet Recommendation 2.5 of the ASX Principles as the Chair is not an independent Director. Despite this, the Board considers that there is an appropriate culture of openness and constructive challenge that allows for a diversity of views to be considered by the Board. The Board considers Nitin Singhi to be the senior independent Director who fulfils the role of chair whenever the chair is conflicted. The Board also has procedures in place to ensure it operates independently of management. Non-executive Directors meet together periodically in the absence of executives of the company to discuss the operation of the Board and a range of other matters. The Board believes the separation of the roles of Chairman and Chief Executive Officer and the composition of the Board comprising 2 independent and 3 non-independent Directors is appropriate. Directors’ shareholdings are set out in the Remuneration Report. 38 | ENERGY ACTION ANNUAL REPORT 2017 1.4 Term of office and re-election of Directors At appointment, each non-executive Director of Energy Action has received a letter of appointment which details the key terms of their appointment, including their powers, rights and obligations. Energy Action’s senior executives, including the CEO, have formalised job descriptions and, as with all Energy Action employees, letters of appointment. The Board has established a Nomination Committee which as at 30 June 2017 consisted of an independent Chairman, Nitin Singhi, Murray Bleach and Paul Meehan. Dr Ronald Watts was a member of this Committee prior to his resignation on 30 June 2017. John Mackay subsequently replaced Dr Ronald Watts as a member of this Committee. A copy of the Nomination Committee Charter which sets out the roles and responsibilities of the Committee is available on the company’s website. In making recommendations to the Board regarding the appointment of Directors, the Nomination Committee assesses the appropriate mix of skills, experience and expertise required by the Board and assesses the extent to which the required skills and experience are represented on the Board. When a vacancy exists, the Nomination Committee determines the selection criteria based on the skills deemed necessary. The Committee identifies potential candidates, and if appropriate, will utilise an external consultant to assist in identifying potential candidates. The Board then appoints the most suitable candidate. The company will undertake appropriate background checks and screening checks prior to nominating a Director for election by shareholders and provides to shareholders all material information in its possession concerning the Director standing for election or re-election in the explanatory notes to accompany the notice of meeting. New Directors will participate in an induction program to assist them to understand Energy Action’s business and the particular issues it faces. All Directors are elected by shareholders at the Annual General Meeting following their appointment and thereafter subject to re-election at least once every three years. 1.5 Access to information and independent advice The Board collectively has the right to seek independent professional advice as it sees fit. Each Director individually has the right to seek independent professional advice, subject to the approval of the Chairman. All Directors have direct access to the Company Secretary. Directors also have complete access to the senior management team. In addition to regular reports by senior management to the Board meetings, Directors may seek briefings from senior management on specific matters and are entitled to request additional information at any time when they consider it appropriate. 2. BOARD COMMITTEES The Board generally operates as a whole across the range of its responsibilities but, to increase its effectiveness, uses committees where closer attention to particular matters is required. The role of the Board Committees is to make recommendations to the Board on matters set out in each Committee’s Charter. The Charters for each of the Audit & Risk Management, Remuneration and Nomination Committees are available on the corporate governance section of the Company’s website. The Audit & Risk Management Committee (ARMC) and the Remuneration & Nomination Committees composition as at 30 June 2017 are set out below. Details regarding the number of Board meetings and Committee meetings held during the year and the attendance of each member will be set out in the 2017 Annual Report. 2.1 Audit & Risk Management Committee Members The Audit & Risk Management Committee as at 30 June 2017 comprises Nitin Singhi (independent non-executive Director), Murray Bleach (non-executive Director) and Paul Meehan (non-executive Director). John Mackay AM (independent non- executive Director) joined the Committee in July 2017 following his appointment as a Director. Nitin Singhi is Chairman of the Committee. The Board aims to progressively appoint independent Directors onto the Committee. 39 Role The ARMC’s role is to assist the Board in fulfilling its responsibility for overseeing the quality and integrity of the accounting, audit, financial and risk management practices of Energy Action. Responsibilities The ARMC’s responsibilities include:- Review the internal control and compliance systems of Energy Action; Monitor the integrity of the financial statements of Energy Action; Consider significant financial reporting issues and judgements made in connection with Energy Action’s financial statements; Monitor and review the performance of the external audit function and make recommendations to the Board; Monitor compliance by the Company with legal and regulatory requirements; and, Where appropriate, and at least twice a year, meet privately with the external auditor to discuss any matters that the Committee or the External Auditor believe should be discussed privately. A copy of the ARMC Charter and Risk Management and Audit Policy is available on the Company’s website. Composition The Committee is chaired by an independent non-executive Director and currently comprises four non-executive Directors, two of whom are independent Directors and financially literate. The Chairman of the Board is not permitted to chair the committee. Mr Nitin Singhi is Chairman of the committee. The Committee met on four (4) occasions during the year to 30 June 2017. Please refer to the Directors’ Report for more information on members, including attendance at committee meetings. Consultation The CEO and Chief Financial Officer (CFO) are invited to attend all committee meetings. Other members of management may also attend by invitation. The committee has access to financial and legal advisers as it considers appropriate. The committee also meets with the external auditor to ensure the committee can be satisfied that the auditors have had the full cooperation of management in conducting the audit functions and to give the auditor the opportunity to raise any matters of concern. The external auditor must monitor its independence and report to the committee every six months that it has remained independent. External Auditor The external auditor is appointed by the Board and approved by shareholders in accordance with the requirements of the Corporations Act. The ARMC is responsible for reviewing the terms of appointment of the external auditor and for making recommendations to the Board regarding the appointment of the external auditor. It is the Company’s policy to require that the external audit partner be rotated within 5 years from the date of appointment. Significant permissible non- audit assignments awarded to the external auditor must be approved in advance by the ARMC (or its chairman between meetings). All non-audit assignments are to be reported to the ARMC every six months. The Board and the ARMC are of the view that, at the present time, Ernst & Young is best placed to provide the Company’s audit services. Ernst & Young is a top tier professional services firm. It has provided audit services to the Group since its listing and is familiar with its structure and assets. The external auditor is required to be independent from the Company and Energy Action. Ernst & Young meets this requirement. The external auditor will attend Energy Action’s annual meeting and will be available to answer shareholder questions on the conduct of the audit, and the preparation and content of the auditor’s report. 2.2 Remuneration Committee Members The Remuneration Committee, as at 30 June 2017 comprises four non-executive Directors being Nitin Singhi (independent non-executive Chairman), Murray Bleach (non-executive Director), Paul Meehan (non-executive Director) and Mark de Kock (non-executive Director). John Mackay AM (independent non-executive director) joined the Committee in July 2017 following his appointment as a Director and was appointed Chairman to replace Nitin Singhi. Nitin Singhi remains a member of the Committee. The Board aims to progressively appoint independent Directors onto the Committee. 40 | ENERGY ACTION ANNUAL REPORT 2017 Role The role of the Committee is to oversee remuneration matters to ensure they are in line with strategic goals and enable the Company to attract and retain high calibre executives and Directors who will create value for shareholders. Responsibilities The responsibilities of the Committee in respect of remuneration include: Ensure Directors and executives are fairly and responsibly remunerated having regard to the performance of the Company, the performance of the executives and the general remuneration environment; Assisting the Board in determining an appropriate remuneration framework for senior management and remuneration, recruitment, retention and termination policies; Making recommendations to the Board on the Chief Executive Officer’s remuneration, (including short and long term incentive plans and performance targets); and, Liaising with external advisors on remuneration-related matters, if and when external remuneration advice is needed. For further information in regards to the Company’s remuneration framework, please refer to the Remuneration Report, including a detailed description of the structure of non-executive Directors’ remuneration and senior executives’ remuneration. Composition The Committee is chaired by an independent non-executive Director and currently comprises five non-executive Directors, two of whom are independent Directors and financially literate. The Chairman of the Board is not permitted to chair the committee. Mr John Mackay was appointed as a member and as Chairman of the committee effective 19 July 2017. The Committee met on three occasions during the year to 30 June 2017. Please refer to the Directors’ Report for more information on members, including attendance at committee meetings Consultation The committee may obtain information from, and consult with, management and external advisers, as it considers appropriate. Charter The Remuneration Committee’s charter which sets out further details on the role and duties of the committee is available in the corporate governance section of the Company’s website. 2.3 Nomination Committee Members The Nomination Committee, as at 30 June 2017 comprised three non-executive Directors being Nitin Singhi (independent non-executive Chairman), Murray Bleach (non-executive director) and Paul Meehan (non-executive director). Dr Ronald Watts resigned as a member of this committee on 30 June 2017. John Mackay AM joined the committee in July 2017 following his appointment as a Director. Nitin Singhi is Chairman of the committee. The Board aims to progressively appoint independent Directors onto the committee. Role The role of the committee is to oversee matters and policies to ensure succession planning, recruitment, appointment and remuneration of non-executive Directors. The Committee met once during the financial year. 41 Responsibilities The responsibilities of the committee in respect of Nomination include: Review and recommend to the Board the size and composition of the Board; including review of Board succession plans and the succession of the Chairman and CEO; Review and recommend to the Board the criteria for Board membership, including assessment of necessary and desirable competencies of Board members; Review Board membership and make recommendations to the Board regarding its membership; and, Assist the Board as required in relation to the performance evaluation of the Board, its committees and individual Directors, and in developing and implementing plans for identifying, assessing and enhancing Director competencies. Composition The committee is chaired by an independent non-executive Director and currently comprises four non-executive directors, 2 of whom are independent directors. Please refer to the Directors’ Report for more information on members, including attendance at committee meetings. Consultation The committee may obtain information from, and consult with, management and external advisers, as it considers appropriate. Charter The Nomination Committee’s charter which sets out further details on the role and duties of the committee is available in the corporate governance section of the Group’s website. 3. PERFORMANCE EVALUATION AND REMUNERATION 3.1 Performance Evaluation The Nominations Committee is responsible for determining the process for evaluating Board Performance. Evaluations are normally undertaken annually and the process led by the Chairman. The evaluation was undertaken in September 2016. The annual performance review involves all Directors completing a questionnaire including allowance for additional comments or raising any issues relating to the Board’s or a committee’s operation. The results of the review will be compiled by the Chairman and discussed with Board members as a whole at an appropriate Board meeting. The purpose of the review is to assess the strengths and weakness of the Board and Committees, and identify areas that might be improved. The findings of the performance review are considered by the Board and continue to be taken into account in identifying and nominating new candidates for appointment as Director, and in planning and conducting Board and committee matters. Directors are able to raise concerns regarding an individual Director’s performance with the Chairman at any time during the year. The performance of the Chief Executive Officer (CEO) is reviewed by the Board on a periodic basis. The Chairman co- ordinates the comments of all directors to provide a written assessment to the CEO. This is supported by half year verbal reviews by the Chairman. The performance of the Company’s senior executives is reviewed by the Chief Executive Officer as part of the annual remuneration review process and reported to the Remuneration Committee. The reviews usually take place in July/ August of each year. Further details regarding the remuneration review process are set out in the Remuneration Report. 