Po Valley Energy Limited Annual Report 2005

Plain-text annual report

PO VALLEY ENERGY LIMITED A.B.N. 33 087 741 571 Annual Report 2005 Po Valley Energy is listed on the Australian Stock Exchange under the symbol PVE. The Company focuses on developing existing but undeveloped shallow, onshore gas ﬁ elds in the Po Valley area in Northern Italy; a proliﬁ c hydrocarbon province which has produced over 25 tcf of gas since discovery in the late 1940s. For 50 years the Po Valley hydrocarbon province was a monopoly of the then state-owned oil company ENI, now one of the 10 largest global oil and gas producers. Following the break-up of ENI’s monopoly and the liberalisation of the Italian gas market, Po Valley Energy entered the province in 1998 through its 100% owned subsidiary, North Sun Italia. Po Valley has successfully drilled its ﬁ rst three ﬁ elds and is moving towards commercial gas production. “Po Valley has successfully drilled its ﬁ rst three ﬁ elds and is moving towards commercial gas production.” Michael Masterman Managing Director Index Index Corporate Directory Chairman’s Letter to Shareholders Highlights Managing Director’s Report Corporate Governance Statement Directors’ Report Auditor’s Independence Declaration Income Statements Statements of Recognised Income and Expense Balance Sheets Statements of Cash Flows Notes to the Consolidated Financial Statements Directors’ Declaration Independent Audit Report Shareholder Information 1 2 3 3 4 10 13 20 21 22 23 24 25 50 51 53 1 Corporate Directory Directors Graham Bradley, Chairman Michael Masterman, Managing Director David McEvoy, Non-Executive Director Byron Pirola, Non-Executive Director Dietmar Greil, Executive Director - Technical Company Secretary Dom Del Borrello Registered Ofﬁce Level 28, 140 St George’s Terrace Perth WA 6000 Tel: (08) 9278 2533 Share Registry Link Market Services Limited Level 12, 680 George’s Street Sydney NSW 2000 Tel: (02) 8280 7424 Solicitor Steinepreis Paganin Level 4, Next Building, 16 Milligan Street Perth WA 6000 Auditor KPMG Central Park, 152-158 St George’s Terrace Perth WA 6000 Bank ANZ Banking Corporation Level 7, 77 St George’s Terrace Perth WA 6000 Stock Exchange Listing Po Valley Energy Limited shares are listed on the Australian Stock Exchange under the code PVE. The company is limited by shares, incorporated and domiciled in Australia. 2 2 Chairman’s Letter to Shareholders Dear Shareholders On behalf of the Board of Directors of Po Valley Energy I am please to present the Annual report of the company for the ﬁ rst full year since listing on the Australian Stock Exchange in December 2004. The company has had an intensely active 2005, delivering positive drilling and testing results from its ﬁ rst three ﬁ elds. Sillaro, the company’s largest ﬁ eld, delivered an exceptional ﬂ ow test result on Christmas Eve and in the week leading up to the new year. Two additional gas bearing intersections have been discovered in the target Pliocene level, with very strong results tested on these levels. Vitalba has also come in strongly in the new year following the drilling of Vitalba 1 and Vitalba 1 dir. Test results exceeded expectations and Vitabla promises to be an important contributor along with Santa Maddalena to the group’s future production. 2006 should see the company make signiﬁ cant progress towards commercial gas production and cashﬂ ow. We will focus on Sillaro as it is our largest and potentially highest return ﬁ eld, and will follow with Vitalba and Santa Maddlena. We will also initiate new projects including drilling the highly attractive Bezzecca ﬁ eld. During the year ahead we also plan to drill Sillaro 2 which we expect to expand the company’s production capacity and potentially further increase our reserves. In 2005 we have demonstrated our operational credentials and delivered a solid platform from which to grow the company in 2006. We could not have achieved this without the commitment and hard work of our small and highly professional team in Italy. On behalf of the board, I thank them for their efforts in 2005. My fellow directors also rolled up their sleeves during the year beyond the call of duty and I thank them for their contribution to the company’s achievements. Graham Bradley Graham Bradley Chairman Highlights • 3 out of 3 gasﬁ elds successfully drilled and tested - Santa Maddalena, Sillaro, Vitalba • Successfully drilled Sillaro Gasﬁ eld - Discovered two new gas bearing levels - Flow rates 10 times expected levels - total of 12.9 million cubic feet per day - Pliocene reserves increase 26% to 15.8 bcf - Deeper Miocene ﬁ eld 40 bcf - to be drilled in 2006 • Successfully drilled Vitalba Gasﬁ eld - Conﬁ rmed proven reserves in two gas bearing levels – San 1 + San 2 - Flow rates twice expectations – 2.8 million cubic feet per day • Upgraded Bezzecca/Pandino to development status • 70% increase in 2P reserves • Italian Gas prices increase 55% since IPO Managing Director’s Report Italian Gas Market The Po Valley region in Northern Italy has historically been a proliﬁ c hydrocarbon province. Over 23tcf of gas has been produced from the province since it was brought into production in the early 1950s -this is over three times the production of Australia’s Northwest Shelf. Current production levels in the province are some 450bcf per annum which is similar to the levels of the Northwest Shelf The gas province sits immediately below one of the largest and highest priced gas consumption regions in Europe. Total gas consumption in Italy during 2005 was four times the size of Australia and has been growing at a rapid rate of 5% per annum. Imports account for over 80% of supply and Italy has recently been severely affected by disruptions to the supply of natural gas from Russia following the Ukraine dispute in later 2005. Gas prices have risen over 54% since the IPO of the company in December 2004. Continued rapid gas consumption demand combined with import capacity constraints and Russian gas supply disruptions have signiﬁ cantly tightened market conditions. Europe is becoming a more integrated market and the declining North Sea gas production and rising UK imports and UK gas prices is having a strong ripple effect on the Italian and European Markets. Energy security and a new found concern regarding the dependence on and reliability of Russian imports is putting a premium on commercial gas reserves within the walls of Europe. Po Valley is perfectly positioned to capitalise on these market conditions. Overview In the 15 months since the Initial Public Opening (IPO) of Po Valley Energy in December 2004, the company has created signiﬁ cant value for its shareholders and through its successful drilling activities substantially reduced the company’s risk proﬁ le. The highlight of the year was the exceptional ﬂ ow test results from Sillaro in late December 2005. Vitalba also came through strongly with good test results in January 2006. Italian to English translation LA REPUBBLICA 15/2/2006 GAS, CUTBACK FROM MOSCOW AND CONSUMPTION RECORDS Italy’s need for gas forced it to use the precious strategic resources (2 million cubic metres). This was a necessary measure to confront the cut in the Russian supply (-12.2% consisting of 2.4% of the total) and the dramatic increase in consumption, up to 22%, and the intervention of the Energy Authority who states the need for a reduction of Eni’s power on the internal market and on the distribution net.... 4 Po Valley Development Projects and Licences Po Valley has been very active on the gasﬁ eld development front and in expanding the potential for future projects through new licence applications. The company started the year with 3 core projects - Sillaro, Vitalba and Santa Maddalena - and quickly added a fourth large development project Bezzecca (formerly known as Pandino). Sillaro, Vitalba and Santa Maddalena have all been successfully drilled and tested and have been fully completed with downhole equipment ready for production. One of the key challenges through 2006 will be to convert these gasﬁ eld licence areas from exploration licences to production concessions and complete the Licence Locations surface plant engineering work, grid connections and associated environmental approvals to put these ﬁ elds into production. Po Valley Gas Province in Perspective Cumulative Production (Billions of cubic feet) Po Valley 22,809 Bcf North West Shelf 7,386 Bcf Annual Production (Billions of cubic feet) Po Valley 476 Bcf North West Shelf 635 Bcf 5 Managing Director’s Report continued Sillaro -Crocetta Licence (100% PVE) Sillaro in the Crocetta licence area is the company’s largest natural gasﬁeld. The ﬁeld was explored under the former ownership of ENI between 1955 and 1982 with seven wells drilled. The ﬁeld contains gas bearing zones in the Pliocene at around 2,100 m and the Miocene around 2,500 m. Po Valley Energy commenced appraisal and development drilling at Sillaro in July 2005 with the drilling of a vertical well – Sillaro 1. The well intersected gas bearing zones and had gas shows, but on closer evaluation of the data and testing, it became clear that at the Sillaro 1 location, the structure was deeper than the previously identiﬁed target levels. Sillaro rig-up, June 2005 The key priorities through 2006 for Sillaro will be to drive the project towards production in early 2007 and to undertake the necessary preparatory work to be positioned to drill a second Sillaro 2 well in the Pliocene and a Sillaro 3 well in the Miocene and Pliocene. The A deviation well – Sillaro 1dir – was drilled 300 m to Miocene level at 2,500 m remains a large target and provides the potential for further increases in proven reserves and production capacity. the south towards the Budrio 2 well during November and December 2005. Sillaro 1dir, targeted at only the Pliocene level, was a highly successful well. The logs identiﬁed three gas bearing levels over a 100m gross interval – compared with the target of one gas bearing zone over 15m. Flow testing was conducted in late December 2005 and produced ﬂow rates over 10 times higher than expectations. The target PL2 B zone produced 3.5 million cubic feet per day on a 5/16” choke and the new discovery zones PL2 C and PL2 A produced 5.4 and 4.0 million cubic feet per day respectively. Subsequent testing of the wells showed very good pressure recovery. In early 2006 the company completed a full revision of its geological model to take into account the new structure and new gas bearing zones and to plan optimal reservoir development. Based on the revised reserve estimates of the Pliocene level there was a good conversion of probable to proven reserves. Sillaro production test December 2005 6 Managing Director’s Report continued In addition to gas production, Vitalba is also ideally suited for use as a gas storage ﬁeld, storing gas in summer for use in winter. Storage capacity in Italy has become tightly constrained and reservoir simulation of the previous ENI well in the Vitalba ﬁeld suggested the ﬁeld has very good reservoir dynamics. Work on converting the Vitalba exploration licence into a production licence is underway and it is planned that Vitalba will follow Sillaro into commercial gas production. Vitalba - Cascina San Pietro Licence (100% PVE) Vitalba had a challenging year coming through strongly with good ﬂow test results in early 2006. A vertical well – Vitalba 1 - was drilled during May and June 2005 in a target zone identiﬁed by seismic analysis. Logs indicated that the vertical well touched the tip of the pinch out structure but that there were insufﬁcient pays zones for production. A decision was taken immediately to drill a deviation well - Vitalba 1dir – 400m south towards the original ENI well Agnadello 1. The