Po Valley Energy Limited Annual Report 2006

Plain-text annual report

Annual Report 2006 PO VALLE Y E NERGY LIM ITED ABN 33 087 741 571 POV final.indd Cov2 POV final.indd Cov2 24/4/07 4:02:51 PM 24/4/07 4:02:51 PM 3 Po Valley Energy Annual Report 2006 POV final.indd Cov3 POV final.indd Cov3 24/4/07 4:02:54 PM 24/4/07 4:02:54 PM Po Valley Energy Limited Annual Report 2006 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 Tce Perth WA 6000 Tel: (08) 9278 2533 Rome Office Via Boncompagni, 47 Rome, Italy 00187 Tel: +39 06 4201 4968 Share Registry Link Market Services Limited Level 12, 680 George St Sydney NSW 2000 Tel: (02) 8280 7424 Contents Corporate Directory Chairman’s Letter to Shareholders Managing Director’s Report Corporate Governance Statement Director’s Report Lead Auditor’s Independence Declaration Income Statements Solicitors Statements of Recognised Income and Expense Steinepreis Paganin Level 4, Next Building 16 Milligan St Perth WA 6000 Chiomenti Studio Legal Via XXIV Maggio, 43 Rome Italy 00187 Balance Sheets Cash Flow Statement Notes to the Consolidated Financial Statements Directors’ Declaration Independent Audit Report Shareholder Information Auditor KPMG Central Park, 152-158 St George’s Tce Perth WA 6000 Banks Anglo Irish Bank Coporation 10 Old Jewry, London EC2R 8DN, UK ANZ Banking Corporation Level 7, 77 St George’s Tce 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. 1 3 4 10 13 21 22 22 23 24 25 46 47 49 POV final.indd Sec1:1 POV final.indd Sec1:1 24/4/07 4:03:46 PM 24/4/07 4:03:46 PM Po Valley Energy Annual Report 2006 1 Highlights • Continued progress towards Sillaro, Castello and Sant’ Alberto production • Reservoir engineering completed • Production concession applications submitted • Connections to gas pipelines agreed with grid operator • Surface plant engineering complete and procurement underway • Development and drilling programs deﬁ ned for next phase of appraisal drilling • Bezzecca 1 to appraise 45bcf structure • Fantuzza 1 to test deeper (Sillaro) Miocene reserves in Crocetta Licence • Sillaro 2 targeting expanded production rates in Sillaro (Pliocene) gas ﬁ eld • Five New licences (preliminary award) to Po Valley Energy containing: • Eight attractive gas prospects • Two large oil/condensate targets in the Ossola licence north of Milan • Continued strong Italian gas prices 2 Po Valley Energy Annual Report 2006 POV final.indd Sec1:2 POV final.indd Sec1:2 24/4/07 4:04:05 PM 24/4/07 4:04:05 PM Chairman’s Letter to Shareholders Dear Shareholders On behalf of the Board of Directors, I am pleased to present the Annual report of the company for 2006. The year has been one of continued progress towards our first commercial gas production following our successful drilling and testing program in late 2005 and early 2006. Our priority for the past year was to complete the steps necessary to bring our three successfully drilled gas fields – Sillaro, Castello and Sant’ Alberto – into commercial production. Significant progress has been made on this front. Essential engineering studies have been completed. Applications for production concessions have been submitted to the Italian authorities. Agreement on the critical pipeline infrastructure connections has been reached with SNAM (the national gas pipeline grid operator). Environmental Impact assessments for Sillaro and Castello are currently underway. In parallel, we are in the process of procuring surface plant equipment to avoid delays to production new licence areas. In addition, the new Ossola licence contains two significant oil/condensate targets which provide further potential exploration upside for the company in future years. All ten of these exploration targets are currently being evaluated. In line with expectations, the company incurred an operating loss of $ 2.8 million in 2006. Also during the year, the company raised $5.85 million by way of a private placement of 3,000,000 shares at a price of $1.95 per share to institutional investors. As at 31 December 2006 the company had available cash of $5.1 million. The continued commitment of our core team of employees and consultants based in Italy has been critical to the progress achieved during the past year. On behalf of the Board, I thank them for their hard work and perseverance. Again this year each of my fellow directors spent time on the ground in Italy providing technical and strategic input and I thank them for their contribution. once all necessary approvals are granted. I look forward to reporting our future progress during In 2006 we also progressed planning for the next phase of our exploration drilling program. Plans are now well advanced for our Bezzecca project and also for exploiting the deeper Miocene structure in the Sillaro field through the drilling of a new development well – Fantuzza 1. The company has also been awarded (100% PVE) five new exploration licences in the Po River Valley region, now underpinning the existing reserve base with a longer term growth platform. Initial seismic reviews and investigations have identified eight gas prospects in our 2007 and early 2008 when we hope to report initial gas production and sales and further steps towards expanding our portfolio of gas assets. Graham Bradley Chairman POV final.indd Sec1:3 POV final.indd Sec1:3 24/4/07 4:04:06 PM 24/4/07 4:04:06 PM Po Valley Energy Annual Report 2006 3 Managing Director’s Report Overview The focus of the company over the last year has been on production and growth. Driving off our exploration we have expanded our sphere of operations to include new gas exploration plays and large oil exploration opportunities. successes in late 2005 and early 2006 we have been The company (through