42 | ENERGY ACTION ANNUAL REPORT 2017 3.2 Director and Executive Remuneration Remuneration levels are competitively set to attract and retain appropriately qualified and experienced personnel. Performance, duties and responsibilities, market comparison and independent advice are all considered as part of the remuneration process. The total remuneration paid to Directors and key management personnel for the year ended 30 June 2017 is set out in the Remuneration Report. Directors’ fees are reviewed annually and are benchmarked against fees paid to Directors of similar organisations. Non- executive Directors are not provided with retirement benefits other than statutory superannuation and do not participate in employee incentive schemes or bonus payments. Executive Directors’, as well as senior executives’ remuneration packages comprise salary and short-term incentives (i.e. bonus). To ensure that Energy Action’s senior executives properly perform their duties, the following procedures are in place: Performance is formally assessed twice each year as part of Energy Action’s formal employee performance review process; the full year achievement review takes place in July at the end of the financial year; All employees were assessed in terms of their achievement of agreed KPI’s (both financial and non-financial) for the period; There is a strong link between the outcomes of this performance review process and the subsequent remuneration review as outlined in the Remuneration Report; and, Executives are provided with access to continuing education to update and enhance their skills and knowledge. 4. RISK MANAGEMENT AND INTERNAL CONTROLS 4.1 Risk Management Framework Energy Action has a formalised risk management framework. The identification and effective management of risk, including calculated risk taking is viewed as an essential part of the Company’s approach to creating long term shareholder value. Compliance with risk management policies is monitored by the ARMC. The Risk Management and Audit Policy is included on the Groups website. As part of its risk monitoring duties, the ARMC is required to: Oversee and approve risk management, internal compliance and control policies and procedures of the Company; Oversee the design and implementation of the risk management and internal control systems Regularly monitor risk management reports provided by management; and, Assess at regular intervals whether Energy Action’s internal financial control systems, risk management policies and risk management systems are adequate. 4.2 Internal controls framework Energy Action has a robust risk management framework in place for identifying, assessing, monitoring and managing its risks. A key component of the framework is a periodical Operational Risk Self-Assessment (ORSA) whereby management workshop key risks and controls in place and their effectiveness. Findings resulting from this assessment are reported to the ARMC, which in turn reports on this to the Board. During the year, management has reported to the ARMC as to the manner in which it manages its material risks, the effectiveness of the framework and the results of the annual ORSA. Considerable importance is placed on maintaining a strong control environment through an organisation structure with clearly drawn lines of accountability and authority. At this point in time, the Board is of the opinion that the structure of the Company does not warrant an internal audit function. This policy is subject to ongoing review. The Board of Energy Action has received assurance from the CEO and CFO that their confirmation given to the Board in respect of the integrity of financial statements is founded on a sound system of risk management and internal control which implements the policies adopted by the Board and that the system is operating in all material respects in relation to financial reporting risks. 43 5. ENERGY ACTION GOVERNANCE POLICIES 5.1 Integrity, ethical standards and compliance Energy Action is committed to being a good corporate citizen and has a robust framework of policies to achieve this. These include: The practices necessary to maintain confidence in the company’s integrity; The practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders; and, The responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Energy Action has established a Code of Conduct for its Directors and employees which forms the basis for ethical behaviour and is the framework that provides the foundation for maintaining and enhancing the Company’s reputation. The objective of the Code is to ensure that all stakeholders and the broader community can be confident that the Company conducts its affairs honestly in accordance with ethical values and practices. The Code sets the standards for dealing ethically with employees, investors, customers, regulatory bodies and the financial and wider community, and the responsibility and accountability of individuals for reporting and investigating reports of unethical behaviour. A full copy of the Code of Conduct is posted on the Corporate Governance section of the Group’s website. Directors are provided with Board reports in advance of Board meetings which contain sufficient information to enable informed discussion of all agenda items. The Board has the responsibility for the integrity of Energy Action’s financial reporting. To assist the Board in fulfilling its responsibility, the processes discussed below have been adopted with a view to ensuring that the Company’s financial reporting is a truthful and factual presentation of Energy Action’s financial performance and position. 5.2 Dealing in Securities The Company has in place a formal Security Trading Policy which regulates the manner in which Directors and staff involved in the management of the Company can deal in Company securities. It requires that they conduct their personal investment activities in a manner that is lawful and avoids conflicts between their own interests and those of the Company and contains all contents suggested in the ASX Corporate Governance Principles and Recommendations. The policy specifies trading blackouts as the periods during which trading securities cannot occur. Trading is always prohibited if the relevant person is in possession of non-public price sensitive information regarding the Company. A copy of the current Security Trading Policy is available on the Company’s website. 5.3 Diversity & Inclusion The Company has in place the Diversity & Inclusion Policy. The Policy includes requirements for the Board to establish measurable objectives for achieving gender diversity and for the Board to assess annually both the objectives and progress in achieving them. The objectives set by the Board, which are included in the Policy, are as follows: Selecting and appointing Directors from a diverse pool of talent by developing an appointment process for future Directors that takes diversity of background into account, in addition to previous Board and leadership experience and experience in a specified field. Considering the Diversity & Inclusion Policy when assessing, selecting and making recommendations to the Board on senior executive appointments. In considering these recommendations the Board is also required to take into account the objectives of this policy. Implementing policies and training which address impediments to diversity in the workplace. Implementing initiatives designed to identify, support and develop talented individuals with leadership potential to prepare them for senior management and Board positions. For example, in the case of gender diversity, such initiatives include: – mentoring programs; and, – supporting the promotion of talented women into management positions. 44 | ENERGY ACTION ANNUAL REPORT 2017 Networking opportunities. Identifying ways to entrench diversity as a cultural priority across the group. Setting targets for women’s participation in the Board, senior management and across all employees and report such in the Annual Report. Energy Action strives for diversity and respects the unique contributions that may be made by employees with diverse backgrounds, experiences and perspectives. Energy Action strongly believes diversity allows the provision of exceptional customer service to an equally diverse community. In order to attract and retain a diverse workforce and, in turn, a broad and varied customer base, Energy Action is committed to providing an environment in which all employees are treated with fairness and respect, and have equal access to opportunities available in the workplace. Energy Action’s approach is about being flexible in the way we think, act and work. It is part of our on-going commitment to develop an inclusive workforce by recognising and accommodating individual circumstances and our work commitments. Diversity in general: Energy Action currently has specific flexible working arrangements with 13 employees representing 9.5 % of total staff (male & female employees). Energy Action has in its employment staff from 19 different cultural backgrounds. The Board set the following measurable objectives for achieving diversity for the reporting year: Ensuring the Remuneration Committee actively monitors all aspects of diversity at each meeting and where elements of diversity need improvement that improvement targets are met. Ensure that our merit-based system remains the only mechanism adopted when employees, managers, senior managers, national managers, senior executives and Directors are appointed. Ensure that applicants continue to be selected from diverse candidate pools and continue to be interviewed by a diverse selection interview panel. All of the above items were successfully in operation during the year ended 30 June 2017. As at 30 June 2017, there were no women on the Board or Executive Committee, 38% of management positions were filled by women and 44% of employees are female. A copy of the Code of Conduct, Trading Policy and Diversity & Inclusion Policy is available on the Company’s Website. 5.4 Health, safety and environment The Company has continued its emphasis on health and safety in the workplace with the aim of ensuring that people achieve outcomes in a safe manner, thereby contributing to operational effectiveness and business sustainability. The Company has an occupational health and safety policy and a new management system in place. MANGO, a web based safety management tool for housing safety information, record keeping and incident reporting was introduced across the PAS division. The Company’s safety performance is reported regularly to the Board to assist the Board in monitoring compliance with the Company’s policy and the relevant regulatory requirements. During FY2017 there were no reported environmental incidents and no Lost Time Injuries. 45 5.5 Continuous disclosure and communications with shareholders The Company is committed to providing relevant and timely information to its shareholders and to the broader market, in accordance with its obligations under the ASX continuous disclosure regime. The Board has a Disclosure Policy, details of which are accessible in the Corporate Governance section on the Company’s website. The policy includes procedures for dealing with potentially price-sensitive information which includes referral to the CEO, CFO and Company Secretary and sometimes the Board for a determination as to disclosure required. The ASX liaison person is the Company Secretary of Energy Action. Energy Action has adopted a Communication Policy. The cornerstone of this policy is the delivery of timely and relevant information as described below: Investors receive an annual report and updates which keep them informed of Energy Action’s performance and operations. Shareholders are able to provide their email address to Energy Action’s share registry, Link Market Services Limited to enable all communications from the company to be received electronically. Contact details for Link Market Services Limited are on the company’s website. After lodging market-sensitive information with ASX, Energy Action’s policy is to place the information on its website, including annual and half year results announcements and investor presentations as soon as practically possible. Energy Action’s website (energyaction.com.au) contains recent announcements, presentations and past and current reports to shareholders. Domestic investor road shows are held periodically throughout Australia. Where they contain new information, investor and road show presentations are released to the ASX and included on the Group’s website. For formal meetings, an explanatory memorandum on the resolutions is included with the notice of meeting. Presentations by the chairman and CEO are webcast. Full copies of notices of meetings are placed on the Energy Action website. Unless specifically stated in the notice of meeting, all holders of fully paid securities are eligible to vote on all resolutions. In the event that shareholders cannot attend formal meetings, they are able to lodge a proxy on line in accordance with the Corporations Act. 46 | ENERGY ACTION ANNUAL REPORT 2017 ASX Corporate Governance Council’s Principles and Recommendations ASX Principle Reference^ Compliance PRINCIPLE 1 – LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT 1.1 A listed entity should disclose: 1.1 Comply (a) the respective roles and responsibilities of its Board and management; and, (b) those matters expressly reserved to the Board and those delegated to management. 1.2 A listed entity should: 1.4 Comply (a) undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a Director; and, (b) provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a Director. A listed entity should have a written agreement with each Director and senior executive setting out the terms of their appointment. The Company Secretary of a listed entity should be accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board. 1.3 1.4 1.5 A listed entity should: 1.4 and 2017 Remuneration Report 1.2 5.3 Comply Comply Comply (a) have a diversity policy which includes requirements for the Board or a relevant committee of the Board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; (b) disclose that policy or a summary of it; and, (c) disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the Board or a relevant Committee of the Board in accordance with the entity’s diversity policy and its progress towards achieving them, and either: (1) the respective proportions of men and women on the Board, in senior executive positions and across the whole organisation (including how the entity has defined “senior executive” for these purposes); or (2) if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act 1.6 A listed entity should: 3.1 Comply (a) have and disclose a process for periodically evaluating the performance of the Board, its committees and individual Directors; and (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process 1.7 A listed entity should: 3.2 Comply (a) have and disclose a process for periodically evaluating the performance of its senior executives; and, (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. 47 ASX Principle Reference^ Compliance PRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE 2.1 The Board of a listed entity should: 2.3 (a) have a nomination committee which: (1) has at least three members, a majority of whom are independent Directors; and (2) is chaired by an independent Director, and disclose: (3) the charter of the committee (4) the members of the committee; and (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings 2.2 A listed entity should have and disclose a Board skills matrix setting out the mix of skills and diversity that the Board currently has or is looking to achieve in its membership 2.3 A listed entity should disclose: (a) the names of the Directors considered by the Board to be independent Directors; (b) if a Director has an interest, position, association or relationship of the type described in Box 2.3 but the Board is of the opinion that it does not compromise the independence of the Director, the nature of the interest, position, association or relationship in question and an explanation of why the Board is of that opinion; and (c) the length of service of each Director 2.4 A majority of the Board of a listed entity should be independent Directors. 