deviation well was successful with logs identifying three gas bearing zones. Initial testing of the lowest zone San A3 was inconclusive due to technical problems during the test. Management then focused on testing the San A1 and San A2 levels that had been the source of strong production rates during operation by ENI of Agnadello 1. Flow rate testing of San A1 and San A2 produced higher than expected ﬂows of 2.8 million cubic feet per day on a ¼” choke. The test evaluations showed good pressure recovery and a clear basis to proceed forward toward production. Vitalba ﬂare Santa Maddalena -San Vincenzo Licence (50% PVE) Santa Maddalena moved forward toward production, albeit more slowly than management expected. Conﬁrmatory ﬂow tests were successfully completed in November 2005 and Edison Gas, our joint venture partner and operator, has now completed all application, engineering and environmental approval documentation required to submit the production concession application. The company will seek to accelerate production of the ﬁeld during 2006. Depth Structure Map - Santa Maddalena Field 7 Managing Director’s Report continued Bezzecca - Cascina San Pietro Licence (100% PVE) Bezzecca (formerly called Pandino) was upgraded to development status in April 2005 following extensive evaluation of the data on the former ENI production ﬁeld that operated during the 1950s. Bezzecca has estimated reserves of 45 bcf and work is advanced to drill Bezzecca 1. Drill site environmental approval documentation has been completed and is ready for submission, with drilling program design underway. Procurement is underway for long lead items of tubing and casing materials for delivery prior to the commencement of drilling currently planned for early 2007. Top M13 Depth Structure Map - Bezzecca Field Other Licences The company has been actively evaluating opportunities In existing licences more detailed work has been for new licence applications in Northern Italy. A extensive program of scanning for opportunities, including the collection of historical data and conducted on the Terra del Sol licence application and the Casone della Sacca licence. Each of these licence areas has some attractive, but smaller targets, which evaluation, has been completed during the year and management are actively investigating the best way to Po Valley Energy is moving forward with eight new drill and realise value. applications. The company expects signiﬁcant progress on this through 2006. 8 Managing Director’s Report continued Gas Reserves The company’s reserves increased in both size and quality reserves rising to 36.6 bcf. The reserves on a PVE during 2005. Proven and Probable (2P) reserves are up equity basis are set out below: 70% to 105bcf since December 2004, with Proven Field Names Exploration Permit 1. Santa Maddalena San Vincenzo 2. Sillaro 3. Vitalba 4. Bezzecca Total Development Crocetta Cascino san Pietro Cascino san Pietro PVE Interest 50% 100% 100% 100% Remaining Recoverable Reserves (bcf) Proven Probable Possible 6.4 10.4 4.6 15.2 36.6 7.1 30.0 1.7 29.2 68.0 8.6 16.3 0.0 0.9 25.8 130.4 PVE Total 22.1 56.7 6.3 45.3 Development Field Reserves (as estimated by consulting geologists, Ecopetrol) Finance Following the $20 million IPO in December 2004, Po Valley Energy raised another $8.4 million through a private placement to Harbert, a large US Hedge Fund. The total funds have been principally used to drill the vertical and deviation wells in both Sillaro and Vitalba and to complete the testing, development and environmental works at Sillaro, Vitalba, and Santa Maddalena. Additional funds have been used to drive the new project acquisition program and to progress Bezzecca. During the year management took the opportunity to write off $745,403 of pre-IPO resource property costs that did not relate to any speciﬁc areas of interest. With a solid cash at bank position and successfully completed and tested production wells at Sillaro, Vitalba and Santa Maddalena, the company starts 2006 in a strong ﬁnancial position. The intention of the company is to fund the key work to put the three ﬁelds into production through bank funding lines backed by these ﬁelds proven reserves. Discussions are underway with a number of leading banks with expertise in Oil and Gas projects. Management 2005 was a very intensive year for management with the ﬁrst year of full scale drilling operations. The company was one of the most active exploration company’s in Italy during the period and demonstrated strong operating and managerial capacity during the initial disappointments of the vertical wells and the subsequent successes with the Sillaro and Vitalba deviation wells. This has fully tested and established the credentials of the team going forward into 2006 and 2007. We will continue to run a lean core team with a low cash burn rate when not drilling. Steps will be taken through 2006 to build the team on both the geological and operational fronts in gearing up to operate and market gas in 2007. Conclusion In 2005 and early 2006 we delivered the drilling successes and production test results to underpin the company’s future growth and earnings potential. The principal focus in 2006 will be to convert the successes with the drilling program into strong Italian gas sales and earnings. Extensive work is required on the engineering and approval fronts to achieve this objective and much of this is underway. Patience will be required in this process as signiﬁcant work is required with the Italian Ministry and associated environmental authorities and it is very important that this work is done correctly to the highest safety and environmental standards. We look forward to the support of the Italian Government in these endeavours. Finally I would like to thank the core team of employees, consultants and contractors who have made our ﬁrst year as a public listed company successful. Michael Masterman Managing Director and Chief Executive Ofﬁcer 9 Corporate Governance Statement The Directors are committed to the principles regularly monitored. A number of areas are to be subject underpinning the best practice in corporate governance. to regular reporting to the board such as ﬁnance, trade The Directors have noted carefully the recent guidance practices, industrial relations, environmental compliance, on the principles of corporate governance issued by the workplace health and safety and insurance matters. ASX. The Directors support the intent of these principles, noting that some recognition is required in their practical application given the limited size and scope of the Company at this time. All Directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the Company. The Directors’ overriding objective is to increase shareholder value within an appropriate framework Audit and Risk Committee that protects the rights and enhances the interests of Shareholders and ensures the Company is properly managed. A description of the Company’s main corporate governance practices is set out below. The Board The board ultimately takes responsibility for corporate governance and operates in accordance with the Company’s Constitution. One-third of the board is subject to re-election at each subsequent annual general meeting. The board comprises ﬁve directors; three non-executive directors and two executive directors. Two directors, including the Chairman, are independent non- executive directors. The board believes that this is an appropriate composition for a company at this stage of its development. Directors have the right, in connection with their duties and responsibility as Directors, to seek independent professional advice at the Company’s expense. Prior approval of the Chairman is required which will not be unreasonably withheld. The board accepts that it has the responsibility for internal control procedures within the Company. Compliance with these procedures covering ﬁnancial reporting, quality and integrity of personnel and operation control is to be The Audit and Risk Committee provides advice and assistance to the board in fulﬁlling the board’s responsibilities relating to the Company’s ﬁnancial statements, ﬁnancial and market reporting processes, internal accounting and ﬁnancial control systems, internal audit, external audit, risk management and such other matters as the board may request from time to time. Responsibilities • Standards and Quality: The Committee oversees the adequacy and effectiveness of the Company’s accounting and ﬁnancial policies and controls, and risk management systems, including periodic discussions with management and external auditors, and seeks assurance of compliance with relevant regulatory and statutory requirements. • Financial Reports: The Committee oversees the Company’s ﬁnancial reporting process and reports on the results of its activities to the board. Speciﬁcally, the Committee reviews, with management and the external auditor, the Company’s annual and interim ﬁnancial statements and reports to Shareholders, seeking assurance that the external auditor is satisﬁed with the disclosures and content of those ﬁnancial statements. 10 • External Audit: • Reporting: The Committee discusses with the external auditors The issues discussed at each Committee meeting the overall scope and plans for their audit activities, are reported at the next board meeting. including stafﬁng, contractual arrangements and fees. It reviews all audit reports provided by the external auditor. The Committee also speciﬁcally reviews any proposed activity or service by the providers of the external audit unrelated to external audit assurance activities. The external auditor will be requested to attend annual general meetings, and be available to answer questions from the shareholders. • Appointment of External Auditor: The board appoints the external auditor. The Committee reviews the performance of the external auditor annually, and can recommend to the board any changes to selection it deems appropriate. • Internal Control: The Committee examines the adequacy of the nature, extent and effectiveness of the internal control processes of the Company. • Risk Management: The Committee oversees the risk management framework of the Company, and reviews risk management reports. Processes • Communications: The Committee maintains free and open communications with the external auditors and management. • Access: In exercising its oversight role, the Committee may investigate any matter relevant to its charter or relating to its role and scope, and for this purpose has full access to the Company’s ﬁnancial reporting and practices. • Charter: The Committee reviews and reassesses this Charter at least annually, and recommends any changes it considers appropriate to the board. The Committee may also undertake any other special duties as requested by the board. The current members of the committee are: Byron Pirola (Chairman), Graham Bradley and David McEvoy. Remuneration Committee The Remuneration Committee must have a majority of non-executive directors. The main role of the Remuneration Committee is to: • review the performance and remuneration of the Chief Executive Ofﬁcer, and in conjunction with the Chief Executive Ofﬁcer, review the engagement, performance and remuneration of senior executives of the Company; and • recommend to the board appropriate terms and conditions of engagement and remuneration of Directors within the aggregate limits approved by Shareholders. 11 Corporate Governance Statement continued In assessing the performance of the Chief Executive Share Trading Ofﬁcer and senior executives, the Committee gives considerable weight to the contribution of the employee towards the achievement of key performance indicators of the Company. Where necessary the committee can obtain external advice in respect to the structure and level of remuneration packages. Directors, management and other employees as nominated will normally be permitted to trade in securities during an eight week period commencing two business days after the announcement to ASX of the half yearly and annual results and after the conclusion of the Company’s annual general meeting, provided The current members of the committee are Graham that the person is not in possession of price sensitive Bradley (Chairman) and Byron Pirola. Nominations Committee The role of the Nominations Committee is to provide recommendations to the board on matters including: • composition of the board and competencies of board members; • appointment and evaluation of the Chief Executive Ofﬁcer; • succession planning for board members and senior management; and • processes for the evaluation of the performance of the Chief Executive Ofﬁcers and Directors. information and the trading is not for short term or speculative gain. Any trading outside these periods can only be conducted with the prior written approval of the Chairman. Related Party Matters Directors and senior management will be required to advise the Chairman of any related party contract or potential contract. The Chairman will inform the board and the reporting party will be required to remove himself/herself from all discussions and decisions involving the matter. The board may, when appropriate, take further steps to avoid conﬂicts of interest in related party matters. The current members of the committee are Graham Shareholder relations Bradley (Chairman) and Byron Pirola. Standards and Codes of Conduct The Directors aim to ensure that the shareholders, on behalf of whom they act, are informed of all information necessary to assess the performance of All executives and employees are required to abide by the Company. Information on all major developments laws and regulations, to respect conﬁdentiality and the affecting the company is to be communicated to the proper handling of information and act with the highest shareholders through: • the Annual Report; • half yearly reports; • the Annual General Meeting and other meetings called to obtain approval for board action as appropriate; and • the Company’s web site. standards of honesty, integrity, objectivity and ethics in all dealings with each other, the Company, customers, suppliers and the community. The codes of conduct will be regularly reviewed and updated as necessary to ensure they reﬂect the highest standards of behaviour and professionalism. Continuous Disclosure The Directors are committed to keeping the market fully informed of material developments to ensure compliance with the Listing Rules and the Corporations Act. At each board meeting speciﬁc consideration is to be given as to whether any matters should be disclosed under the Company’s continuous disclosure policy. 12 Directors’ Report The directors present their report together with the ﬁnancial report of Po Valley Energy Limited (‘the Michael Masterman Managing Director and CEO, BEcHons, Age 43 Company” or “PVE”) and of the consolidated entity, Michael is a co-founder of PVE and is based in Europe. being the Company and its controlled entities, for the Michael took up the position of Executive Chairman year ended 31 December 2005. 1. Directors The directors of the Company at any time during or since the end of the ﬁnancial year are: Date of Appointment 22 June 1999 and CEO of PVE and Northsun Italia S.p.A. in 2002. Prior to joining PVE he was CFO and Executive Director of Anaconda Nickel (now Minara Resources). Michael oversaw the ﬁnancing of the US$1 billion Murrin Murrin Nickel and Cobalt project in Western Australia, involving the negotiation of a US$220m joint venture agreement with Glencore International and the raising of US$420m in project ﬁnance from a US capital 10 May 2002 markets issues – the ﬁrst of its kind for a green ﬁelds 30 September 2004 30 September 2004 mining project. Prior to joining Anaconda Nickel, he spent 8 years at McKinsey & Company serving major international resources company’s principally in the 5 August 2005 area of strategy and development. He is also Executive Chairman of Caspian Holdings Plc, an AIM listed company with oil interests in Kazakhstan. Directors M Masterman B Pirola G Bradley D McEvoy D Greil Information on Directors The board is composed of a majority of non-executive Directors, including the Chairman. The Chairman of the board is elected by the board and is an David McEvoy Non Executive Director, BSc, Grad Diploma (Appl. Geophysics), Age 59 independent director. Graham Bradley Chairman BA, LLB (Hons), LLM, FAICD, Age 57 Graham joined PVE as a director and Chairman in September 2004 and is based in Sydney. He is an experienced Chief Executive Ofﬁcer and listed public company director. Graham previously served as Chief Executive Ofﬁcer of one of Australia’s major listed funds management and ﬁnancial services groups, Perpetual Trustees Australia. He was Managing Partner and Chief Executive Ofﬁcer of a national law ﬁrm, Blake Dawson Waldron and was a senior Partner of McKinsey & Company. Mr Bradley is currently a director of MBF Australia and Singapore Telecommunications. He is Chairman of HSBC Bank Australia Limited, Stockland Corporation, Film Finance Corporation Australia Limited and Proteome Systems Limited. David joined PVE as a Director in September 2004 and is based in Sydney. He has over 36 years experience in the oil and gas industry since joining Esso Australia Limited in 1969. Key positions held within Exxon afﬁliates included Esso Australia Limited’s Exploration General Manager, Exploration and Development Vice President for Esso Resources Canada and Regional Vice President of Exxon Exploration Company responsible for Exxon’s exploration activities in the Far East, USA, Canada and South America. He was recently the Business Development Vice President and member of the Management Committee of Exxon (subsequently ExxonMobil) Exploration Company, responsible for new exploration and development opportunities worldwide. He is currently a Non-Executive Director of Woodside Petroleum Limited and Innamincka Petroleum Limited. 13 Directors’ Report continued Byron Pirola Non Executive Director, BSc, PhD, Age 45 2. Company Secretary Byron is a co-founder of PVE and is based in Sydney. He Dom Del Borrello, BCom, Age 39 is currently a Director of Port Jackson Partners Limited, Dom was appointed to the position of Company a Sydney based strategy management consulting ﬁrm. Secretary in September 2004. He has signiﬁcant Prior to joining Port Jackson Partners in 1992, Byron corporate ﬁnance and capital markets experience with spent six years with McKinsey & Company working a focus on resources company’s. He is currently the out of the Sydney, New York and London Ofﬁces and Group Manager, Treasury and Risk of Iluka Resources across the Asian Region. He has extensive experience Limited a leading global producer of mineral sands. in advising CEOs and boards of both large public and small developing company’s across a wide range of industries and geographies. Dietmar Greil Executive Director Technical, MEng Age 52 Dietmar is a highly experienced reservoir engineer with over 30 years experience in exploration and development in the oil and gas industry. He has extensive oil and gas experience having worked for Statoil, Chevron and Pruesagg. Dietmar has been a member of the management team since the Company’s listing in late 2004. 3. Directors Meetings The number of formal meetings of the Board of Directors held during the ﬁnancial year and the number of meetings attended by each director is provided below. The Company also has a Remuneration Committee which did not meet during the year. 4. Principal Activities The principal continuing activities of the group in the course of the year were; • the exploration for gas in the Po Valley region in Italy • appraisal and development of gas properties No. of board meetings held No. of board No. of board No. of Audit meetings eligible meetings to attend attended Committee meetings held G Bradley M Masterman D McEvoy B Pirola D Greil 12 12 12 12 12 12 12 12 12 8 12 12 12 11 4 2 2 2 2 2 No. of Audit Committee meetings attended 2 - 2 2 - 14 5. Earnings per share The basic loss per share for the Company was 3.19 cents. Conﬁrmatory tests were completed at Santa Maddalena during the year and discussions are underway with the Ministry of Productive Activities on a production concession. 6. Operating and ﬁnancial review The consolidated loss of the consolidated entity The Company completed a private placement late in the year issuing 12,500,000 shares to Harbert Asset after income tax amounted to $ 2,267,469 Management, a leading US hedge fund at AUD0.70 (2004: $1,613,460). cents a share, raising $8,750,000. During 2005, the Company successfully drilled and Cash at bank at the end of the year was $10,437,245 tested the Vitalba and Sillaro gas ﬁelds, tested the Santa leaving the Company well positioned to pursue it’s Maddalena gasﬁeld, and upgraded the Pandino/Bezzecca development and exploration activities for 2006. ﬁeld to development status following an extensive geological review. Sillaro 1d deviation well conﬁrmed three gas bearing levels – PL2A, PL2B, PL2C. This well indicated positive ﬂow tests at aggregate rate of 12.9m cubic feet per day and it expected that a reserve upgrade will be made for this ﬁeld. The Vitalba well was successfully drilled with a production test completed indicating positive ﬂow test 7. Dividends No dividends have been paid or declared by the Company during the year ended 31 December 2005. 8. Events subsequent to reporting date Since 31 December 2005, the consolidated entity has undertaken the following signiﬁcant events: on levels San 1 and San 2 of 2.8m cubic feet per day. • Successfully tested gas ﬂows at the Vitalba The Pandino ﬁeld was upgraded to development #1 deviation well status and environmental approval documentation • Upgraded proven reserves (1P) by 45 % to 36.6 bcf has been submitted. Other than as set out above, there were no events between the end of the ﬁnancial year and the date of this report that, in the opinion of the directors, affect signiﬁcantly the operations of the consolidated entity, the results of those operations, or the state of affairs of the Directors and management inspecting the Bezzecca site. consolidated entity. 9. Likely Developments During 2006 the Company intends to drill a second well in the Sillaro gas ﬁeld and push forward with the successfully drilled Sillaro, Vitalba and Santa Maddalena gas ﬁelds towards production in early 2007. Preparation will also commence to drill Bezzacca 1 in the company’s Cascina san Pietro licence. The Company now has a portfolio of 11 exploration and development licences and licence applications and will focus on detailed geological evaluation of these projects and preparation of drilling programs. 