2.5 2.6 The chair of the Board of a listed entity should be an independent Director and, in particular, should not be the same person as the CEO of the entity. A listed entity should have a program for inducting new Directors and provide appropriate professional development opportunities for Directors to develop and maintain the skills and knowledge needed to perform their role as Directors effectively. 1.2 1.2 1.3 1.2 1.4 As at 30 June 2017, do not comply as the Committee has three Directors, one of whom is an independent Director. Another independent Director was appointed to this committee in July 2017. Comply Details disclosed in the 2017 Annual Report As at 30 June 2017, do not comply as the Board has five Directors, two of whom are independent Directors. As at 30 June 2017 do not comply as the chair of the Board is not an independent Director. Comply PRINCIPLE 3 – ACT ETHICALLY AND RESPONSIBLY 3.1 A listed entity should: 5.1 Comply (a) have a code of conduct for its Directors, senior executives and employees; and (b) disclose that code or a summary of it. 48 | ENERGY ACTION ANNUAL REPORT 2017 ASX Principle Reference^ Compliance PRINCIPLE 4 – SAFEGUARD INTEGRITY IN CORPORATE REPORTING 4.1 The Board of a listed entity should: (a) have an Audit Committee which: (1) has at least three members, all of whom are non-executive Directors and a majority of whom are independent Directors; and (2) is chaired by an independent Director, who is not the chair of the Board, and disclose: (3) the charter of the committee; (4) the relevant qualifications and experience of the members of the committee; and (5) in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings. 4.2 The Board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. 4.3 A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. 2.1 As at 30 June 2017, do not comply with 4.1(a) (1) as the Committee comprised of one independent and three non-independent Directors. Another independent director was appointed to this committee and a non-independent director resigned from this committee in July 2017. 4.2 Comply 2.1 Comply PRINCIPLE 5 – MAKE TIMELY AND BALANCED DISCLOSURE 5.1 A listed entity should: 5.5 Comply (a) have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and, (b) disclose that policy or a summary of it. PRINCIPLE 6 – RESPECT THE RIGHTS OF SECURITY HOLDERS 6.1 6.2 6.3 6.4 A listed entity should provide information about itself and its governance to investors via its website. A listed entity should design and implement an investor relations program to facilitate effective two-way communication with investors. A listed entity should disclose the policies and processes it has in place to facilitate and encourage participation at meetings of security holders. A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically. 5.5 5.5 5.5 5.5 Comply Comply Comply Comply 49 ASX Principle Reference^ Compliance PRINCIPLE 7 – RECOGNISE AND MANAGE RISK 7.1 The Board of a listed entity should: 4.1, 4.2 (a) have a committee or committees to oversee risk, each of which: (1) has at least three members, a majority of whom are independent Directors; and (2) is chaired by an independent Director, and disclose: (3) the charter of the committee; (4) the members of the committee; and As at 30 June 2017, do not comply with 7.1(a) (1) as the Committee comprised of one independent and three non-independent Directors. Another independent director was appointed to this committee and a non-independent director resigned from this committee in July 2017. (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; 7.2 The Board or a committee of the Board should: 4.2 Comply (a) review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound; and (b) disclose, in relation to each reporting period, whether such a review has taken place. 7.3 A listed entity should disclose: 4.2 (a) if it has an internal audit function, how the function is structured and what role it performs; or (b) if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes. Comply – The Company’s internal audit function is carried out by the Company’s Audit and Risk Management Committee. 7.4 A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. 4.1, 4.2 Comply PRINCIPLE 8 – REMUNERATE FAIRLY AND RESPONSIBLY 8.1 The Board of a listed entity should: 2.2 (a) have a remuneration committee which: (1) has at least three members, a majority of whom are independent Directors; and (2) is chaired by an independent Director, and disclose: (3) the charter of the committee; (4) the members of the committee; and As at 30 June 2017, do not comply for 8.1(a) (1) as the Remuneration Committee comprised one independent and three non-independent Directors. An independent Director was appointed as a member and Chair of this committee in July 2017. (5) as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings. 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of non-executive Directors and the remuneration of executive Directors and other senior executives. 2.2 Comply 50 | ENERGY ACTION ANNUAL REPORT 2017 ASX Principle 8.3 A listed entity which has an equity-based remuneration scheme should: (a) have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and (b) disclose that policy or a summary of it. Reference^ Compliance 5.2 and 2016 Remuneration Report Comply All references are to sections of this Corporate Governance Statement unless otherwise stated 51 FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 30 June 2017 Note Consolidated Group 2017 $ 2016 $ 5&6 32,563,808 33,577,492 6 6 4 6 6 6 6 6 6 7 8 8 393,295 401,216 32,957,103 33,978,708 (5,931,570) (6,172,886) (15,665,277) (16,193,083) (392,811) (3,850,327) (507,725) (169,399) (1,176,810) (1,141,438) (675,694) (567,281) (3,875,894) (3,359,613) 4,731,322 2,524,681 (1,510,210) (1,319,921) 3,221,112 1,204,760 (539,378) (462,725) 2,681,734 742,035 (908,764) (1,191,434) 1,772,970 (449,399) (3,307) (18,889) 1,769,666 (468,288) Cents 6.83 6.76 Cents (1.73) (1.73) Revenue Other income Total Revenue Cost of goods and services sold Employee benefits expense Deferred consideration on acquisitions Acquisition, transaction and restructuring related costs Rental expense Travel costs Administration expenses EBITDA* Depreciation and amortisation expense EBIT** Financing costs Profit before income tax Income tax expense Profit / (loss) for the period attributable to owners of the parent entity Other comprehensive profit / (loss) net of income tax that may be reclassified subsequently to profit and loss Exchange differences on translation of foreign operations Total comprehensive profit / (loss) for the period attributable to owners of the parent entity Gain / (loss) per share: Basic gain/(loss) per share for the year attributable to ordinary equity holders of the parent Diluted gain/(loss) per share for the year attributable to ordinary equity holders of the parent EBITDA = Earnings before Interest, Tax, Depreciation & Amortisation. * ** EBIT = Earnings before Interest & Tax. 52 | ENERGY ACTION ANNUAL REPORT 2017 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2017 ASSETS CURRENT ASSETS Cash and cash equivalents Trade and other receivables Current tax asset Other assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Trade and other receivables Property, plant and equipment Other assets Other Intangible assets Goodwill Customer relationships TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Current tax liabilities Short-term provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Other long-term provisions Loans and Borrowings Deferred tax liability TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Share based payments reserve Retained earnings Interest rate hedging reserve Foreign currency translation reserve TOTAL EQUITY The accompanying notes form part of these financial statements. Note Consolidated Group 2017 $ 2016 $ 10 11 16 14 11 12 14 13 13 13 15 16 17 17 18 16 19b 2,105,780 5,992,413 877 2,221,521 10,320,591 91,358 744,273 549,478 3,312,004 9,944,796 1,406,174 16,048,083 26,368,674 1,207,046 4,969,770 - 1,468,736 7,645,552 85,509 801,237 868,944 2,805,478 9,944,796 1,645,257 16,151,221 23,796,773 2,717,042 5,567,651 - 47,052 1,374,146 4,091,188 1,312,597 6,927,300 320,180 9,015,005 372,339 9,707,524 13,798,712 12,569,962 6,537,906 262,768 5,830,890 (24,165) (37,437) 357,270 3,973,358 532,566 4,863,194 11,790,494 12,006,279 6,537,906 530,998 4,971,505 - (34,130) 12,569,962 12,006,279 53 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2017 Consolidated Group Note Ordinary Issued Share Capital Share Based Payments Reserve Retained Earnings Foreign currency translation reserve Interest Swap Reserve Total $ - - - - - - - - - $ 13,498,553 (449,399) (18,889) (468,288) (22,156) (1,001,830) 12,006,279 1,772,970 (3,307) Balance at 30 June 2015 6,537,906 553,154 6,422,734 (15,241) $ $ $ $ Loss attributable to owners of parent entity Foreign currency translation reserve Total comprehensive income Transaction with owners Share based payments 19 Dividends paid or provided for - - - - - - - - (449,399) - - (18,889) (449,399) (18,889) (22,156) - - (1,001,830) - - Balance at 30 June 2016 6,537,906 530,998 4,971,505 (34,130) Loss attributable to owners of parent entity Foreign currency translation reserve Interest rate hedging reserve Total comprehensive income Transaction with owners Share based payments Dividends paid or provided for 19 9 - - - - - - - - - - 1,772,970 - (3,307) - - - (24,165) (24,165) 1,772,970 (3,307) (24,165) 1,745,498 (268,230) - - (913,585) - - - - (268,230) (913,585) Balance at 30 June 2017 6,537,906 262,768 5,830,890 (37,437) (24,165) 12,569,962 The accompanying notes form part of these financial statements. 54 | ENERGY ACTION ANNUAL REPORT 2017 CONSOLIDATED STATEMENT OF CASH FLOW For the year ended 30 June 2017 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Note Consolidated Group 2017 $ 2016 $ 35,163,840 36,388,976 (31,502,849) (29,738,629) Payments for deferred consideration 4 (3,142,000) (4,142,000) Restructuring costs Interest received Share based payments share purchase Interest paid Income tax paid Net cash (used in) / provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment Software development costs Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid by parent entity Bank loan Bank guarantee fees Net cash provided by/ (used in) financing activities Net (decrease)/increase in cash held Cash (including restricted cash) at beginning of financial year Cash (including restricted cash) at end of financial year The accompanying notes form part of these financial statements. (339,958) (169,399) 8,557 39,053 (59,407) (427,373) - (338,115) (1,116,918) (1,093,603) (1,416,108) 946,283 (335,927) (296,453) (1,385,646) (1,331,243) (1,721,573) (1,627,696) (913,585) (1,001,829) 4,950,000 150,000 - - 4,036,415 (851,829) 898,734 (1,533,242) 1,207,046 2,740,288 2,105,780 1,207,046 21 12 13 9 18 10 10 55 NOTES TO THE FINANCIAL STATEMENTS FOR YEAR ENDED 30 JUNE 2017 NOTE 1: CORPORATE INFORMATION The consolidated financial statements and notes represent those of Energy Action Limited and it’s Controlled Entities (the “consolidated group” or “group” or ‘’EAX’’) for the year ended 30 June 2017. The financial statements were authorised for issue in accordance with a resolution of the directors on 22 August 2017. Energy Action Limited (“the Parent”) is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange. The Group is a for profit entity. The nature of the operation and principal activities of the Group are described in the directors’ report. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 2.1 Basis of Preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Material accounting policies adopted in the preparation of these financial statements are presented below and have been consistently applied unless otherwise stated. The financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. The financial report is presented in Australian dollars and all values. The functional currency is also Australian dollars. The financial report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. 2.2 New Accounting Standards and interpretations (i) Changes in accounting policies The accounting policies adopted are consistent with those of the previous financial year except as follows: The group has adopted the following new and amended Australian Accounting Standards and AASB Interpretations as of 1 July 2016; none of which had a material impact on the financial statements: AASB 2014-4 Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to AASB 116 and AASB 138) AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 AASB 2014-9 Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements 56 | ENERGY ACTION ANNUAL REPORT 2017 Note 2: Summary of Significant Accounting Policies (Continued) (ii) Accounting Standards and Interpretations issued but not yet effective Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual reporting period ending 30 June 2017 are outlined in the table below: Standard/Interpretation Effective for the annual reporting period beginning on Expected to be initially applied in the financial year ending AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 AASB 2017-2 Amendments to Australian Accounting Standards – Further Annual Improvements 2014-2016 Cycle AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses [AASB 112] AASB 9 Financial Instruments AASB 15 Revenue from Contracts with Customers AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions AASB 2017-1 Amendments to Australian Accounting Standards – Transfers of Investments Property, Annual Improvements 2014-2016 Cycle and Other Amendments AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration AASB 16 Leases IFRIC 23 Uncertaininty over Income Tax Treatments (Australian-equivalent interpretation not yet issued) January 1, 2017 June 30, 2018 January 1, 2017 June 30, 2018 January 1, 2018 June 30, 2019 January 1, 2018 January 1, 2018 June 30, 2019 June 30, 2019 January 1, 2018 June 30, 2019 January 1, 2018 June 30, 2019 January 1, 2018 June 30, 2019 January 1, 2019 June 30, 2020 January 1, 2019 June 30, 2020 With the exception of those noted below, the Directors have not yet assessed whether the above amendments and interpretations will have a material impact on the financial report of the Group in the year or period of initial application. Impact of AASB15 on future reporting periods: Adoption of AASB15, to apply in FY2019, will require revenue from certain procurement activities to be recognised in the period in which the procurement activity is undertaken. Procurement revenue currently recognised over the term of the underlying energy contract will be brought forward and recognised on inception of the energy procurement contract. This will result in a one-off acceleration of revenue. Management has completed an initial assessment review, the finding indicates that AASB15 will mainly impact auction revenue. Impact of AASB16 on future reporting periods: Adoption of AASB16, to apply in FY2020, will require leases currently treated as operating leases, such as rental of office premises, to be recognised on the balance sheet. This change will impact the classification of certain expenses such as rental expense, deprecation and financing costs. Consequently, non IFRS measures such as EBITDA and EBIT will also be impacted. Management has completed an initial assessment review, and this change is expected to result in an increase of leased assets and lease liabilities. 