15 Directors’ Report continued 10. Environmental Regulation The Company’s operations are subject to environmental Non-Executive Directors The remuneration of PVE Non-Executive Directors regulations under both Federal and local municipality comprises cash fees and superannuation contributions. legislation in relation to its mining exploration and There is no current scheme to provide performance development activities in Italy. Company management based bonuses or retirement beneﬁts to Non-Executive monitor compliance with the relevant environmental Directors other than superannuation contributions. legislation. The Directors are not aware of any breaches Non-Executive Directors typically do not participate in of legislation during the period covered by this report. equity or options schemes of the Company, but given the size of PVE, and its focussed nature of the business and shareholdings structure, issues of share options to Non-Executive Directors have previously been made, and may in the future be, approved by shareholders to enhance overall shareholder wealth creation. The board of directors and shareholders last approved the maximum agreed remuneration for Non-Executive Directors at a meeting of the Company in late 2004 at $200,000 per annum. The total amount paid in 2005 to non-executive directors was $135,549. The major provisions of the service contracts held with the speciﬁed directors and executives, in addition to any performance related bonuses and/or options are as follows: 11. Remuneration Report The Remuneration Report outlines the remuneration arrangements which were in place during the year, and remain in place as at the date of this report, for the Directors and executives of the Company. Remuneration Policy The Company aims to ensure that the level and composition of remuneration of its directors and executives is sufﬁcient and reasonable for the competitive industry in which the Company operates. The Remuneration Committee is responsible for determining and reviewing compensation arrangements for the Directors, the Chief Executive Ofﬁcer and the executive team. The Remuneration Committee assesses the appropriateness of the nature and amount of entitlements of such ofﬁcers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder beneﬁt from the retention of a high quality board and executive team. Executive Directors The remuneration of PVE executive directors and senior executives comprises some or all of the following elements: ﬁxed salary; short term incentive bonus based on performance; long term incentive shares and/or option scheme; and other beneﬁts including employment insurances and superannuation contributions. In relation to the payment of bonuses, share option and other incentive amounts, discretion is exercised by the Remuneration Committee having regard to the overall performance of the Company and of the relevant individual during the period. 16 Speciﬁ ed Directors Graham Bradley, Chairman • Commencement Date:19 May 2005 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December, 2005: $60,000 • No termination beneﬁ ts David McEvoy, Non-executive director • Commencement Date:19 May 2005 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December, 2005: $40,000 • No termination beneﬁ ts Byron Pirola, Non-executive director • Commencement Date:19 May 2005 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December, 2005: $40,000 • No termination beneﬁ ts Michael Masterman, Chief Executive Ofﬁ cer and Managing Director • Commencement Date:14 December 2004 • Term of Agreement: 2 years with a further 1 year extension at the option of the executive • Fixed remuneration inclusive of superannuation for the year ended 31 December, 2005: $240,000 • Payment of termination beneﬁ t on termination by the employer (other than for gross misconduct) equal to one years total ﬁ xed remuneration Dietmar Greil, Executive Director - Technical • Commencement Date: 1 January 2005 • Term of Agreement: 2 years with a further 1 year extension at the option of the executive • Fixed remuneration for the year ended 31 December, 2005: EUR100,000 • Payment of termination beneﬁ t on termination by the employer (other than for gross misconduct) equal to one years total ﬁ xed remuneration Speciﬁ ed Executive Dom Del Borrello, Company Secretary • Commencement Date: 6 September 2004 • Term of Agreement: No ﬁ xed term • Contracted on a ﬁ xed hourly rate to provide company secretarial services. • No termination beneﬁ ts 17 The remuneration details of each director and speciﬁed executives during the year is presented in the table below. There are no executive ofﬁcers of the consolidated entity other than those listed. Speciﬁed executives G Bradley (Chairman) D McEvoy B Pirola M Masterman (CEO) D Greil (appointed 5 August 2005) Speciﬁed executives D Del Borrello Salary & Fees $ Bonus $ Super-annuation beneﬁts $ Value of options (i) $ 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 57,163 15,000 39,198 10,000 39,198 10,000 255,877 152,000 149,714 57,804 33,058 5,000 - - - - - - - - - - - - - - 1,350 292,500 - 900 - 900 - - - - - - - 146,250 - 58,500 280,986 61,128 168,592 36,677 28,099 6,113 Total $ 57,163 308,850 39,198 157,150 39,198 69,400 536,863 213,128 318,306 94,481 61,157 11,113 Non-Audited S300A(1)(e)(vi) Value of options as proportion of remuneration % - 95% - 93% - 84% 52% 29% 53% 39% 46% 55% (i) These options were granted in 2004 as follows: Further details of Director and Executive Non-executive directors G Bradley D McEvoy B Pirola 1,000,000 500,000 200,000 Executive directors M Masterman 1,500,000 D Greil 900,000 Speciﬁed Executives D Del Borrello 150,000 Options granted to executive directors and executives vest 50% after 12 months from date of ASX listing and 50% 24 months from date of ASX listing. Remuneration are set out in Note 24 to the Financial Statements and form part of this report. 12. Directors’ interests At the date of this report, the direct and indirect interests of the Directors in the shares and options of the Company were: Options over Ordinary Shares Ordinary Shares $1.00 expiring 31 Oct 08 G Bradley 323,981 1,000,000 $1.25 expiring 31 Oct 08 - M Masterman 21,339,242 - 1,500,000 D McEvoy D Pirola D Greil J Masterman 1 I Masterman 1 G Masterman 1 129,593 500,000 12,010,821 200,000 695,989 4,788,444 500,000 388,778 - - - - 1. Related parties to M Masterman - - 900,000 - - - 18 13. Share Options Details of share options over ordinary shares issued during the year and on issue at 31 December 2005 are 15. Indemniﬁcation and insurance of ofﬁcers and auditors The Company has agreed to indemnify current Directors set out in Note 16 to the Financial Statements and form against any liability or legal costs incurred by a Director part of this report. No options have been exercised as an ofﬁcer of the Company or entities within the between the end of the ﬁnancial year and the date consolidated entity or in connection with any legal of this report. 14. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of PVE support and have adhered to the principles of sound corporate governance. The Board recognises the recommendations of the ASX Corporate Governance Council, and considers that PVE is in compliance with those guidelines which are of importance to the commercial operation of a junior listed gas exploration company. proceedings involving the Company or entities within the consolidated entity which is brought against the director as a result of his capacity as an ofﬁcer. During the ﬁnancial year the Company has paid premiums to insure the Directors against certain liabilities arising out of the conduct while acting on behalf of the Company. Under the terms and conditions of the insurance contract, the nature of liabilities insured against and the premium paid cannot be disclosed. 16. Non audit services During the year KPMG has not performed any other The Company’s Corporate Governance Statement and disclosures are contained elsewhere in the services in addition to their statutory duties as auditors to the Company. annual report. 17. Proceedings on behalf of the Company No person has applied for leave of Court, pursuant to section 237 of the Corporations Act 2001, 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. 18. Lead Auditor’s independence declaration The lead auditor’s independence declaration is set out on page 18 and forms part of the Directors’ report for the ﬁnancial year ended 31 December 2005. This report has been made in accordance with a resolution of Directors. Graham Bradley Chairman Sydney, NSW Australia 20 March 2006 19 Auditor’s Independence Declaration To: the directors of Po Valley Energy Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the ﬁ nancial year ended 31 December 2005 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG BC Fullarton Partner Perth 20 March 2006 20 PO VALLEY ENERGY LIMITED Income Statements FOR THE YEAR ENDED 31 DECEMBER 2005 CONSOLIDATED COMPANY Revenue Employee beneﬁt expense Depreciation and amortisation expense Corporate overheads Finance costs Resource property costs written off Other expenses Loss before income tax expense Income Tax Expense Loss of the period Basic/Diluted loss per share 2 4 3 6 7 Notes 2005 2004 2005 591,064 195,057 471,436 2004 18,970 (1,176,455) (854,177) (561,972) (619,506) (12,095) (18,672) - . - . (804,474) (821,074) (412,864) (633,383) (29,700) (40,042) (27,825) (38,687) (745,403) (30,451) - . - . (90,406) (44,101) (331,366) (93,624) (2,267,469) (1,613,460) (862,591) (1,366,230) - . - . - . - . (2,267,469) (1,613,460) (862,591) (1,366,230) (3.19) (11.73) The income statements are to be read in conjunction with the accompanying notes to the ﬁnancial statements. 21 PO VALLEY ENERGY LIMITED Statements of Recognised Income and Expense FOR THE YEAR ENDED 31 DECEMBER 2005 CONSOLIDATED COMPANY Notes 2005 2004 2005 2004 Foreign exchange translation differences Shared based payment transactions Net income and expense recognised directly in equity 18 18 (787,954) 242,245 - . - . 561,972 619,506 561,972 619,506 (225,982) 861,751 561,972 619,506 Loss for the year (2,267,469) (1,613,460) (862,591) (1,366,230) Total recognised income and expense for the year (2,493,451) (751,709) (300,619) (746,724) 22 PO VALLEY ENERGY LIMITED Balance Sheets AS AT 31 DECEMBER 2005 Current Assets Cash Receivables Total Current Assets Non-Current Assets Investments Receivables Plant & Equipment Resource Property Costs Total Non-Current Assets Total Assets Current Liabilities Payables Interest Bearing Liabilities Provisions Total Current Liabilities Total Liabilities Net Assets Equity Contributed equity Reserves Accumulated Losses Total Equity CONSOLIDATED COMPANY Notes 2005 2004 2005 2004 8 9 10 11 12 13 14 15 17 10,437,245 18,030,792 8,667,320 17,821,432 1,035,392 539,989 27,109 46,726 11,472,637 18,570,781 8,694,429 17,868,158 - 1,939,540 - - 10,749,314 10,749,314 18,580,545 1,740,215 494,542 849,867 27,032,818 12,157,809 - - - - 29,466,900 13,007,676 29,329,859 12,489,529 40,939,537 31,578,457 38,024,288 30,357,687 5,980,010 1,939,581 561,324 - 36,454 513,160 21,692 - - 6,016,464 2,474,433 6,016,464 2,474,433 561,324 561,324 393,444 513,160 - 906,604 906,604 34,923,073 29,104,024 37,462,964 29,451,083 38,589,171 30,276,671 38,589,171 30,276,671 (526,686) 261,268 - - (3,139,412) (1,433,915) (1,126,207) (825,588) 18 34,923,073 29,104,024 37,462,964 29,451,083 The balance sheets are to be read in conjunction with the accompanying notes to the ﬁnancial statements. 23 PO VALLEY ENERGY LIMITED Statements of Cash Flows FOR THE YEAR ENDED 31 DECEMBER 2005 CONSOLIDATED COMPANY NOTES 2005 2004 2005 2004 Cash ﬂows from operating activities Payments to suppliers and employees (1,331,529) (529,387) (484,170) (419,936) Interest received Interest paid 512,952 18,991 471,435 18,970 (38,763) (3,142) (36,887) - . Net cash outﬂow from operating activities 23 (857,340) (513,538) (49,622) (400,966) Cash ﬂows from investing activities Payments for non-current assets (487,628) (809,692) Payments for exploration expenditure (14,252,182) (2,088,805) - . - . - . - . Payments for investments Amounts advanced to related parties - . - . - . - . (1,531,571) (3,376) (17,120,613) (1,754,821) Net cash outﬂow from investing activities (14,739,810) (2,901,873) (17,120,613) (3,286,392) Cash ﬂows from ﬁnancing activities Proceeds from the issues of shares 8,750,000 22,678,500 8,750,000 22,678,500 Payments for share issue costs (161,195) (1,120,918) (161,195) (1,120,918) Repayment of borrowings (504,098) (66,411) (504,098) (66,411) Net cash inﬂow from ﬁnancing activities 8,084,707 21,491,171 8,084,707 21,491,171 Net (decrease)/increase in cash held (7,512,443) 18,075,760 (9,085,528) 17,803,813 Cash and cash equivalents at 1 January 18,030,792 69,589 17,821,432 42,518 Effects of exchange rate ﬂuctuations on cash held (81,104) (114,557) (68,584) (24,899) Cash and cash equivalents at 31 December 8 10,437,245 18,030,792 8,667,320 17,821,432 The statements of cash ﬂows are to be read in conjunction with the accompanying notes to the ﬁnancial statements. 