57 Note 2: Summary of Significant Accounting Policies (Continued) 2.3 Key Accounting Policies a. Principles of Consolidation The consolidated financial statements comprise of the financial statements of the Group and its subsidiaries as at 30 June 2017. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if and only if the Group has: Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee) Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect its returns When the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: The contractual arrangement with the other vote holders of the investee Rights arising from other contractual arrangements The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it: De-recognises the assets (including goodwill) and liabilities of the subsidiary De-recognises the carrying amount of any non-controlling interests De-recognises the cumulative translation differences recorded in equity Recognises the fair value of the consideration received Recognises the fair value of any investment retained Recognises any surplus or deficit in profit or loss Reclassifies the parent’s share of components previously recognised in OCI to profit or loss or retained earnings, as appropriate, as would be required if the Group had directly disposed of the related assets or liabilities Subsidiaries are recorded as a component of other revenues in the separate income statement of the parent entity, and do not impact the recorded cost of the investment. Upon receipt of dividend payments from subsidiaries, the parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist. Where such indicators exist, to the extent that the carrying value of the investment exceeds its recoverable amount, an impairment loss is recognised. b. Business combinations Business combinations occur where an acquirer obtains control over one or more businesses. A business combination is accounted for by applying the acquisition method, unless it is a combination involving entities or businesses under common control. The business combination will be accounted for from the date that control is attained, whereby the fair value of the identifiable assets acquired and liabilities (including contingent liabilities) assumed is recognised (subject to certain limited exemptions). 58 | ENERGY ACTION ANNUAL REPORT 2017 Note 2: Summary of Significant Accounting Policies (Continued) When measuring the consideration transferred in the business combination, any asset or liability resulting from a contingent consideration arrangement is also included. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability is remeasured each reporting period to fair value, recognising any change to fair value in profit or loss, unless the change in value can be identified as existing at acquisition date. When measuring the consideration transferred in the business combination, any asset or liability resulting from a contingent consideration arrangement is also included. Subsequent to initial recognition, contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. Contingent consideration classified as an asset or liability is remeasured each reporting period to fair value, recognising any change to fair value in profit or loss, unless the change in value can be identified as existing at acquisition date. All transaction costs incurred in relation to the business combination are expensed to the statement of comprehensive income. The acquisition of a business may result in the recognition of goodwill or a gain from a bargain purchase. c. Goodwill Goodwill is carried at cost less accumulated impairment losses. Goodwill is calculated as the excess of the sum of: i) ii) iii) the consideration transferred; any non-controlling interest; and the acquisition date fair value of any previously held equity interest; over the acquisition date fair value of net identifiable assets acquired. The acquisition date fair value of the consideration transferred for a business combination plus the acquisition date fair value of any previously held equity interest shall form the cost of the investment in the separate financial statements. Fair value uplifts in the value of pre-existing equity holdings are taken to the statement of comprehensive income. Where changes in the value of such equity holdings had previously been recognised in other comprehensive income, such amounts are recycled to profit or loss. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested for impairment annually and is allocated to the Group’s cash-generating units or groups of cash- generating units, representing the lowest level at which goodwill is monitored not larger than an operating segment. Gains and losses on the disposal of an entity include the carrying amount of goodwill related to the entity disposed of. d. Income Tax and other taxes The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income). Current income tax expense charged to profit or loss is the tax payable on taxable income. Current tax liabilities (assets) are measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well unused tax losses. Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. 59 Note 2: Summary of Significant Accounting Policies (Continued) Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (a) a legally enforceable right of set-off exists; and (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: When the GST incurred on a purchase of goods and services in not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable Receivables and payables, which are stated with the amount of GST included The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority is classified as part of operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. e. Plant and Equipment Each class of plant and equipment is carried at cost or fair value as indicated less, where applicable, any accumulated depreciation and impairment losses. Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised either in profit or loss or as a revaluation decrease if the impairment losses relate to a re-valued asset. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial period in which they are incurred. Depreciation The depreciable amount of all fixed assets including buildings and capitalised lease assets, but excluding freehold land, is depreciated on a straight-line basis over the asset’s useful life to the consolidated group commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation rates used for each class of depreciable assets are: Class of Fixed Asset Depreciation Rate Computer equipment 25%-33.3% Furniture and fittings 20% 60 | ENERGY ACTION ANNUAL REPORT 2017 Note 2: Summary of Significant Accounting Policies (Continued) The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the statement of comprehensive income. When re-valued assets are sold, amounts included in the revaluation surplus relating to that asset are transferred to retained earnings. f. Leases Leases of fixed assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership that is transferred to entities in the consolidated group, are classified as finance leases. Finance leases are capitalised by recognising an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over the shorter of their estimated useful lives or the lease term. Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are recognised as expenses in the periods in which they are incurred. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the lease term. Estimated remediation costs at the conclusion of a lease are accrued on a straight-line basis over the lease term. g. Financial Instruments Initial recognition and measurement Financial assets within the scope of AASB 139 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge as appropriate. The Group determines the classification of its financial assets at initial recognition. The financial assets held by the Group during the past two years only included loans and receivables and available-for-sale financial assets. Amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition less principal repayments and any reduction for impairment, and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount calculated using the effective interest method. Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models. The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) through the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying value with a consequential recognition of an income or expense item in profit or loss. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Loans and receivables are included in current assets, where they are expected to mature within 12 months after the end of the reporting period. (ii) Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are either not suitable to be classified into other categories of financial assets due to their nature, or they are designated as such by management. They comprise investments in the equity of other entities where there is neither a fixed maturity nor fixed or determinable payments. The only investments held by the Parent are in investments in its subsidiaries. As the investments are subsidiaries they are measured at cost, when the financial asset is derecognised, the cumulative gain or loss pertaining to that is recognised in the profit or loss. 61 Note 2: Summary of Significant Accounting Policies (Continued) Available-for-sale financial assets are included in non-current assets where they are expected to be sold within 12 months after the end of the reporting period. All other financial assets are classified as current assets. (iii) Financial liabilities Non-derivative financial liabilities (excluding financial guarantees) are subsequently measured at amortised cost. h. Impairment of Non-financial Assets The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded subsidiaries or other available fair value indicators. The Group bases its impairment calculation on detailed budgets and forecast calculations. These budgets and forecast calculations generally cover a period of five years. For longer periods, a long-term growth rate is calculated and applied to project future cash flows after the fifth year. Impairment losses of continuing operations, are recognised in the income statement in expense categories consistent with the function of the impaired asset. For assets excluding goodwill, an assessment is made at each reporting date whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the assets or CGUs recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase. The following assets have specific characteristics for impairment testing: Goodwill Goodwill is tested for impairment annually (as at 30 June) and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods. Intangible assets Intangible assets with indefinite useful lives are tested for impairment annually as at 30 June either individually or at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for any intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in the Statement of Comprehensive Income in the expense category consistent with the function of the intangible asset. 62 | ENERGY ACTION ANNUAL REPORT 2017 Note 2: Summary of Significant Accounting Policies (Continued) i. Intangible assets other than Goodwill Software, research and development costs Research costs are expensed as incurred. Development expenditures including website development costs on an individual project are recognised as an intangible asset when the Group can demonstrate: The technical feasibility of completing the intangible asset so that it will be available for use or sale Its intention to complete and its ability to use or sell the asset How the asset will generate future economic benefits The availability of resources to complete the asset The ability to measure reliably the expenditure during development Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated impairment losses. Amortisation of the asset begins when development is complete and the asset is available for use. It is amortised over the period of expected future benefit. Amortisation is expensed through the profit and loss. During the period of development, the asset is tested for impairment annually. The useful life of development costs is finite. It is amortised on a straight line basis over its expected useful life. The development costs are internally developed. The amortisation rates are as follows: Software development costs 20% Customer relationships The useful life of customer relationships is finite. It is amortised on a straight line basis over its expected useful life, which is between six and twelve years. j. Employee Benefits Provision is made for the Group’s liability for employee benefits arising from services rendered by employees to the end of the reporting period. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. In determining the liability, consideration is given to employee wages increases and the probability that the employee may satisfy vesting requirements. Those cash flows are discounted using market yields on high quality corporate bonds with terms to maturity that match the expected timing of cash flows. k. Provisions Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. When the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset, but only when the reimbursement is virtually certain. The expense relating to any provision is present in the income statement net of any reimbursement. Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period. Onerous contracts An onerous contract is considered to exist where the company has a contract under which the unavoidable cost of meeting the contractual obligations exceed the economic benefits estimated to be received. Present obligations arising under onerous contracts are recognised as a provision to the extent that the present obligation exceeds the economic benefits estimated to be received. Restructuring A restructuring provision is recognised when Energy Action has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. Future operating losses are not provided for. 63 Note 2: Summary of Significant Accounting Policies (Continued) l. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, deposits available on demand with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are reported within short-term borrowings in current liabilities in the statement of financial position. m. Revenue and Other Income Revenue is measured at the fair value of the consideration received or receivable after taking into account any trade discounts and volume rebates allowed. Revenue recognition relating to the provision of services is recognised in accordance with the contract terms, which matches the commission terms. Procurement and Monitoring revenue is recognised progressively over the term of the contract (typically over 1-2 years for Auctions and 4 years for Monitoring). A portion of the Auction commission is recognised upfront with the balance recognised over the contract term. Project and Advisory Services (PAS) revenue is recognised in the accounting period in which services are rendered, in accordance with the percentage of completion of the project. Revenue from cancellation fees are recognised upon receipt. Interest revenue is recognised using the effective interest rate method. Dividend revenue is recognised when the right to receive a dividend has been established. All revenue is stated net of the amount of goods and services tax (GST). n. Government Grants Government grants are recognised at fair value where there is reasonable assurance that the grant will be received and all grant conditions will be met. Grants relating to expense items are recognised as income over the periods necessary to match the grant to the costs they are compensating. Grants relating to assets are credited to deferred income at fair value and are credited to income over the expected useful life of the asset on a straight-line basis. o. Contract Acquisition Costs The sales commission paid to sales employees is an incremental cost directly related to obtaining or acquiring energy supply, monitoring or PAS agreements. Sales employees are paid a base salary and an additional commission for successfully executed agreements. The commission paid to sales employees is calculated as a percentage of the commission or fee paid to EAX. This commission is capitalised and is being amortised over the term of the customer contract. p. Foreign Currency Transaction The Group’s consolidated financial statements are presented in Australian dollars, which is also the Parent’s functional currency. For each entity the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The Group uses the direct method of consolidation and has elected to recycle the gain or loss that arises from using this method. i) Transactions and balances Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognised in other comprehensive income until the net investment is disposed of, at which time, the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non- monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the 64 | ENERGY ACTION ANNUAL REPORT 2017 Note 2: Summary of Significant Accounting Policies (Continued) item (i.e., translation differences on items whose fair value gain or loss is recognised in other comprehensive income or profit or loss are also recognised in other comprehensive income or profit or loss, respectively). Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date. ii) Group companies On consolidation, the assets and liabilities of foreign operations are translated into dollars at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognised in other comprehensive income. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in profit or loss q. Work-in-progress hen the outcome of a contract can be estimated reliably, contract revenue and contract costs are recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the balance sheet date. When the outcome of a contract cannot be estimated reliably, contract revenue is recognised to the extent of contract costs incurred that are likely to be recoverable. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. At the end of each accounting period the long term contracts percentage completion is assessed individually and any unbilled percentage completion is recognised as work in progress income for the period. In the next period, the amount recognised as income will be reversed and the position of work in progress will be recalculated. r. Share based payments The Group provides benefits to employees in the form of equity settled share based payments, whereby employees render services in exchange for shares or rights over shares. The fair value of rights granted to eligible employees under the Energy Action Performance Rights & Options Plan (PROP) is recognised as an employee benefits expense, with a corresponding increase in the employee equity benefits reserve. The fair value is measured at grant date and recognised over the period in which the employee becomes entitled to the PROP grant. The fair value at grant date is determined by an independent valuer. Details of the fair value of share based payment plans are set out in Note 19. At the end of each reporting period, the Group revises its estimate of the numbers of rights expected to vest. The amount recognised as an expense is only adjusted when the rights do no vest due to non-market related conditions. s. Interest Rate Hedging The Group uses derivative financial instrument, such as interest rate swaps to hedge its interest rate risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. At the inception of the hedge relationship, the Group formally designates and documents the hedge relationship to which it wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedge item, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. To protect against adverse interest rate movement, the Group has entered into an interest rate swap transaction for up to a maximum of $5 million to fix at an effective interest rate of 3.38% (inclusive of margin) on the first $5 million for the balance of the Multi-Option Facility Agreement ending 1 October 2019. At the end of each reporting period, the Group assesses the hedge effectiveness between hedged item and hedging instrument to determine whether the risk management objective for the hedging relationship has changed. The estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. 65 NOTE 3: SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Impairment of goodwill and other intangible assets The Group assesses impairment at the end of each reporting period by evaluating conditions and events specific to the Group that may be indicative of impairment triggers. Recoverable amounts of relevant assets are reassessed using value- in-use calculations which incorporate various key assumptions. Share-based payment transactions The Group measures the cost of equity-settled transactions with suppliers with reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 19. Development costs Development costs are capitalised in accordance with the accounting policy in Note 2(i). Initial capitalisation of costs is based on management’s judgement that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. In determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generation of the project, discount rates to be applied and the expected period of benefits. This includes significant investments in the development of software. The software is being enhanced and /or developed for use within the business, improving operational efficiency. Provision for impairment of receivables Collectability of trade receivables is assessed on an ongoing basis. An allowance for doubtful debts is established when there is objective evidence the Energy Action will not be able to collect all amounts due. Management uses its judgement in determining the level of doubtful debt provisioning, considering historical analysis of bade debts trends and prevailing economic circumstances. Business Combinations Acquisitions of businesses are accounted for using the acquisition method. This method requires the application of fair values for both the consideration and the assets and liabilities acquired. The calculation of fair value is often based on estimates and judgements including future cash flows, revenue streams and value in use calculations. Onerous Contracts Energy Action’s policy for onerous contracts is stated in Note 2(k). The application of this policy requires management to make certain estimates and assumptions as to future events and circumstances in relation to costs to meet contractual obligations. Employee benefits Employee benefits are predominantly annual leave and long service leave. In determining these provisions, management makes assumptions in regards to future wage increases, and the probability that employees may satisfy vesting requirements for long service leave Work in progress Energy Action performs services under contracts that last longer than one reporting period. For these contracts, revenue and costs are recognised on a percentage of completion basis. Percentage of completion by project is estimated by the project relevant project manager based on their assessment of completion versus milestones. 66 | ENERGY ACTION ANNUAL REPORT 2017 NOTE 4: BUSINESS COMBINATIONS 4.1 Information on prior year acquisition Acquisition of Energy Advice On 18 August 2014, Energy Action Limited (“EAX”) acquired 100% of the voting shares of Energy Advice Pty Ltd (“Energy Advice”). Full details of this transaction have been disclosed in the previous years financial statements. The acquisition included deferred consideration of $6,284,000 payable to the vendors as follows: $3,142,000 on 18 August 2015; and, $3,142,000 on 18 August 2016 The deferred payments are subject to the continued employment of the vendors. Due to the direct link to continued employment of the vendors the deferred consideration of $6,284,000 is required to be expensed to the Profit and Loss Statement evenly over the 2 year period ended 18 August 2016. The expense recognised in the 12 month period to 30 June 2017 was $392,811 (FY16 $2,749,247) and this has been emphasised as a Significant Item in the Directors Report. All deferred payments have now been fully expensed and no further expense associated with this transaction will be recognised in future periods. 4.2 Total amounts of deferred consideration expense and acquisition expense Deferred consideration Exergy Energy Advice Total deferred consideration expense NOTE 5: SEGMENT INFORMATION Identification of reportable segments Consolidated Group 2017 $ 2016 $ - 392,811 392,811 708,333 2,141,994 3,850,327 The Group has identified one reportable operating segment, which provides electricity and gas procurement services, Contract Managerment & Environmental Reporting (CMER) services, and sustainability services in Australia. The types of services provided are detailed below. Types of Services Energy Action’s principal activities are providing integrated energy management services to a diverse base of commercial and industrial customers. Its core services are: Energy procurement: specialised buying and negotiation strategies, utilising reverse auctions, bespoke tender models and advising on structured products; CMER: manage client energy contracts, including account management, liason with their retailer, validating their bill, ensuring the right tariff and helping them to understand how they are using energy; and, Energy efficiency and sustainability; Projects and Advisory Services (PAS). The Australian Energy Exchange (AEX) electricity and gas procurement service is an online, real time and reverse auction platform for business customers which provides the opportunity to competitively obtain energy supply contracts from various energy providers. Energy Metrics is an independent CMER platform which transforms energy data into usable business intelligence that is easy to understand and essential for improving overall business efficiency. 67 Note 5: Segment Information (Continued) The types of CMER services include energy consumption monitoring and costing, energy emissions monitoring, contract administration, detailed technical reporting, desktop energy efficiency review and additional reporting and monitoring. Projects & Advisory Services (PAS) is the energy efficiency and sustainability partnering service, which aims to improve and manage on site level of energy efficiency, through the use of innovative energy efficiency and energy management methodologies. The various services include metering intelligence, sub metering, carbon footprint measurement and reduction advice, Australian Standard Level 2 compliance energy audits, project feasibility studies and supporting onsite power generation projects such as co-generation and tri-generation units from prefeasibility through to commissioning. In the table below revenue is analysed by service line, however overall the performance of the business is monitored as one. Accounting Policies and inter-segment transaction The accounting policies used by the Group in the reporting segment internally are the same as those contained in Note 2 to the accounts. Revenue by customer There is no revenue with a single external customer that contributes more than 10% of total revenue. Year-ended 30 June 2017 Procurement Monitoring Project Advisory Services Sales to external customers $ 8,079,593 8,079,593 $ 16,695,501 16,695,501 7,788,714 32,563,808 7,788,714 32,563,808 Year-ended 30 June 2016 Procurement Monitoring Project Advisory Services Total $ Total $ $ $ 7,930,792 33,577,492 7,930,792 33,577,492 Consolidated Group 2017 $ 2016 $ 32,563,808 393,295 32,957,103 33,577,492 401,216 33,978,708 Sales to external customers $ 7,586,787 7,586,787 $ 18,059,913 18,059,913 NOTE 6: REVENUE, OTHER INCOME AND EXPENSES Revenue Sales revenue Other income Total Revenue 68 | ENERGY ACTION ANNUAL REPORT 2017 Note 6: Revenue, Other Income and Expenses (Continued) Employee benefits Salaries Commissions Superannuation Share based payment expense Other Total Employment benefits Administrative costs Accounting, audit and tax fees Advertising Legal and professional fees Telephone and internet Computer maintenance costs Bad debt expense Recruitment costs Travel costs Rental expense Other expenses Total Administrative costs Depreciation and amortisation Depreciation Amortisation – Software Amortisation – Customer relationships Total Depreciation & Amortisation Significant Item Costs Deferred payments for acquisitions Restructure costs Total Significant Items Financing costs / (income) Interest income Interest expenses Borrowing costs Total Financing costs / (income) Note Consolidated Group 2017 $ 2016 $ 12,357,351 805,863 1,392,122 (203,230) 1,313,171 15,665,277 203,993 239,803 132,353 500,862 945,571 141,074 238,246 675,694 1,176,810 1,473,992 5,728,398 392,007 879,120 239,083 12,441,628 1,076,991 1,466,826 (22,156) 1,229,794 16,193,083 207,414 213,337 181,695 472,125 761,687 134,946 157,602 567,281 1,141,438 1,230,806 5,068,331 379,577 701,250 239,094 1,510,210 1,319,921 4 392,811 507,725 900,536 (8,557) 452,652 95,283 539,378 3,850,327 169,399 4,019,726 (39,053) 378,728 123,050 462,725 69 NOTE 7: INCOME TAX EXPENSE Note Consolidated Group a. The components of tax expense comprise: Current tax Current tax – under/(over) prior year Deferred tax 16 b. The prima facie tax on profit from ordinary activities before income tax is reconciled to the income tax as follows: 2017 $ 1,050,787 18,204 (160,227) 908,764 2016 $ 1,238,705 (11,290) (35,981) 1,191,434 Prima facie tax (benefit) / payable on profit / (loss) from ordinary activities before income tax at 30% (2016: 30%) 804,520 222,611 Add Tax effect of: Permanent Differences – Deferred consideration – Share based payments/trust – Customer Amortisation – Other permanent differences – Accounting R&D – Prior year adjustments Less Tax effect of: Deductible Expense – R&D Benefit – Unbooked tax losses Income tax attributable to entity The applicable weighted average effective tax rates are as follows: 117,845 (60,969) - 81,815 90,165 18,204 (120,220) (22,596) 908,764 33.89% 1,155,098 - (43,969) (18,215) 208,804 (54,490) (278,405) - 1,191,434 160.56% Energy Action Limited and its 100% owned subsidiaries formed a tax consolidated group with effect from 3 March 2009. Energy Action Limited is the head entity of the tax consolidated group. 