24 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2005 NOTE 1: Summary of Signiﬁcant Accounting Policies Po Valley Energy Limited (“the Company” or “PVE”) is a company domiciled in Australia. The consolidated ﬁnancial report of the Company for the year ended 31 December 2005 comprised the Company and its subsidiaries (together referred to as the “Consolidated Entity”). The ﬁnancial report was authorised for issuance on 17 March 2006. (a) STATEMENT OF COMPLIANCE The ﬁnancial report is a general purpose ﬁnancial report which has been prepared in accordance with Australian Accounting Standards (“AASB’s”), Urgent Issues Group Interpretations (“UIG’s’) adopted by the Australian Accounting Standards Board (“AASB”) and the Corporations Act 2001. International Financial Reporting Standards (“IFRS”) form the basis of Australian Accounting Standards adopted by the AASB, and for the purpose of this report are called Australian equivalents to IFRS (“AIFRS”) to distinguish from the previous Australian GAAP. The ﬁnancial report of the consolidated entity and the Company also complies with IFRS and interpretations adopted by the International Accounting Standards Board. This is the consolidated entity’s ﬁrst ﬁnancial report prepared in accordance with AIFRS and AASB 1 First time Adoption of Australian Equivalents to International Reporting Standards has been applied. An explanation of how the transition to AIFRS has affected the reported ﬁnancial position, ﬁnancial performance and cash ﬂows of the consolidated entity and the Company is provided in note 25. This ﬁnancial report has been prepared on the basis of AIFRS on issue that are effective at the consolidated entity’s ﬁrst AIFRS annual reporting date 31 December 2005. Based on these AIFRS, the Board of Directors have made assumptions about the accounting policies expected to be adopted when the ﬁrst AIFRS annual ﬁnancial report is prepared for the year ended 31 December 2005. (b) BASIS OF PREPARATION The ﬁnancial report is presented in Australian dollars. This ﬁnancial report has been prepared on the basis of historical cost, except for ﬁnancial assets and liabilities recognised at fair value. The accounting policies set out below have been applied consistently to all periods presented in the consolidated ﬁnancial report and in preparing an opening AIFRS balance sheet at 1 January 2004 for the purposes of the transition to Australian Accounting Standards - AIFRS. The accounting policies have been applied consistently by consolidated entities. (c) PRINCIPLES OF CONSOLIDATION Subsidiaries The consolidated ﬁnancial statements incorporate the assets and liabilities of all entities controlled by Po Valley Energy Limited (“parent entity”) as at 31 December 2005 and the results of all controlled entities for the half-year then ended. Po Valley Energy Limited and its controlled entities together are referred to in this ﬁnancial report as the consolidated entity. The effects of all transactions between entities in the consolidated entity are eliminated in full. Outside equity interests in the results and equity of controlled entities are shown separately in the consolidated income statement and balance sheet respectively. When control of an entity is obtained during the ﬁnancial year, its results are included in the consolidated income statement from the date on which control commences. Investments in subsidiaries are carried at their cost of acquisition in the Company’s ﬁnancial statement less impairment losses. 25 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 1: Summary of Signiﬁcant Accounting Policies (continued) Deferred tax assets are reduced to the extent that it is no longer probable that the related tax beneﬁt will be realised. Joint Ventures Joint ventures are those entities over whose activities are jointly controlled by the consolidated entity, established by contractual agreement. The consolidated entity’s interests in unincorporated joint ventures are brought to account by including its proportionate share of joint venture operations’ assets, liabilities and expenses and the consolidated entity’s revenue from the sale of its share of output on a line-by-line basis, from the date joint control commences to the date joint control ceases. (d) TAXATION Income tax on the proﬁt or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting nor taxable proﬁt; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁts will be available against which the asset can be utilised. (e) IMPAIRMENT OF ASSETS The carrying amounts of the consolidated entity’s assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁable cash ﬂows (cash generating units). (f) CASH AND CASH EQUIVALENTS For purposes of the cash ﬂow statement, cash includes short term deposits less bank overdrafts which are readily convertible to cash on hand and which are used in the cash management function on a day-to-day basis. (g) PROPERTY, PLANT AND EQUIPMENT Items of property, plant and equipment are recorded at cost and depreciated over their estimated useful lives using the straight line method. The useful lives of each class of asset fall within the following ranges: Ofﬁce furniture & equipment 2005 2004 3 - 5 years 3 - 5 years (h) Trade and Other Payables Trade payables and other payables are recognised when the consolidated entity becomes obliged to make future payments resulting from the purchase of goods and services. These amounts are stated at cost. 26 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 1: Summary of Signiﬁcant Accounting Policies (continued) (i) Resource Properties Resource property costs are intangible assets and are accumulated in respect of each separate area of interest. Resource property costs are carried forward where right of tenure of the area of interest is current and they are expected to be recouped through sale or successful development and exploitation of the area of interest, or, where exploration and evaluation activities in the area of interest have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves. Resource properties include the cost of acquiring and developing resource properties, mineral rights and exploration, evaluation and development expenditure relating to exploration areas. Resource properties are amortised using the unit of production basis over the economically recoverable reserves. Amortisation of resource properties commences from the date when commercial production commences. When there is little likelihood of a mineral right being exploited, or the value of the exploitable mineral right has diminished below cost, the asset is written down to its recoverable amount. Cumulative exploration, evaluation and development expenditure which no longer satisﬁes the above policy is no longer carried forward as an asset, but is charged against, and shown as a deduction from operating proﬁt. (j) Revenue Recognition Interest Revenue Interest revenue is recognised as it accrues, taking into account the effective yield on the ﬁnancial asset. (k) Trade and Other Receivables Trade receivables and other receivables are recorded stated at their cost less impairment losses. (l) Employee Beneﬁts Provision is made for beneﬁts accruing to employees in respect of wages and salaries, annual leave, long service leave, and sick leave when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of wages and salaries, annual leave, sick leave, and other employee beneﬁts expected to be settled within 12 months, are measured at their undiscounted amounts using the remuneration rate expected to apply at the time of settlement including related on-costs. Provisions made in respect of other employee beneﬁts which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outﬂows to be made by the consolidated entity in respect of services provided by employees up to reporting date. Superannuation The consolidated entity contributes to superannuation plans. Contributions are recognised as an expense as they are made. Share-based payments The executive and employee share option plan grants options to employees as part of their remuneration. The fair value of options granted is recognised as an employee expense with a corresponding increase in retained earnings. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured, using a binomial model; taking into account the market related vesting conditions upon which the options were granted. The amount recognised as an expense is adjusted to reﬂect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. 27 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 1: Summary of Signiﬁcant Accounting Policies (continued) (m) Foreign Currency determined as at the date of acquisition plus costs incidental to the acquisition. When equity instruments are issued as consideration, their market price at date of acquisition is used as fair value. Functional and presentation currency (p) Earnings Per Share Items included in the ﬁnancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated ﬁnancial statements are presented in Australian dollars, which is Po Valley Energy Limited’s functional and presentation currency. Transactions and Balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year- end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash ﬂow hedges. Group Company’s The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation are translated to Australian dollars at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. (n) Interest-bearing Liabilities Bank loans and other loans are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest bearing liabilities are stated at amortised cost. (o) Acquisition of Assets Assets acquired are recorded at the cost of acquisition, being the purchase consideration Basic earnings per share (“EPS”) is calculated by dividing the net proﬁt attributable to members of the parent entity for the reporting period, after excluding any costs of servicing equity (other than ordinary shares and converting preference shares classiﬁed as ordinary shares for EPS calculation purposes), by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue. Diluted EPS is calculated by dividing the basic EPS earnings, adjusted by the after tax effect of ﬁnancing costs associated with dilutive potential ordinary shares and the effect on revenues and expenses of conversion to ordinary shares associated with dilutive potential ordinary shares, by the weighted average number of ordinary shares and dilutive potential ordinary shares adjusted for any bonus issue. (q) Use and Revision of Accounting Estimates The preparation of the ﬁnancial report requires the making of estimations and assumptions that affect the recognised amounts of assets, liabilities, revenues and expenses and the disclosure of contingent liabilities. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised 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. 28 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 2: Revenue CONSOLIDATED COMPANY Interest received - non related corporations 512,952 18,991 471,436 2005 2004 2005 Provisions written back Other Total Revenue NOTE 3: Other Expenses Foreign exchange losses Realised Unrealised 2004 18,970 - - 72,052 135,704 6,060 40,362 - - 591,064 195,057 471,436 18,970 81,104 44,101 68,584 68,728 9,302 - 262,782 24,896 90,406 44,101 331,366 93,624 NOTE 4: Employee Beneﬁt Expenses Wages and salaries 614,483 234,671 - - Equity based compensation 561,972 619,506 561,972 619,506 1,176,455 854,177 561,972 619,506 NOTE 5: Auditors’ Remuneration Remuneration for audit or review of the ﬁnancial reports of the parent entity or any entity in the consolidated entity: Auditors of parent entity - KPMG 46,566 32,000 26,704 32,000 29 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 6: Income Tax Expense The income tax expense on pre tax accounting reconciles to the income tax expense in the ﬁnancial statements as follows: CONSOLIDATED COMPANY 2005 2004 2005 2004 Loss from ordinary activities before income tax expense (2,267,469) (1,613,460) (862,591) (1,366,230) Income tax calculated at 30% (680,240) (484,038) (258,777) (409,869) Tax effect of permanent differences Tax effect of timing differences Tax losses not brought to account as future income tax beneﬁt 634,226 (6,878) - . - . 52,892 409,869 168,592 (6,878) 97,063 - . - . - . Income tax attributable to loss - . - . - . - . The directors estimate that the potential future income tax beneﬁt at 31 December 2005 in respect of tax losses not brought to account is This beneﬁt for tax losses will only be obtained if: 411,776 358,884 408,467 311,404 (i) the relevant company derives future assessable income of a nature and of an amount sufﬁcient to enable the beneﬁt from the deductions for the losses to be realised; (ii) the relevant company continues to comply with the conditions for deductibility imposed by tax legislation; and (iii) no changes in tax legislation adversely affect the relevant company in realising the beneﬁt from the deductions for the losses. NOTE 7: Earnings Per Share Basic loss per share (cents) (3.19) (11.73) The calculation of basic loss per share was based on the loss attributable to shareholders of $2,267,469 (2004: Loss $1,613,460) and a weighted average number of ordinary shares outstanding during the year of 71,165,753 (2004: $13,759,050). Diluted loss per share is the same as basic loss per share. NOTE 8: Cash and Cash Equivalents Cash at bank and on hand 10,437,245 18,030,792 8,667,320 17,821,432 30 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 9: Trade and Other Receivables Sundry debtors CONSOLIDATED COMPANY 2005 2004 132,712 89,805 2005 17,500 2004 - . Indirect taxes receivable 902,680 450,184 9,609 46,726 1,036,392 539,989 27,109 46,726 NOTE 10: Investments Shares in controlled entities, at cost - . - . 10,749,314 10,749,314 The investments held in controlled entities are included in the ﬁnancial statements at cost at 31 December 2005 are as follows: Name: Country of Incorporation Class of Shares 2005 Investment $ 2004 Investment $ Northsun Italia S.p.A Italy Ordinary 10,033,424 10,033,424 Po Valley Operations Pty Limited Australia Ordinary 715,890 715,890 Holding % 100 100 10,749,314 10,749,314 NOTE 11: Non- Current Assets - Receivables Indirect taxes receivable Loans - Controlled Entities CONSOLIDATED COMPANY 2005 2004 1,939,540 - . - . - . 2005 - . 2004 - . 18,580,545 1,740,215 1,939,540 - .. 18,580,545 1,740,215 These loans are unsecured, interest free and repayable on demand in Euro. 31 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 12: Property Plant and Equipment CONSOLIDATED COMPANY 2005 2004 2005 2004 Ofﬁce Furniture & Equipment: At cost Accumulated depreciation Well Equipment: At cost Reconciliations: 109,571 88,935 (80,810) (68,715) 28,761 20,220 465,781 829,647 494,542 849,867 Reconciliation of the carrying amounts for each class of plant & equipment are set out below: Ofﬁce Furniture & Equipment: Carrying amount at beginning of year 20,220 21,191 Additions Depreciation expense 20,636 11,226 (12,095) (12,197) Carrying amount at end of year 28,761 20,220 Well Equipment: Carrying amount at beginning of year 829,647 - . Additions 465,781 829,647 Transfer to resource property costs (829,647) - . Carrying amount at end of year 465,781 829,647 494,542 849,867 - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . - . 32 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 13: Resource Property Costs CONSOLIDATED COMPANY 2005 2004 2005 2004 Resource Property costs Exploration Phase 27,032,818 12,157,809 Reconciliation of carrying amount of resource properties Exploration Phase Carrying amount at beginning of year 12,157,809 7,936,133 Transfer from property plant & equipment 829,647 - Exploration expenditure 14,790,765 4,252,127 Exploration expenditure written off (745,403) (30,451) Carrying amount at end of year 27,032,818 12,157,809 - - - - - - - - - - - - NOTE 14: Trade and Other Payables Trade payables Taxes payable Sundry payables and accruals 5,277,777 1,939,581 15,824 393,444 28,995 673,238 - - - 545,500 - - 5,980,010 1,939,581 561,324 393,444 NOTE 15: Interest-bearing Loans and Borrowings Current Liabilities Unsecured loans from: Other parties Directors and director-related entities These loans were repaid during the year. - - - 4,098 509,062 513,160 - - - 4,098 509,062 513,160 33 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 16: Employee Beneﬁts The Company has issued options to Directors, Executives and nominated employees. Details of Employee Options are summarised below. Details of the options issued to Directors and Executives are in Note 24. Employee Incentive Option Scheme The issue of Employee Incentive Option Scheme (“EIOS”) was approved by the Board of the Company on 15 October 2004. The opportunity for a number of employees to acquire options over ordinary shares in the Company was offered to employees and consultants who were instrumental to the initial public offering of the Company. Each option is convertible to one ordinary share. The exercise price of the options, determined in accordance with the rules of the plan, must not be less than the market price on the date the options are granted. The terms and conditions with respect to expiry, exercise and vesting provisions are at the discretion of the Board of the Company. There are no voting or dividend rights attached to the options. Voting and dividend rights will only be attached once an option is exercised into ordinary shares. The total number of shares which are the subject of options issued under the EIOS immediately following an issue of options under the EIOS must not exceed 5% of the then issued share capital of the Company on a diluted basis. 2005 2004 Number of options Weighted average exercise price Number of options Weighted average exercise price Balance at beginning of year 3,000,000 $1.25 - - Granted Exercised (a) - - - - 3,000,000 $1.25 - - Balance at end of year (b) 3,000,000 $1.25 3,000,000 $1.25 Exercisable at end of year 3,000,000 3,000,000 (a) Options granted during the reporting period 2005 2004 Number granted Grant date Vesting date Expiry date Exercise price - - - - - 3,000,000 15 Oct 2004 14 Dec 20051 14 Dec 20061 31 Oct 2008 $1.25 (1) 50% vest 12 months after listing and 50% vest 24 months after listing date. Of the options granted, the total number granted to directors and executives including M Masterman, D Greil and D Del Borrello has also been disclosed at Note 24. Fair value of shares is estimated to be the market price of shares of the Company on the Australian Stock Exchange as at close of trading on their respective issue dates. At 31 December 2005 the closing share price was $1.00 34 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 16: Employee Beneﬁts continued (b) Options held at the end of the reporting period Number of Options 1,500,000 1,500,000 Grant date Vesting date Expiry date Exercise price ($) 15 Oct 2004 15 Dec 2005 31 Oct 2008 15 Oct 2004 15 Dec 2006 31 Oct 2008 $1.25 $1.25 NOTE 17: Provisions The aggregate employee beneﬁt liability recognised and included in the ﬁnancial statement is as follows: Provision for employee beneﬁts: CONSOLIDATED COMPANY 2005 2004 2005 2004 Current 36,454 21,692 - - 35 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 18: Capital and Reserves Reconciliation of movement in capital and reserves attributable to equity holders of the parent Consolidated Issued Translation Reserve Capital Accumulated losses 2005 Total Balance at 1 January 2005 30,276,671 261,268 (1,433,915) 29,104,024 Total recognised income and expense Equity-settled transactions Shares issued Share issue costs - - 8,750,000 (437,500) (787,954) (2,267,469) (3,055,423) - - - 561,972 561,972 - - 8,750,000 (437,500) Balance at 31 December 2005 38,589,171 (526,686) (3,139,412) 34,923,073 Consolidated Issued Capital Translation Accumulated losses Reserve Outside Shareholder Interest 2004 Total Balance at 1 January 2004 6,409,352 19,023 (439,961) 53,561 6,041,975 Total recognised income and expense Equity-settled transactions - - Shares issued Share issue costs 25,104,437 (1,237,118) Outside shareholder interest acquired - 242,245 (1,613,460) - - - - 619,506 - - - - - (1,371,215) 619,506 - 25,104,437 - (1,237,118) (53,561) (53,561) Balance at 31 December 2004 30,276,671 261,268 (1,433,915) - 29,104,024 Reconciliation of movement in capital and reserves Company Issued Accumulated losses Capital 2005 Total Issued Capital Accumulated losses 2004 Total Balance at 1 January 30,276,671 (825,588) 29,451,083 6,409,352 (78,864) 6,330,488 Total recognised income and expense Equity-settled transactions - - (862,591) (862,591) 561,972 561,972 - - (1,366,230) (1,366,230) 619,506 619,506 Shares issued 8,750,000 Share issue costs (437,500) - - 8,750,000 25,104,437 - 25,104,437 (437,500) (1,237,118) - (1,237,118) Balance at 31 December 38,589,171 (1,126,207) 37,462,964 30,276,671 (825,588) 29,451,083 36 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 18: Capital and Reserves continued 2005 70,000,000 Share Capital Opening balance - 1 January Shares issued during the year: Debt to equity swap at $5.00 each on 01.01.2004 Cash issues at $5.00 each on 08.03.2004 Options exercised at $1.00 each on 15.08.2004 Options exercised at $1.30 each on 15.08.2004 Seed issues at $9.00 each on 08.10.2004 Debt to equity swap at $9.00 each on 08.10.2004 Share issue at $9.00 each on 08.10.2004 Total shares after share reconstruction of 12.9593 for each share on issue on 15.10.04 Initial public offer at $1.00 each on 14.12.2004 2004 2,564,254 10,000 200,000 525,000 195,000 100,000 30,500 233,493 50,000,000 20,000,000 Share issue at 70c each on 22.11.2005 Share issue at 70c each on 23.12.2005 10,500,000 2,000,000 Closing balance - 31 December 82,500,000 70,000,000 Fully paid ordinary shares carry one vote per share and carry the right to dividends. In the event of winding up the Company, ordinary shareholders rank after creditors. NOTE 19: Financial Reporting by Segments The Company operates primarily as a gas explorer and in one geographical location, being Italy. 37 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 20: Financial Instruments (a) Interest Rate Risk Exposures The consolidated entity’s exposure to interest rate risk and the effective weighted average interest rate for classes of ﬁnancial assets and ﬁnancial liabilities is set out below: 2005 Weighted Average Interest Rate Floating Interest Rate Fixed interest Maturing in 1 year or < 1 -5 years Financial Assets $ $ $ Non- Interest bearing $ Total $ Cash assets 3.61% 8,853,410 1,583,835 - . - . 10,437,245 Receivables Current Non current Financial Liabilities Payables Provisions . . 1,035,392 1,939,540 1,267,572 1,707,360 . . (5,980,010) (5,980,010) (36,454) (36,454) Net ﬁnancial assets/(liabilities) 8,853,410 1,583,835 - . (3,041,532) (7,395,713) 2004 Weighted Average Interest Rate Floating Interest Rate Fixed interest Maturing in 1 year or < 1 -5 years Financial Assets $ $ $ Non- Interest bearing $ Total $ Cash assets Receivables Financial Liabilities Payables Interest bearing liabilities - current Provisions 0.21% 18,030,792 - . - . - . 