70 | ENERGY ACTION ANNUAL REPORT 2017 NOTE 8: EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the basic diluted earnings per share computations: Net profit / (loss) attributable to ordinary equity holders of the parent from continuing operations Net profit / (loss) attributable to ordinary equity holders of the parent for basic earnings Net profit / (loss) attributable to ordinary equity holders of the parent adjusted for the effect of dilutions 2017 $ 1,772,970 1,772,970 1,772,970 2017 No. 2016 $ (449,399) (449,399) (449,399) 2016 No. Weighted average number of ordinary shares for basic earnings per share 25,954,117 25,954,117 Effect of dilution: Share options and performance rights Weighted average number of ordinary shares adjusted for the effect of dilution Basic earnings / (loss) per share (Statutory) Diluted Earnings / (loss) per share (Statutory) 268,188 - 26,222,305 25,954,117 6.83 6.76 (1.73) (1.73) There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of these financial statements. Under the accounting standards, losses are not diluted. The dilution calculation has been performed to enable users of these financial statements to determine the impact of the dilution on both Statutory and Operating Profit per share. Refer also to the Directors’ Report for further information on the calculation of Operating Profit. 71 NOTE 9: DIVIDENDS Dividends paid: Final 2015 franked dividend of 1.06 cents per share Interim 2016 franked dividend of 2.80 cents per share Final 2016 franked dividend of 3.52 cents per share Interim 2017 franked dividend a. Proposed final 2017 franked dividend of 1.40 cents per share 26 (Final 2016 franked dividend of 3.52 cents per share) b. Balance of franking account at year end adjusted for franking credits arising from: – Opening balance – Opening balance adjustment – Payment of provision for income tax – Dividends recognised as receivables and franking debits arising from payment of proposed dividends, and franking credits that may be prevented from distribution in subsequent financial years Subsequent to year end, the franking account would be reduced by the proposed dividend reflected per (a) as follows: Note Consolidated Group 2017 $ 2016 $ - - 913,585 - 913,585 363,358 275,114 726,715 - - 1,001,829 913,585 6,091,677 5,427,430 57,752 - 1,077,041 1,093,603 (391,536) (429,355) 6,834,935 6,091,677 (155,725) (391,536) 6,679,210 5,700,141 Tax rates The tax rate at which paid dividends have been franked is 30% (2016: 30%). Dividends proposed will be franked at the rate of 30% (2016: 30%). 72 | ENERGY ACTION ANNUAL REPORT 2017 NOTE 10: CASH AND CASH EQUIVALENTS Cash at floating rates Restricted cash* Total Cash Consolidated Group 2017 $ 2016 $ 2,100,187 1,142,046 5,593 65,000 2,105,780 1,207,046 * Refers to cash held in the Energy Action Employee Share Trust, an entity used to manage employee equity plans. Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. NOTE 11: TRADE AND OTHER RECEIVABLES CURRENT Trade receivables Provision for impairment Total current trade receivables NON-CURRENT Bonds and security deposits Consolidated Group 2017 $ 2016 $ 6,208,932 (216,519) 5,992,413 5,184,333 (214,563) 4,969,770 91,358 85,509 a. Provision for Impairment of Receivables Current trade and term receivables are non-interest bearing and generally on 30 to 90-day terms. Credit risk The Group has no significant concentration of credit risk with respect to any single counterparty or group of counterparties other than those receivables specifically provided for and mentioned within Note 11. The class of assets described as “trade and other receivables” is considered to be the main source of credit risk related to the Group. The following table details the Group’s trade and other receivables exposed to credit risk (prior to collateral and other credit enhancements) with ageing analysis and impairment provided for thereon. Amounts are considered as “past due” when the debt has not been settled, with the terms and conditions agreed between the Group and the customer or counterparty to the transaction. Receivables that are past due are assessed for impairment by ascertaining solvency of the debtors and are provided for where there are specific circumstances indicating that the debt may not be fully repaid to the Group. The balances of receivables including overdue are considered to be fully recoverable. Customers have trading terms varying between 30 - 90 days. 73 Note 11: Trade and other Receivables (Continued) Past due but not impaired (days overdue) Net Amount Past due and Impaired < 30 31–60 61–90 91+ Within Initial Trade Terms $ $ $ $ $ $ $ 2017 Trade and term receivables 5,992,413 216,519 1,196,571 508,372 289,443 430,957 3,783,589 2016 Trade and term receivables 4,969,770 214,563 1,281,746 375,723 317,177 173,288 3,036,399 Neither the Group nor parent entity holds any financial assets with terms that have been renegotiated, which would otherwise be past due or impaired. b. Collateral Held as Security Current trade and term receivables are non-interest bearing and generally on 30 to 90-day terms. No collateral or security is held by the company for loans or receivables. NOTE 12: PROPERTY, PLANT AND EQUIPMENT Computer equipment: At cost Accumulated depreciation Furniture and fittings: At cost Accumulated depreciation Total Plant and Equipment Note Consolidated Group 2017 $ 2016 $ 1,827,612 (1,626,109) 201,503 1,637,712 (1,094,942) 542,770 744,273 1,716,633 (1,484,463) 232,170 1,415,552 (846,485) 569,067 801,238 74 | ENERGY ACTION ANNUAL REPORT 2017 Note 12: Property Plant and Equipment (Continued) a. Movements in Carrying Amounts Movement in the carrying amounts for each class of property, plant and equipment between the beginning and the end of the current financial year Note Computer Equipment Furniture and Fittings $ $ Total $ Consolidated Group: Balance at 1 July 2015 Additions Assets disposed Depreciation expense Balance at 30 June 2016 Additions Assets disposed Depreciation expense Balance at 30 June 2017 NOTE 13: INTANGIBLE ASSETS Goodwill Customer relationships Accumulated amortisation Net carrying value – customer relationships Software development costs Adjustment Accumulated amortisation Net carrying value – software development costs Total intangibles 294,975 110,920 (12,420) (161,304) 232,171 115,644 (2,761) (143,551) 201,503 601,806 896,781 185,533 - 296,453 (12,420) (218,273) (379,577) 569,066 222,160 - 801,237 337,804 (2,761) (248,456) (392,007) 542,770 744,273 Consolidated Group 2017 $ 2016 $ 9,944,796 9,944,796 2,438,000 (1,031,826) 1,406,174 7,654,189 - (4,342,185) 3,312,004 14,662,974 2,438,000 (792,743) 1,645,257 6,268,543 3,429 (3,466,494) 2,805,478 14,395,531 75 Note 13: Intangible Assets (Continued) Consolidated Group: Year ended 30 June 2015 Goodwill Customer Relationships Software Development Costs $ $ $ Total Intangibles $ Balance at the beginning of year 9,942,429 1,884,351 2,175,485 14,002,265 Acquisition of a subsidiary 2,367 Internal development Adjustment Amortisation charge - - - Closing value at 30 June 2016 9,944,796 Year ended 30 June 2016 - - - (239,094) 1,645,257 - 1,327,815 3,429 (701,251) 2,805,478 2,367 1,327,815 3,429 (940,345) 14,395,531 Balance at the beginning of year 9,944,796 1,645,257 2,805,478 14,395,531 Acquisition of a subsidiary Internal development Amortisation charge - - - Closing value at 30 June 2017 9,944,796 - - (239,083) 1,406,174 - 1,385,646 (879,120) 3,312,004 - 1,385,646 (1,118,203) 14,662,974 Intangible assets, excluding goodwill, have finite useful lives. The current amortisation charges for intangible assets are included under depreciation and amortisation expense in the statement of comprehensive income. Refer to Note 2 for capitalisation policy. 13 (a) Impairment testing of goodwill For the year ended 30 June 2017, Goodwill acquired through business combinations with indefinite lives has been allocated to one Cash Generating Unit (CGU). Energy Action has one reportable operating segment, being ‘the provision of electricity procurement services, CMER services, and project advisory services in Australia’. Therefore goodwill will be allocated across Energy Action’s sole operating segment. The recoverable amount of Goodwill has been determined on a value in use calculation using cash flow projections based on the Board approved budget for the year ended 30 June 2018 extrapolated for 4 years. The discount rate applied to cash flow projections is a pre-tax rate of 21.4% (post tax 15.0%) and the cash flows beyond the approved budgets are extrapolated using 3% growth rate and terminal growth rate of 1%. 76 | ENERGY ACTION ANNUAL REPORT 2017 NOTE 14: OTHER ASSETS CURRENT Prepayments Work in progress Contract acquisition costs NON CURRENT Contract acquisition costs Consolidated Group 2017 $ 2016 $ 1,047,072 593,814 580,635 2,221,521 549,478 549,478 400,983 765,216 302,537 1,468,736 868,944 868,944 Contract acquisition costs represent sales commissions paid to sales employees. Sales commissions are calculated and paid on a monthly basis to sales employees. These costs are recognised progressively in line with revenue from procurement and contract management services, typically over two to five years. NOTE 15: TRADE AND OTHER PAYABLES Consolidated Group 2017 $ 2016 $ CURRENT Unsecured liabilities: Trade payables Deferred consideration payable – Energy Advice Other payables and accrued expenses a. Financial liabilities at amortised cost classified as trade and other payables Trade and other payables: – total current Financial liabilities as trade and other payables 23 291,926 - 2,425,116 2,717,042 2,717,042 2,717,042 2,717,042 Terms and conditions of the above financial liabilities: Trade payables are non-interest bearing and are normally settled on 30 or 60 day terms Other payables are non-interest bearing and have an average term of six months 695,463 2,749,189 2,122,999 5,567,651 5,567,651 5,567,651 5,567,651 77 NOTE 16: TAX CURRENT Income tax asset Income tax payable NON-CURRENT Consolidated Group Deferred Tax 2017 Provisions Accruals Fixed assets Customer relationships Prepaid commissions Work in progress Share Based Payments Deferred Tax 2016 Provisions Accruals Fixed assets Equity raising costs Customer relationships Prepaid commissions Work in progress Share Based Payments Other Consolidated Group 2017 $ 877 - Charged directly to Equity $ - - - - - - - - - - - - - - - - - - 2016 $ - 47,052 Closing Balance $ 590,087 214,869 (257,607) (421,852) (341,232) (176,498) 19,894 (372,339) 574,398 270,218 (322,755) - (493,577) (351,444) (229,565) 20,159 - (532,565) Opening Balance $ 574,398 270,218 (322,755) (493,577) (351,444) (229,565) 20,159 (532,566) 599,032 205,879 (418,511) 45,428 (565,305) (376,741) (49,105) - 1,342 (557,981) Charged to Income $ 15,689 (55,349) 65,148 71,725 10,212 53,067 (265) 160,227 (24,634) 64,339 95,756 (45,428) 71,728 25,297 (180,460) 20,159 (1,342) 25,414 78 | ENERGY ACTION ANNUAL REPORT 2017 NOTE 17: PROVISIONS AND OTHER LIABILITIES Analysis of total provisions Current Annual leave Long service leave Deferred grant income Non-current Long service leave Consolidated Group 2017 $ 923,448 450,698 - 1,374,146 320,180 320,180 2016 $ 929,782 378,886 3,929 1,312,597 357,270 357,270 Provision for Long-term Employee Benefits A provision has been recognised for employee entitlements relating to long service leave. In calculating the present value of future cash flows in respect of long service leave, the probability of long service leave being taken is based on historical data. The measurement and recognition criteria relating to employee benefits have been included in Note 2. NOTE 18: LOANS AND BORROWINGS Multi-Option Facility Agreement Less capitalised debt establishment fees Consolidated Group 2017 $ 9,200,000 (184,995) 9,015,005 2016 $ 4,250,000 (276,642) 3,973,358 During the year ending 30 June 2015, Energy Action entered into $12 million multi-option secured debt facility. The facility has a five year term and is available to fund future purchase price instalments of the Energy Advice acquisition and for general corporate purposes. Funds can be utilised in the form of loans, bank guarantees and letters of credit. Funds advanced under the facility are secured by a charge over the assets of the Group, and includes Interest Cover and Gearing ratios. Debt establishment fees are capitalised and amortised over the life of the loan facility. 79 Note 18: Loans & Borrowings (Continued) Utilisation of the facility is summarised in the following table: Financing facilities Loan facilities Amounts utilised Borrowings Bank guarantees Total amounts utilised Total amounts unutilised NOTE 19: ISSUED CAPITAL AND RESERVES Fully paid ordinary shares a. Ordinary Shares (number) Ordinary Shares (number) At the beginning of the reporting period: Movement in the year: At the end of the reporting period b. Ordinary Shares ($) At the beginning of the reporting period: Movement in the year At the end of the reporting period Consolidated Group 2017 $ 2016 $ 12,000,000 12,000,000 9,200,000 128,620 9,328,620 2,671,380 4,250,000 3,270,620 7,520,620 4,479,380 Consolidated Group 2017 $ 6,537,906 6,537,906 2016 $ 6,537,906 6,537,906 Consolidated Group 2017 No. 2016 No. 25,954,117 25,954,117 - - 25,954,117 25,954,117 6,537,906 6,537,906 - - 6,537,906 6,537,906 Ordinary shares participate in dividends and the proceeds on winding-up of the parent entity in proportion to the number of shares held. At the shareholders’ meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. 80 | ENERGY ACTION ANNUAL REPORT 2017 Note 19: Issued Capital and Reserves (Continued) c. Share based payments reserve Share-based payment transactions: The share-based payment reserve is used to recognise the value of equity-settled share-based payment provided to employees. On 30 December 2016, 104,237 performance rights were granted to senior executives and certain other employees under the Performance Rights & Options Plan (PROP). Vesting only occurs when and if service and performance conditions are met. The service condition is such that the employee must be employed by Energy Action at the time any performance rights vest. The Performance Conditions comprise two tests, the Earnings per Share (EPS) and Total Shareholder Return (TSR) tests, which are described below. The number of Performance Rights allocated to an individual which may vest will be determined by reference to: an Earnings Per Share (EPS) component achieved by comparing the Company’s Actual Operating EPS for the year ending on the relevant test date to the Company’s Budget Operating EPS for the year ending on the relevant test date (Target 1); and a Total Shareholder Return (TSR) component achieved by comparing the Company’s total compounded return to the total compounded return of the S&P/ASX300 (Index) for the year ending on the relevant test date (Target 2). 