18,030,792 . 539,989 539,989 5.48% - . (513,160) - . - . (513,160) (1,939,581) (1,939,581) (21,692) (21,692) Net ﬁnancial assets/(liabilities) 18,030,792 (513,160) - . (1,421,284) 16,096,348 38 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 20: Financial Instruments continued (b) Credit Risk Exposures The consolidated entity is not exposed to signiﬁcant credit risk. Credit risk with respect to cash is held with recognised ﬁnancial intermediaries with acceptable credit ratings. (c) Net Fair Values of Financial Assets and Liabilities The carrying amounts of ﬁnancial assets and liabilities as disclosed in the statement of ﬁnancial position equate to their estimated net fair value. (d) Foreign Currency Risk The consolidated entity is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than Australian Dollars. The currency giving rise to this risk is primarily Euro. Amounts receivable/(payable) in foreign currency which are not effectively hedged: Cash Current - Receivables Non-current - Receivables Current - Payables CONSOLIDATED COMPANY 2005 2004 2005 2004 1,747,322 1,344,651 745 1,146,056 1,025,783 493,263 1,939,540 - 5,418,686 1,672,658 - - - - - - NOTE 21: Commitments and Contingencies (i) Exploration Commitments Under its exploration licence for Crocetta and for Cascina San Pietro, PVE is required to drill one well in 2005. This was satisﬁed by the drilling of the Sillaro #1 (Crocetta) and Vitalba #1 (Cascina San Pietro) during 2005. Under it’s exploration licence for Casone della Sacca, PVE is required to drill one well by March 2006 expected to cost $ 2,034,000. (ii) Contingencies The consolidated entity provided a ﬁnancial guarantee to secure payment obligation for drilling of wells . At 31 December 2005, a credit line of $2,672,414 was available at the consolidated entity’s bank and was undrawn. The consolidated entity has provided for $1,217,400 in current liabilities. 39 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 22: Joint Ventures As at the 31 December, 2005 the consolidated entity held interests in the following Joint Ventures and permits in Italy: Titles of Permits granted San Vincenzo Participation percentages Other registered holders and relevant percentages NSI 32.5% PVO 17.5% Edison 50% Assets and liabilities of the Joint Venture at 31.12.2005 were as follows: Resource Property Costs Receivables Payables Net Assets 1,560,176 75,537 (26,491) 1,609,222 As at the 31 December, 2004 the consolidated entity held interests in the following Joint Ventures and permits in Italy: Titles of Permits granted San Vincenzo Casone della Sacca Participation percentages Other registered holders and relevant percentages NSI 32.5% PVO 17.5% NSI 36.1% PVO 19.45% Edison 50% ENI 44.45% Assets and liabilities of the Joint Ventures at 31.12.2004 were as follows: Resource Property Costs Payables Net Assets 1,597,940 (773,039) 824,901 40 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 23: Reconciliation of Cash Flows from Operating Activities Loss for the period Foreign exchange loss Adjustment for non-cash items: Share-based payments Provision written back CONSOLIDATED COMPANY 2005 2004 2005 2004 (2,267,469) (1,613,460) (862,591) (1,366,230) 90,406 (3,544) 331,366 93,624 561,972 619,506 561,972 619,506 - (135,704) - - - - - - - - - - Depreciation - ofﬁce furniture & equipment 12,095 12,197 Exploration expenditure written off 745,403 30,451 Other - provisions Creditors written back 14,762 10,665 - (8,365) Change in operating assets and liabilities: (Increase) decrease in other receivable (166,592) (4,920) 37,118 (43,425) (Increase) decrease in sundry debtors 44,504 (157) - - Increase in shareholder loans for interest (9,062) 40,760 (9,062) 38,687 Increase (decrease) in trade and other creditors 116,641 539,033 (108,425) 256,872 Net cash outﬂow from operating activities (857,340) (513,538) (49,622) (400,966) 41 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 24: Key Management Personnel Disclosure The following were key management personnel of the consolidated entity at any time during the reporting period and unless otherwise indicated were key management personnel for the entire period. (a) Remuneration The major provisions of the service contracts held with the speciﬁed directors and executives, in addition to any performance related bonuses and/or options are as follows: Speciﬁed directors Graham Bradley, Chairman • Commencement Date: • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December, 2005: $60,000 • No termination beneﬁts 19 May 2005 David McEvoy, Non-executive director • Commencement Date: • Term of Appointment: • Fixed remuneration for the year ended 31 December, 2005: $40,000 • No termination beneﬁts 19 May 2005 3 years Byron Pirola, Non-executive director • Commencement Date: • Term of Appointment: • Fixed remuneration for the year ended 31 December, 2005: $40,000 • No termination beneﬁts 19 May 2005 3 years Michael Masterman, Chief Executive Ofﬁcer and Executive director • Commencement Date: • Term of Agreement: • Fixed remuneration inclusive of superannuation for the year ended 31 December, 2005: $240,000 • Payment of termination beneﬁt on termination by the employer (other than for gross misconduct) equal to one 14 December 2004 2 years with a further 1 year extension at the option of the executive years total ﬁxed remuneration Dietmar Greil, Technical director • Commencement Date: • Term of Agreement: • Fixed remuneration for the year ended 31 December, 2005: EUR100,000 • Payment of termination beneﬁt on termination by the employer (other than for gross misconduct) equal to one 1 January 2005 2 years with a further 1 year extension at the option of the executive years total ﬁxed remuneration Speciﬁed Executive Dom Del Borrello, Company Secretary 6 September 2004 • Commencement Date: No ﬁxed term • Term of Agreement: • Contracted on a ﬁxed hourly rate to provide company secretarial services. • No termination beneﬁts 42 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 24: Key Management Personnel Disclosure continued Salary & fees Bonus Super- annuation beneﬁts Value of options (1) Total Speciﬁed directors G Bradley (Chairman) 2005 2004 D McEvoy B Pirola M Masterman (CEO) 2005 2004 2005 2004 2005 2004 D Greil 2005 (appointed 5 August 2005) 2004 Speciﬁed executives D Del Borrello 2005 2004 2005 2004 57,163 15,000 39,198 10,000 39,198 10,000 255,877 152,000 149,714 57,804 33,058 5,000 574,208 249,804 - - - - - - - - - - - - - - - 1,350 - 900 - 900 - - - - - - - - 292,500 - 146,250 - 58,500 280,986 61,128 168,592 36,677 57,163 308,850 39,198 157,150 39,198 69,400 536,863 213,128 318,306 94,481 28,099 6,113 61,157 11,113 477,677 1,051,885 3,150 601,168 854,122 The directors and executives were appointed on the following dates M Masterman B Pirola G Bradley D McEvoy D Greil 22 June 1999 10 May 2002 30 September 2004 30 September 2004 5 August 2005 (as director, previously as speciﬁed executive) D Del Borrello 6 September 2004 (1) The exercise of Non-Executive Director options in 2004 was conditional upon the weighted average closing price of the Company’s Shares on the ASX for a period of 60 consecutive trading days being equal to or greater than $1.25. The exercise price of the Non-Executive Director options is $1.00 and the expiry is on 31 October 2008. These options are subject to mandatory ASX escrow and are unable to be exercised until 14 December 2006. The issue of Executive Director and Executive options in 2004 was conditional upon 50% vesting 12 months after the listing of the Company and 50% vesting 24 months after the listing of the Company. The exercise price of the Executive Director and Executive options is $1.25. The Executive Director options issued to Michael Masterman are subject to mandatory ASX escrow and are unable to be exercised earlier than 14 December 2006. The fair value of options was calculated at the date of issue using a Black-Scholes Option Pricing Model, adjusted for a discount rate (25%) to take into account such factors as the option exercise price, the current level and volatility of the underlying share price, the performance hurdles, the non-tradeable and non-transferable nature of the options, and the vesting and escrow periods before the options are able to be exercised. All options expire 31 October 2008 and each option entitles the holder to purchase one share. 43 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 24: Key Management Personnel Disclosure continued (b) Options and rights over equity instruments granted as remuneration or exercised All options refer to options over ordinary shares of Po Valley Energy Limited, which are exercisable on a one-for-one basis. During the reporting period, no options over ordinary shares were issued or exercised. (c) Option holdings The movement during the reporting period in the number of options over ordinary shares in the Company held directly or indirectly by each speciﬁed director and speciﬁed executive, including their personally-related entities, is as follows: Held at 31 Dec 2004 Issued Held at 31 Dec 2005 Speciﬁed directors G Bradley M Masterman D McEvoy B Pirola D Greil Speciﬁed executives D Del Borrello 1,000,000 1,500,000 500,000 200,000 900,000 150,000 - - - - - - 1,000,000 1,500,000 500,000 200,000 900,000 150,000 The details of the options held at 31 December 2005 are as follows: $1.00 exercise price, expiring 31Oct 08 $1.25 exercise price, expiring 31Oct 08 Total 1,000,000 - 1,000,000 - 1,500,000 1,500,000 500,000 200,000 - - - - 900,000 500,000 200,000 900,000 150,000 150,000 1,700,000 2,550,000 4,250,000 Speciﬁed directors G Bradley M Masterman D McEvoy B Pirola D Greil Speciﬁed executives D Del Borrello 44 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 24: Key Management Personnel Disclosure continued d) Equity holdings and transactions The movement during the reporting period in the number of ordinary shares of the Company, held directly indirectly by each speciﬁed director and speciﬁed executive, including their personally-related entities is as follows: Held at 31 Dec 2004 Purchased Held at 31 Dec 2005 Speciﬁed directors G Bradley M Masterman D McEvoy B Pirola D Greil Speciﬁed executives D Del Borrello Related Entities J Masterman1 I Masterman1 G Masterman1 323,981 21,339,242 129,593 12,010,821 695,989 90,715 4,788,444 500,000 388,778 - - - - - - - - - 323,981 21,339,242 129,593 12,010,821 695,989 90,715 4,788,444 500,000 388,778 1 Related parties to M Masterman (e) Other transactions with the Company A total amount of $35,858 (2004: $18,531) was received or receivable from Caspian Holdings Plc, a company which is related to Michael Masterman and Dietmar Greil, for recharge of the use of courier and telephone services . Recharges were based on the cost from third party service invoice. The loan from Masterman Investments Pty Limited, a company controlled by Michael Masterman was repaid during the year (2004: $509,062). During the year interest of $27,824 (2004: $27,812) was accrued and paid to Masterman Investments Pty Limited. NOTE 25: Explanation Of Transition To Australian Equivalents To AIFRS As stated in signiﬁcant accounting policies note (a) these are the consolidated entity’s ﬁrst consolidated ﬁnancial statements prepared in accordance with AIFRSs. The policies set out in the signiﬁcant accounting policies section of this report have been applied in preparing the ﬁnancial statements for the year ended 31 December 2005, the comparative information presented in these ﬁnancial statements for the year ended 31 December 2004 and in the preparation of an opening AIFRS balance sheet at 1 January 2004 (the consolidated entity’s date of transition). 