75% of Performance Rights Earnings Per Share Target (EPS) (“Target 1 Entitlement”) 25% of Performance Rights Total Shareholder Return (TSR) (“Target 2 Entitlement”) Target 1 Available Performance Rights Target 2 Available Performance Rights Actual Operating EPS LESS THAN 94.9 % of Budget Operating EPS Nil Company Total Compounded TSR LESS THAN Total Compounded TSR of the Index 0% Actual Operating EPS EQUALS 95% of Budget Operating EPS 50% Company Total Compounded TSR EQUALS Total Compounded TSR of the Index 50% Actual Operating EPS EQUALS (OR GREATER THAN) Budget Operating EPS Vesting will occur on a linear basis between 50% and up to a maximum of 100% Company Total Compounded TSR BETWEEN EQUAL TO AND 1.10 TIMES Total Compounded TSR of the Index Vesting will occur on a linear basis between 50% and 100% Company Total Compounded TSR 1.10 TIMES Total Compounded TSR of the Index 100% Awards have been granted with a 3 year vesting period ending 30 June 2019. The details and fair values of performance rights granted during the year was as follows: EPS $ TSR $ 3 Year 0.9967 0.5406 A Monte Carlo simulation valuation technique has been adopted to value the performance rights at grant date. The fair value of performance rights granted during the year ended 30 June 2017 was estimated on the date of grant using the following assumptions: Dividends Expected volatility (%) Risk-free interest rate (%) Share price ($) FY17 6.32 cents, 10% pa growth thereafter 50 1.76% (2 year), 1.88% (3 year) 1.10 81 Note 19: Issued Capital and Reserves (Continued) For the year ended 30 June 2017, the Group has recognised ($203,230) of share-based payment expense in the statement of comprehensive income (30 June 2016: ($22,156)). Share based payments expense is net of reversals due to non-achievement of targets (EPS targets) and forfeitures in the case of terminated employees. d. Foreign currency translation reserve Exchange differences arising on translation of the foreign controlled entity are taken to the foreign currency translation reserve, as described in Note 2. The reserve is recognised in profit or loss when the net investment is disposed of. e. Capital Management The Group’s capital includes ordinary share capital. Management controls the capital of the Group in order to maintain a prudent debt to equity ratio, provide the shareholders with adequate returns and ensure that the Group can fund its operations and continue as a going concern. This includes adjusting dividend payments to shareholders and equity attributable to the entity holders of the parent. There is an externally imposed capital requirement of $50,000 to be held in cash, as a requirement of holding an Australian Financial Services Licence. The way management controls Group’s capital is by assessing the Group’s financial risks and adjusting its capital structure in response to changes in those risks and in the market. The responses include the management of debt levels, distributions to shareholders and share issues. f. Interest Rate Hedging Reserve Exposure to interest rate risk arises on financial assets recognised at reporting date whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s borrowings balances with floating interest rates. Interest rate risk is managed using a mix of terms on the bank borrowings and the interest rate swap hedging instrument. To protect against adverse interest rate movement, the Group has entered into an interest rate swap transaction for up to a maximum of $5 million to fix at an effective interest rate of 3.38% on the first $5 million for the balance of the Multi- Option Facility Agreement ending 1 October 2019. At the end of each reporting period, the Group assesses the hedge effectiveness between hedged item and hedging instrument to determine whether the risk management objective for the hedging relationship has changed as described in note 2. There have been no changes in the strategy adopted by management to control the capital of the Group since the prior year. The Group includes within net debt, trade and other payables including provision for income tax, less cash and cash equivalents. Bank guarantees are excluded from this calculation. The gearing ratios for the year ended 30 June 2017 and 30 June 2016 are as follows: Bank loans Less cash and cash equivalents Net debt / (cash) Total Equity Gearing percentage (%) Note 18 10 Consolidated Group 2017 $ 9,015,005 (2,105,780) 6,909,225 12,569,962 55% 2016 $ 3,973,358 (1,207,046) 2,766,313 12,006,279 23% Gearing as measured by total net debt divided by total equity was 55% as at 30 June 2017 and 23% at 30 June 2016. 82 | ENERGY ACTION ANNUAL REPORT 2017 NOTE 20: CAPITAL AND LEASING COMMITMENTS a. Operating Lease Commitments Non-cancellable property operating leases contracted for but not recognised in the financial statements Payable – minimum lease payments: – not later than 12 months – between 12 months and 5 years Note Consolidated Group 2017 $ 2016 $ 870,072 928,874 1,798,946 822,452 1,782,224 2,604,676 The property leases are non-cancellable leases with a maximum 5 year term with rent payable monthly in advance. Contingent rental provisions within the lease agreement require the minimum lease payments shall be increased by the lower of CPI or between 4-5% per annum. An option exists to renew a number of leases at the end of the term for a maximum of five years. b. Bank Guarantees The Group acquired Energy Advice in prior period and the acquisition included deferred consideration arrangement. The final deferred consideration payment of $3,142,000 was made to the Energy Advice vendors on 18 August 2016. The bank guarantee related to this payment has subsequently been cancelled. The Group has provided the following bank guarantees at 30 June 2017 for regional offices: – Parramatta office – Sydney office – Brisbane office – Melbourne office Note Consolidated Group 2017 $ 97,297 126,210 31,323 19,250 274,080 2016 $ 97,297 126,210 31,323 33,232 288,062 83 NOTE 21: CASH FLOW INFORMATION a. Reconciliation of Cash Flow from Operations with Profit after Income Tax Profit after income tax – Depreciation and amortisation – Share based payments expense – Other non-cash items Changes in assets and liabilities, net of the effects of purchase and disposal of subsidiaries: – – – – – (increase)/decrease in trade and term receivables (increase)/decrease in prepayments and other assets increase/(decrease) in trade payables and accruals increase/(decrease) in deferred taxes increase/(decrease) in provisions Cash flow from operations Consolidated Group 2017 $ 2016 $ 1,772,970 1,510,210 (203,230) 57 (1,028,492) (434,196) (2,897,659) (160,227) 24,459 (1,416,108) (449,399) 1,319,921 (22,156) 54,984 906,644 (269,753) (588,218) (25,415) 19,675 946,283 84 | ENERGY ACTION ANNUAL REPORT 2017 NOTE 22: RELATED PARTY DISCLOSURES The financial statements include the financial statements of the Group and the subsidiaries listed in the following table: a. Controlled Entities Consolidated Country of Incorporation Percentage Owned (%)* Subsidiaries of Energy Action Limited: Eactive Consulting Pty Limited Energy Action (Australia) Pty Limited EAIP Pty Limited ACN 087 790 770 Pty Limited Exergy Holdings Pty Limited Exergy Australia Pty Limited Exergy New Zealand Limited Energy Advice Pty Ltd 2017 100% 100% 100% 100% 100% 100% 100% 100% Australia Australia Australia Australia Australia Australia New Zealand Australia 2016 100% 100% 100% 100% 100% 100% 100% 100% * b. i. Percentage of voting power is in proportion to ownership. The Group’s main related parties are as follows: Key management personnel: Any person(s) having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity, are considered key management personnel. For details of disclosures relating to key management personnel, refer to the Remuneration Report contained in the Director’s Report. ii. Other related parties: Other related parties include entities controlled by the ultimate parent entity and entities over which key management personnel exercise significant influence. The Group procures legal services on an arms-length basis from Meehan’s solicitors. No fees were paid in FY17 (FY16 $1,668). The Group procures recruitment services on an arms-length basis from Derwent Executive. Murray Bleach is a member of the Advisory Board of Derwent Executive. $84,150 was paid in FY17 (FY16 nil) c. Compensation of Key Management Personnel (KMP) Refer to the Remuneration Report contained in the Director’s Report for details of the remuneration paid or payable to each member of the Group’s key management personnel for the year ended 30 June 2017. 85 Note 22: Related Party Disclosures (Continued) The totals of remuneration paid to KMP of the Group during the year are as follows: Note Consolidated Group Short-term employee benefits Long-term employee benefits Share based payments Post-employment benefits – superannuation Total Compensation 2017 $ 892,118 165,000 18,281 61,047 2016 $ 1,044,589 - 81,071 72,288 1,136,446 1,197,948 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period relating to KMP. d. The ultimate parent Energy Action Limited is the ultimate parent based and listed in Australia. NOTE 23: FINANCIAL RISK MANAGEMENT The Group’s principal financial liabilities comprise borrowings, trade and other payables. The main purpose of these financial liabilities is to finance the Group’s operations. The Group has trade and other receivables, and cash and short- term deposits that arrive directly from its operations. The totals for each category of financial instruments, measured in accordance with AASB 139 as detailed in the accounting policies to these financial statements, are as follows: Note Consolidated Group 2017 $ 2,105,780 5,992,413 91,358 877 2016 $ 1,207,046 4,969,770 85,509 - 8,190,428 6,262,325 9,015,005 2,717,042 - - 11,732,047 3,973,358 2,818,462 2,749,189 47,052 9,588,061 10 11 11 16 18 15 15 16 Financial assets Cash and cash equivalents, including restricted cash Receivables Bond and security deposits Tax Receivable Total financial assets Financial liabilities Loans and Borrowings Trade & Other payables Deferred cash consideration payable Tax Payable Total financial liabilities 86 | ENERGY ACTION ANNUAL REPORT 2017 Note 23: Financial Risk Management (Continued) Financial Risk Management Policies The Audit and Risk Management Committee (ARMC) has been delegated responsibility by the Board of Directors for, amongst other matters, monitoring and managing financial risk exposures of the Group. The ARMC monitors the Group’s financial risk management policies and exposures and approves financial transactions within the scope of its authority. It also reviews the effectiveness of internal controls relating to financing risk and interest rate risk. The ARMC meets at least three times a year and minutes of the ARMC are reviewed by the Board. The ARMC’s overall risk management strategy seeks to assist the consolidated group in meeting its financial targets, while minimising potential adverse effects on financial performance. Its functions include the review of the credit risk policies and future cash flow requirements. Specific Financial Risk Exposures and Management The main risks the Group is exposed to through its financial instruments are credit risk, liquidity risk and market risk consisting of interest rate risk. a. Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities (primarily for trade receivables) and from its financing activities, including deposits with banks and financial institutions, and other financial instruments. Credit risk is managed through the maintenance of procedures (such procedures include the utilisation of systems for the approval, granting and renewal of credit limits, regular monitoring of exposures against such limits and monitoring of the financial stability of significant customers and counterparties), ensuring to the extent possible, that customers and counterparties to transactions are of sound credit worthiness. Such monitoring is used in assessing receivables for impairment. Credit terms are generally 30 to 90 days from the invoice date. Risk is also minimised through investing surplus funds in financial institutions that maintain a high credit rating. The institutions selected are determined by the Board. The maximum exposure to credit risk by class of recognised financial assets at the end of the reporting period excluding the value of any collateral or other security held, is equivalent to the carrying value and classification of those financial assets (net of any provisions) as presented in the statement of financial position. The Group has no significant concentrations of credit risk with any single counterparty or group of counterparties. Details with respect to credit risk of trade and other receivables are provided in Note 11. Trade and other receivables that are neither past due nor impaired are considered to be of high credit quality. Aggregates of such amounts are as detailed in Note 11. b. Liquidity risk Liquidity risk arises from the possibility that the Group might encounter difficulty in settling its debts or otherwise meeting its obligations related to financial liabilities. The Group manages this risk through the following mechanisms: preparing forward looking cash flow analysis in relation to its operational, investing and financing activities; obtaining funding from a variety of sources; maintaining a reputable credit profile; managing credit risk related to financial assets; only investing surplus cash with major financial institutions; and comparing the maturity profile of financial liabilities with the realisation profile of financial assets 87 Note 23: Financial Risk Management (Continued) Within 1 Year 1 to 5 Years Over 5 Years Total Consolidated Group 2017 $ 2016 $ 2017 $ 2016 $ 2017 $ 2016 $ 2017 $ 2016 $ Financial liabilities due for payment Bank loans - - 9,015,005 3,973,358 Deferred consideration - 2,749,189 Trade and other payables (excluding est. annual leave) 2,717,042 2,818,462 Tax liability - 47,052 - - - - - - Total expected outflows 2,717,042 5,614,703 9,015,005 3,973,358 Financial assets — cash flows realisable Cash and cash equivalents Restricted cash Trade, term and loans receivables Bonds and security deposits Tax asset 2,100,187 1,142,046 5,593 65,000 5,992,413 4,969,770 - - - - - - - 877 - - 91,358 85,509 - - Total anticipated inflows 8,099,070 6,176,816 91,358 85,509 Net (outflow)/inflow on financial instruments c. Interest rate risk 5,382,028 562,113 (8,923,647) (3,887,849) - - - - - - - - - - - - - 9,015,005 3,973,358 - - 2,749,189 - 2,717,042 2,818,462 - - 47,052 - 11,732,047 9,588,061 - 2,100,187 1,142,046 - 5,593 65,000 - 5,992,413 4,969,770 - - 91,358 85,509 877 - - 8,190,428 6,262,325 - (3,541,619) (3,325,735) Interest rate risk arises as a result of changes in market interest rates and will affect the future cash flows. The Group manages its interest rate risk by having a variety of borrowing terms from 30 days to 180 days and hedging $5 million of loan amounts via an interest rate swap. Cash and cash equivalents are all on short term deposits. As at 30 June 2017, the Group had bank loans of $9.2 million comprising of $6.2 million on 30 day terms at 2.87% and $3.0 million on 3.38% fixed interest for 2.5 years. At the end of each reporting period, the Group assesses the hedge effectiveness between hedged item and hedging instrument to determine whether the risk management objective for the hedging relationship has changed. The interest rate hedge effectiveness was assessed as at 30 June 2017, $24k was recognised in interest rate reserve in the balance sheet. As at 30 June 2016, the Group had bank loans of $4.25 million all of which was at 30 day terms at 3.1%. d. Market Risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market prices for Energy Action Limited comprise interest rate risk. Financial instruments affected by interest risk include cash at bank. i) Interest rate risk Exposure to interest rate risk arises on financial assets recognised at reporting date whereby a future change in interest rates will affect future cash flows or the fair value of fixed rate financial instruments. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s borrowings balances with floating interest rates. Interest rate risk is managed using a mix of terms on the bank borrowings and the interest rate swap referred to in Note 23(c) above. The company has insignificant other balances that have interest payment terms. 88 | ENERGY ACTION ANNUAL REPORT 2017 Note 23: Financial Risk Management (Continued) ii) Sensitivity Analysis The following table illustrates sensitivities to the Group’s exposures to changes in interest rates. The table indicates the impact on how profit and equity values reported at balance date would have been affected by changes in the relevant risk variable that management considers to be reasonably possible. These sensitivities assume that the movement in a particular variable is independent of other variables, and the other assumptions remain consistent with prior years. Year ended 30 June 2017 Year ended 30 June 2016 Consolidated Group Increase/decrease in basis points $ +/- 100 +/- 100 Profit before tax $ +/- 68,540 +/- 73,310 The assumed movement in basis points for the interest rate sensitivity analysis is based on currently observable market environment, showing a significantly lower volatility than in prior years. Fair Values Fair value estimation The carrying value of financial assets and financial liabilities is materially the same as the fair value. The fair values of the following financial assets and liabilities have been determined based on the following methodologies and assumptions: (i) Cash and cash equivalents, trade and other receivables and trade and other payables are short-term instruments whose carrying value are deemed to be equivalent to fair value. Trade and other payables exclude amounts provided for relating to annual leave which is not considered a financial instrument. (ii) Term receivables generally reprice to a market interest rate every 6 months, and fair value therefore approximates carrying value. (iii) Financial liabilities are classified into Levels: Level 1 those items traded with quoted prices in active markets for identical liabilities Level 2 those items with significantly observable inputs other than quoted process in active markets Level 3 those with unobservable inputs Fair Values Financial Liabilities Bank loans Level 1 FY17 Level 2 Level 3 Level 1 FY16 Level 2 Level 3 - 9,015,005 - - 3,973,358 - 89 NOTE 24: AUDITORS’ REMUNERATION Consolidated Group 2017 $ 2016 $ The auditor for Energy Action Limited is Ernst & Young Amounts received or due and receivable by Ernst & Young (Australia) for: – An audit or review of the financial report of the entity and any other entity in 146,965 146,965 the consolidated group – Other services in relation to the entity and any other entity in the - 10,500 consolidated group – Tax services (Fringe benefit tax) 6,075 153,040 18,425 175,890 NOTE 25: INFORMATION RELATING TO ENERGY ACTION LIMITED (“THE PARENT ENTITY”) The following information has been extracted from the books and records of the parent and has been prepared in accordance with Accounting Standards. Note Parent 2017 $ 2016 $ STATEMENT OF FINANCIAL POSITION ASSETS Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Issued capital Retained earnings Total Equity Profit of the parent entity Total comprehensive income of the parent entity 8,839,702 14,799,620 23,639,322 (4,836,178) (12,877,274) (17,713,452) (8,161,626) 2,235,756 5,925,870 (5,414,625) (5,414,625) 5,647,604 15,038,703 20,686,307 (6,858,775) (8,087,501) (14,946,276) (8,161,626) 2,421,594 5,740,032 (1,957,779) (1,957,779) NOTE 26: EVENTS AFTER THE REPORTING PERIOD A fully franked dividend in respect of the 6 months period to 30 June 2017 of 1.40 cents per share was declared on 22 August 2017. Except for the above issues, no other matters or circumstances have arisen since the end of the financial year which significantly affected or could significantly affect the operations of the consolidated group, the results of those operations, or the state of affairs of the consolidated group in future financial years. 90 | ENERGY ACTION ANNUAL REPORT 2017 DIRECTOR’S DECLARATION In accordance with a resolution of the Directors of Energy Action Limited, I state that: 1. In the opinion of the Directors: a. The financial statements and notes of Energy Action Limited for the financial year ended 30 June 2017 are in accordance with the Corporations Act 2001, including: i. giving a true and fair view of its financial position as at 30 June 2017 and performance ii. complying with Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001 b. The financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2.1 c. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2017. On behalf of the board Murray Bleach Director 22 August 2017 91 INDEPENDENT AUDIT REPORT TO MEMBERS OF ENERGY ACTION LIMITED The auditor’s independent audit report to members of Energy Action Limited for the year ended 30 June 2017 has been received and can be found on the following page of the financial report. 92 | ENERGY ACTION ANNUAL REPORT 2017 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 Energy Action Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Energy Action Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2017 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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. 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 2 Carrying value of intangible assets Why significant How our audit addressed the key audit matter As required by Australian Accounting Standard - AASB 136 Impairment of assets, the Group performs an annual impairment analysis for goodwill balances and should indicators of impairment exist during the year, for other amortising intangible assets. Other intangible assets comprised of customer relationships and capitalised system development costs were assessed by the Group for indicators of impairment. We obtained the Group’s intangible assets impairment assessment. We performed the following procedures: Assessed whether the Group’s determination of Cash Generating Unit (CGU)s. was in accordance with Australian Accounting Standard AASB136 Impairment of Assets. Evaluated the Group’s assessment for indicators of impairment for the other intangible assets The impairment tests were considered to be a key audit matter due to the complexity of the assessment process and significant judgments and assumptions involved which are affected by expected future market or economic conditions. Refer to Note 13 – Intangible assets within the financial report for the amounts recorded on the consolidated statement of financial position as at 30 June 2017 and related disclosures. Assessed the appropriateness of the Board approved cash flow forecast and assumptions therein, including performing a sensitivity analysis of key assumptions and evaluated whether a reasonably possible change in assumptions could result in an impairment of the carrying value of the assets. Considered the historical accuracy of the Group’s cash flow forecasts against the entity’s actual cash performance in prior years. Considered the adequacy of the financial report disclosures contained in Note 13 of the financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 3 Recognition of revenue and valuation of unbilled revenue Why significant How our audit addressed the key audit matter The Group generates revenue from projects that may cross multiple financial periods. Australian Accounting Standard - AASB 118 Revenue requires the Group to estimate the amount of revenue to be recognised in the current financial period. This assessment is dependent upon the costs incurred of the project at the end of the reporting period relative to the estimated total project costs. There is significant judgment exercised by the Group in determining the valuation of unbilled revenue to be recorded. Refer to Note 2(m) within the financial report for a summary of the Group’s policy. The contracting terms used can vary significantly between contracts and involve judgment in the recognition of revenue and valuation of unbilled revenue. As a result, this is a key audit matter. Our audit procedures included the following: Obtained an understanding of the Group’s process and controls to recognise revenue and value unbilled revenue. Tested the operating effectiveness of the Group’s controls over the recording and processing revenue transactions. Assessed whether the Group recognised revenue in accordance with AASB 118 Revenue. Assessed the appropriateness of the estimated project costs for significant projects by considering the Group’s historical forecast accuracy. Recomputed the mathematical accuracy of revenue and contract profit based on the percentage of completion for a sample of contracts. Assessed whether the disclosure within Note 6 of the financial report was in accordance with AASB 118 Revenue. Information Other than the Financial Statements and Auditor’s Report The directors are responsible for the other information. The other information comprises the information included in the Group’s 2017 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report that is to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 4 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 5 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. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 6 Report on the Audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in the directors' report for the year ended 30 June 2017. In our opinion, the Remuneration Report of Energy Action Limited for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Ryan Fisk Partner Sydney 22 August 2017 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation CORPORATE INFORMATION ACN: 137 363 636 Directors Murray Bleach - Non-Executive Chairman Nitin Singhi – Independent Non-Executive Director John Mackay AM – Independent Non-Executive Director (appointed 30 June 2017) Paul Meehan – Non Executive Director Mark de Kock – Non-Executive Director Dr. Ronald Watts – Non-Executive Director (resigned 30 June 2017) Company Secretary Carolyn West (resigned 21 June 2017) Anna Sandham (appointed 21 June 2017) Registered Office and principal place of Business Level 5, 56 Station Street Parramatta NSW 2150 Share register Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Energy Action Limited shares (EAX) are listed on the Australian Securities Exchange (ASX) Solicitors DLA Piper No 1 Martin Place Sydney NSW 2000 Bankers Commonwealth Bank of Australia Level 3, 101 George Street Parramatta NSW 2150 Auditors Ernst & Young 200 George Street Sydney NSW 2000 99 SHARE AND SHAREHOLDER INFORMATION TWENTY LARGEST SHAREHOLDERS AS AT 12 OCTOBER 2017 Fully paid ordinary shares Details of the 20 largest shareholders of quoted securities by registered shareholding are: Shareholder MEEHANTEAM PTY LTD J P MORGAN NOMINEES AUSTRALIA LIMITED MICROEQUITIES ASSET MANAGEMENT PTY LTD HOLYOAKE INVESTMENTS PTY LTD TOVEELEN PTY LTD MR MURRAY EDWARD BLEACH & MRS NORMA LEIGH EDWARDS ANACACIA PTY LIMITED AMARINA SYSTEMS PTY LTD J & C ALLEN SUPERANNUATION FUND PTY LTD MR EDWARD JAMES HANNA JASPER SUPERANNUATION FUND PTY LTD MR BARRY DENTON NATIONAL NOMINEES LIMITED AMARINA SYSTEMS PTY LIMITED MR IVAN ROMAN SLAVICH & MRS ANNA SLAVICH EQUITAS NOMINEES PTY LIMITED DR GEOFFREY PHILLIP BENT & MRS GABRIELLE MARY BENT BLIND WELFARE PTY LTD MR PETER SCARF & MRS IDA SCARF BLEACH FAMILY CO NO 2 PTY LTD UBS NOMINEES PTY LTD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 18 19 20 No. Shares % 2,900,698 2,718,465 2,698,538 1,774,127 1,696,209 1,608,490 1,295,368 1,240,487 875,833 611,387 552,553 330,165 322,246 313,300 289,214 250,000 246,299 200,000 200,000 198,775 189,239 11.18 10.47 10.40 6.84 6.54 6.20 4.99 4.78 3.37 2.36 2.13 1.27 1.24 1.21 1.11 0.96 0.95 0.77 0.77 0.77 0.73 Total Balance of register 20,511,393 5,442,724 79.03 20.97 Grand total 25,954,117 100.00 Number of security holders and securities on issue Quoted equity securities EAX has 25,954,117 fully paid ordinary shares on issue which are held by 503 shareholders. Unquoted equity securities EAX has no unquoted equity securities. 100 | ENERGY ACTION ANNUAL REPORT 2017 DISTRIBUTION OF SHARES The following table summarises the distribution of shares as at 12 October 2017. Category / Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Number of shareholders 121 189 64 100 29 503 % 24.06 37.57 12.72 19.88 5.77 100 Unmarketable parcel of shares The number of individual shareholders holding less than a marketable parcel of shares was 70. 575 fully paid ordinary shares comprise a marketable parcel at EAX’s closing share price of $0.87 as at 12 October 2017. Substantial shareholders The following table shows holdings of five percent or more of voting rights in Energy Action Limited’s shares (as at 12 October 2017): Person or Group Number of Shares Current Interest Microequities Asset Management Pty Ltd Mr Paul Meehan & related entities Mr Stephen Twadell & related entities Dr Ron Watts & related entities Mr Murray Bleach & related entities Voting rights 5,185,244 4,798,993 1,829,440 1,730,371 1,717,329 19.98% 18.49% 7.05% 6.67% 6.62% At a meeting of members, each member who is entitled to attend and vote may attend and vote in person or by proxy, attorney or representative. On a show of hands, every person present who is a member, proxy, attorney or representative shall have one vote and on a poll, every member who is present in person or by proxy, attorney or representative shall have one vote for each fully paid share held. Securities exchange listing Energy Action Limited’s shares are traded on the Australian Securities Exchange under the ticker code “EAX”. On-market buy-back There is no current on-market buy-back. 101 GLOSSARY OF TERMS Australian Energy Exchange (AEX) Energy Action’s online, real-time reverse auction platform for the procurement of electricity and gas contracts Bill Validation Review of energy bill for validity and correctness Energy Metrics C & I Gigajoule Energy Action’s advanced electricity and gas monitoring technology platform. service A Commercial & Industrial business which consumes more than 160 MWh p.a. in NSW, VIC, SA, ACT & TAS and more than 100 MWh in QLD A measure of energy which equals one thousand megajoules. Kilowatt (kW) A measure of one thousand watts of electric power. Megawatt (MW) A measure of one million watts of electric power Meter NABERS A device used to measure energy consumption at a site. National Australian Built Environment Rating System that measures the environmental performance of Australian buildings, tenancies and homes. National Greenhouse Energy Reporting System Provides methods and criteria for calculating greenhouse gas emissions and energy data under the National Greenhouse and Energy Reporting Act 2007 (NGER Act) Network Tariff The Continuous charge for supplying electricity and maintaining the network of poles, wires and other equipment that distribute power to customers. Petajoule (PJ) A measure of energy equivalent which equals one thousand terajoules. RFP Site Request for Proposal An individual metered location with a unique supply point identifier (SPID). Small-Medium Enterprise (SME) A SME is a business which consumes less than 160 MWh p.a. in NSW, VIC, SA, ACT & TAS and less than 100 MWh in QLD Structured Product Retail supply contracts with a fixed term, variable commodity prices and variable volumes. The term structured product refers to retail electricity contracts with these features. Tariff The pricing a retailer charges a customer for energy consumption. Terajoule (TJ) A measure of energy equivalent which equals one thousand gigajoules. Terrawatt (TW) A measure of one trillion watts of electrical power Terawatt hour (TWh) A terawatt hour is a unit of energy equivalent to one terawatt (1 TW) of power sustained for one hour. 102 | ENERGY ACTION ANNUAL REPORT 2017 ENERGYACTION.COM.AU 103