45 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 25 : Explanation Of Transition To Australian Equivalents To AIFRS continued (i) Reconciliation of equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to equity under Australian equivalents to IFRS (AIFRS) CONSOLIDATED 1 Jan 2004 AGAAP Effect of transition AIFRS to AIFRS 31 Dec 2004 AGAAP Effect of transition AIFRS to AIFRS Current Assets Cash Receivables Other Assets 69,897 76,601 - . 69,897 18,030,792 - . 18,030,792 - . 76,601 539,989 - . 539,989 51,755 - . 51,755 - . - . - . Total Current Assets 198,253 - . 198,253 18,570,781 - . 18,570,781 Non-Current Assets Plant & Equipment b 21,191 - . 21,191 826,213 23,654 849,867 Resource Property Costs b 7,936,133 - . 7,936,133 11,869,449 288,360 12,157,809 Total Non-Current Assets 7,957,324 - . 7,957,324 12,695,662 312,014 13,007,676 Total Assets 8,155,577 - . 8,155,577 31,266,443 312,014 31,578,457 Current Liabilities Provisions Payables 11,028 - . 11,028 21,692 - . 21,692 1,237,190 - . 1,237,190 1,939,581 - . 1,939,581 Interest Bearing Liabilities - . - . - . 513,160 - . 513,160 Total Current Liabilities 1,248,218 - . 1,248,218 2,474,433 - . 2,474,433 Non- Current Liabilities Interest Bearing Liabilities 865,384 - . 865,384 - . - . - . Total Liabilities 2,113,602 - . 2,113,602 2,474,433 - . 2,474,433 Net Assets 6,041,975 - . 6,041,975 28,792,010 312,014 29,104,024 Equity Contributed Equity 6,409,352 - . 6,409,352 30,276,671 - . 30,276,671 Reserves b 19,023 - . 19,023 - . 261,268 261,268 Accumulated losses a,b (439,961) - . (439,961) (1,484,661) 50,746 (1,433,915) Outside shareholders interest 53,561 - . 53,561 - . - . - . Total Equity 6,041,975 - . 6,041,975 28,792,010 312,014 29,104,024 46 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 25 : Explanation Of Transition To Australian Equivalents To AIFRS continued (i) Reconciliation of equity reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to equity under Australian equivalents to IFRS (AIFRS) COMPANY 1 Jan 2004 31 Dec 2004 Previous Effect of transition AIFRS Previous Effect of transition AIFRS GAAP to AIFRS GAAP to AIFRS Current Assets Cash Receivables 42,518 - . - . - . 42,518 17,821,432 - . 17,821,432 - . 46,726 - . 46,726 Total Current Assets 42,518 - . 42,518 17,868,158 - . 17,868,158 Non-Current Assets Investments Receivables 7,156,353 - . 7,156,353 10,749,314 - . 10,749,314 - . - . - . 1,740,215 - . 1,740,215 Total Non-Current Assets 7,156,353 - . 7,156,353 12,489,529 - . 12,489,529 Total Assets 7,198,871 - . 7,198,871 30,357,687 - . 30,357,687 Current Liabilities Payables 2,999 - . 2,999 393,444 - . 393,444 Interest Bearing Liabilities - . - . - . 513,160 - . 513,160 Total Current Liabilities 2,999 - . 2,999 906,604 - . 906,604 Non- Current Liabilities Interest Bearing Liabilities 865,384 - . 865,384 - . - . - . Total Liabilities 868,383 - . 868,383 906,604 - . 906,604 Net Assets 6,330,488 - . 6,330,488 29,451,083 - . 29,451,083 Equity Contributed Equity 6,409,352 - . 6,409,352 30,276,671 - . 30,276,671 Accumulated losses a ( 78,864) - . ( 78,864) (825,588) - . (825,588) Total Equity 6,330,488 - . 6,330,488 29,451,083 - . 29,451,083 47 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 25 : Explanation Of Transition To Australian Equivalents To AIFRS continued (ii) Reconciliation of loss for 2004 reported under previous Australian Generally Accepted Accounting Principles (AGAAP) to equity under Australian equivalents to IFRS (AIFRS) CONSOLIDATED Previous Effect of transition AIFRS GAAP to AIFRS COMPANY Previous Effect of transition AIFRS GAAP to AIFRS Revenue 195,057 - . 195,057 18,970 - . 18,970 Employee beneﬁt expense a (234,671) (619,506) (854,177) - . (619,506) (619,506) Depreciation and amortisation expense (18,672) - . (18,672) - . - . - . General & administration (821,074) - . (821,074) (633,383) - . (633,383) Finance costs Exploration written off (40,042) (30,451) - . - . (40,042) (30,451) (38,687) - . Other expenses b (94,847) 50,746 (44,101) (93,624) - . - . - . (38,687) - . (93,624) Loss before income tax expense (1,044,700) (568,760) (1,613,460) (746,724) (619,506) (1,366,230) Income tax expense - . - . - . - . - . - . Loss from ordinary activities after income tax expense (1,044,700) (568,760) (1,613,460) (746,724) (619,506) (1,366,230) Net loss attributable to (1,044,700) members of Po Valley Energy Limited (568,760) (1,613,460) (746,724) (619,506) (1,366,230) 48 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements NOTE 25 : Explanation Of Transition To Australian Equivalents To AIFRS continued (iii) Notes to the reconciliations a) AASB 2 THE EFFECT OF SHARE-BASED PAYMENTS The consolidated entity has granted share-based payments in 2004 and 2005. The consolidated entity applied AASB 2 to its share-based payment arrangements that had not yet vested before 1 January 2005. Under previous GAAP, the consolidated entity did not account for equity settled share based payments; such payments are now recognised at fair value in accordance with AASB 2. The effect of accounting for equity-settled share-based payment transactions is to increase employee beneﬁt expense by $619,506 for the year ended 31 December 2004 in the consolidated entity and the Company with a corresponding increase in retained earnings. At 1 January 2004, there was no impact in relation to AASB 2. b) AASB 121 THE EFFECT OF FOREIGN EXCHANGE RATES Under previous GAAP foreign operations were translated using the temporal method. Monetary assets and liabilities were translated at current rate at reporting date; non-monetary assets, liabilities, equity and revenue and expense items were translated at rates relevant at the transactions dates. Differences were taken to proﬁt and loss. Under AIFRS, speciﬁcally AASB121, the consolidated entity has determined the functional currency of its foreign operations to be Euro. The assets and liabilities of the foreign operations are translated to the presentation currency being Australian dollars. This has resulted in an increase in Plant & Equipment of $23,654 and Resource Property costs $288,360 recognised directly in the foreign currency translation reserve. Translation differences for the year ended 31 December 2004 previously recognised in proﬁt and loss under AGAAP have now been taken to the foreign currency translation reserve; this has resulted in a decrease in the accumulated loss of $50,746. At 1 January 2004, there was no impact in relation to AASB 121. There was no impact on the equity of the Company in relation to AIFRS. 49 PO VALLEY ENERGY LIMITED Directors’ Declaration 1. In the opinion of the directors of Po Valley Energy Ltd (“the Company”): i) the ﬁ nancial statements and notes, as set out on pages 21 to 49, are in accordance with the Corporations Act 2001, including: a. giving a true and fair view of the ﬁ nancial position of the Company and the consolidated entity as at 31 December 2005 and of their performance, as represented by the results of their operations and their cash ﬂ ows, for the ﬁ nancial year ended on that date. b. complying with Australian Accounting Standards and the Corporations Regulations 2001; and ii) There are reasonable grounds to believe that the Company will be able to pay it’s debts as and when they become due and payable. 2. The directors have been given the declarations by the chief executive ofﬁ cer and company secretary for the ﬁ nancial year ended 31 December 2005 pursuant to Section 295A if the Corporations Act 2001. Dated at Sydney this twentieth day of March 2006. Signed in accordance with a resolution of the directors: Graham Bradley Chairman Byron Pirola Non-Executive Director 50 PO VALLEY ENERGY LIMITED Independent Audit Report 51 PO VALLEY ENERGY LIMITED 52 PO VALLEY ENERGY LIMITED AND ITS CONTROLLED ENTITIES Shareholder Information Additional information required by the Australian Stock Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information was prepared based on share registry information processed up to 28 February, 2006. Shareholdings Substantial Shareholders Name Michael Masterman Number of ordinary shares held 21,339,242 Harbert Distressed Investment Fund 12,500,000 Beronia Investments Pty Ltd1 12,010,821 Hunter Hall Investment Management Pty Ltd 9,856,981 Joan Masterman 4,788,444 1) Interests associated with Non-Executive Director, Byron Pirola Distribution of Share and Option Holdings Percentage of capital held % 25.87% 15.16% 14.55% 11.95% 5.80% Size of Holdings 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - over Ordinary Shares Options Number of Number of shares holders Number of holders Number of options 22 127 79 14,627 444,250 691,915 143 4,621,062 41 76,728,146 0 0 0 4 7 0 0 0 150,000 4,550,000 412 82,500,000 11 4,700,000 Number of ordinary shareholders with less than a marketable parcel Nil Voting Rights of Shares and Options Refer to Note 16 and Note 18. On-Market Buy-Back There is no current on-market buy-back. 53 PO VALLEY ENERGY LIMITED AND ITS CONTROLLED ENTITIES Shareholder Information continued Twenty Largest Shareholders Number of ordinary shares held Percentage of capital held (%) 1 Michael Masterman 21,339,242 2 Harbert Distressed Investment Master Fund Ltd 12,050,000 3 Citicorp Nominees Pty Limited 10,701,507 4 Beronia Investments Pty Ltd 10,389,821 5 Joan Masterman 6 Equity Trustees Limited 7 Beronia Investments Pty Ltd 8 Ken Ambrecht 9 Equitas Nominees Pty Limited 10 Holly Gibson 10 Lauri Macri 11 Dietmar Greil 12 Christie (Qld) Pty Ltd 13 Arton No 001 Pty Limited 13 Nicola Forrest 14 Alpha US Sub Fund VI LLC 15 McDonald Petroleum Pty Ltd 16 Mellior Pty Ltd 17 George Gurney Masterman 18 Chris & Betsy Carr 4,788,444 2,862,385 1,621,000 1,224,649 1,177,405 1,000,000 1,000,000 695,989 575,000 500,000 500,000 450,000 422,000 400,142 388,778 370,000 19 ANZ Nominees Limited 327,000 20 Graham Bradley 20 NorthSun Energy Limited 323,981 323,981 25.87% 14.61% 12.97% 12.59% 5.80% 3.47% 1.96% 1.48% 1.43% 1.21% 1.21% 0.84% 0.70% 0.61% 0.61% 0.55% 0.51% 0.49% 0.47% 0.45% 0.40% 0.39% 0.39% 73,431,926 89.01% 54 PO VALLEY ENERGY LIMITED AND ITS CONTROLLED ENTITIES Shareholder Information continued Option holders - Unquoted Number of ordinary options held Percentage of Options held (%) 1 Michael Masterman 2 Options issued under the PVE Employee Incentive Option Scheme1 3 Graham Bradley 4 5 David McEvoy Byron Pirola Restricted Securities Class 1,500,000 1,500,000 1,000,000 500,000 200,000 4,700,000 Number of ordinary restricted Securities 31.91% 31.91% 21.28% 10.64% 4.26% 100% Date of Release Director & Executives - fully paid ordinary shares 3,323,171 16 September 20051 Director & Executives - fully paid ordinary shares 31,259,252 16 December 2006 Other - Fully paid ordinary shares 795,925 15 March 2005 Other - Fully paid ordinary shares 8,929,172 16 September 20051 Other - Fully paid ordinary shares Other - Fully paid ordinary shares Director & Executives - unlisted Options Other - unlisted 167,258 4,970,223 3,200,000 1,500,000 15 October 2005 16 December 2006 16 December 2006 15 October 2005 (1) Release date is the earlier of the 16th September, 2005 or 10 days after the release of the ASX announcements regarding the complete results of the proposed 2 well Sillaro gas ﬁeld drilling and testing program (or as that program is otherwise modiﬁed by the board). 55 Notes 56 57 PO VALLEY ENERGY LIMITED PO VALLEY ENERGY LIMITED A.B.N. 33 087 741 571 A.B.N. 33 087 741 571 Registered Ofﬁ ce Registered Ofﬁ ce Level 28, 140 St. Georges Terrace Level 28, 140 St. Georges Terrace Perth WA 6000 Perth WA 6000 Tel: (08) 9278 2533 Tel: (08) 9278 2533

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