its 100% owned subsidiaries pursuing a steady program to put our three gasfield North Sun Italia and Po Valley Operations) has expanded discoveries into production. In parallel we have created its portfolio from four licences at the time of its IPO to very significant growth options for the company ten licences or licence applications. through our success in new licence applications with a preliminary award of a portfolio of five new licences containing eight gas prospects and two oil/condensate exploration prospects added to the portfolio. Po Valley Energy’s Development Projects and Licences Po Valley Energy currently operates exclusively in Northern Italy exploiting the large hydrocarbon system The production, development and exploration projects identified to date in these licences are shown in the table below. Sillaro, Castello, and Sant’ Alberto have been successfully drilled and are being prepared for production. Licence and Gasfield Ownership Summary that was previously the exclusive territory of ENI - the Exploration Licences successful Italian Oil and Gas Company founded in the 1950’s by Enrico Mattei. Crocetta Cascina San Pietro San Vincenzo Production Concession Applications Sillaro Sant’ Alberto Castello Exploration Permit Applications (preliminary award subject to environmental clearances) Terra del Sole La Risorta La Prospera Opera Podere Gallina Ossola Exploration Permit Applications (awaiting preliminary award) Mazzalasino The initial focus of the company was to develop proven but underdeveloped gas reserves in former ENI discovery/production fields. Over the last twelve months 4 Po Valley Energy Annual Report 2006 PVE Share% 100% 100% 50% 100% 50% 100% PVE Share % 100% 100% 100% 100% 100% 100% 100% POV final.indd Sec1:4 POV final.indd Sec1:4 24/4/07 4:04:07 PM 24/4/07 4:04:07 PM Managing Director’s Report continued Po Valley Energy is the 100% owner and operator of all Final environmental approval documentation has been licences, with the exception of the San Vincenzo licence, prepared and submitted and Po Valley Energy expects which is 50% owned and operated by the EDF Group’s, the formal grant of the Production Concession in the subsidiary Edison. second half of calendar year 2007. Sillaro – Crocetta licence (100% PVE) Following the grant of the production concession, the Sillaro in the Crocetta licence area is the company’s largest natural gasfield discovered to date. 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 2,100m and the Miocene at around 2,500m. Po Valley Energy successfully drilled and tested Sillaro 1d between November 2005 and January 2006, identifying three gas bearing levels over a 100m gross interval in the Pliocene sequence. Each of the levels were successfully tested and this test work, the associated reservoir simulations and development analysis confirmed a commercial gas field development. Flow rate testing of the three productive layers produced at up to 5.4, 4.0 and 3.0 million cubic feet per day respectively. The company has moved forward to put the field into commercial production. The required application to the Italian Ministry for a production concession was submitted in May 2006 and has been considered at the 12th April Hydrocarbon Commission meeting. An agreement has been reached with SNAM Rete Gas, the national pipeline grid operator, to connect the Sillaro development to the pipeline grid. The connection point is 300 metres from the Sillaro well location and SNAM will construct the connection line at its own cost. company plans to drill a second Pliocene production well – Sillaro 2. This well has been designed to produce from multiple levels increasing overall production rates, optimising total well reservoir field recovery, and targeting increased reserves. Sillaro 2 will be drilled from the existing Sillaro 1d drill site and prior to commencing production from this field. Plans are also well advanced to exploit the deeper Miocene structure. 50 km of seismic data has been acquired and reviewed to confirm the size and structure of the Miocene target and to identify the best location for drilling. Fantuzza 1 will be the first Po Valley Energy well targeted to test this deeper structure, which was previously successfully drilled and tested by ENI. The Fantuzza 1 drilling program and environmental approval documentation has been submitted to the regulatory authorities and the necessary casing, tubing and wellhead have been ordered. The well is expected to be drilled in the first half of 2008 to a depth of 2,600m. The surface plant and pipeline connection at Sillaro has been sized to take advantage of success at Fantuzza 1 which is about 2km from the Sillaro field production site. Castello – Cascina San Pietro Licence (100% PVE) On current scheduled planning, Castello should be the company’s first gas field in commercial production. The field was drilled in 2005 on an updip from the former ENI, Agnadello 1 well which produced 13bcf of gas over a period of five years in the 1980s. The Castello gas field, formerly known as Vitalba, was successfully tested at two gas bearing levels in early 2006. 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. Field development will be based on a one well development connected to the grid some 500 metres away. Reservoir and surface plant engineering has been completed and on the basis of this work, a production concession application was submitted in September 2006. Po Valley Energy Annual Report 2006 5 POV final.indd Sec1:5 POV final.indd Sec1:5 24/4/07 4:04:11 PM 24/4/07 4:04:11 PM Managing Director’s Report continued Managing Director’s Report continued The Hydrocarbon Commission has considered the second production well in Sant’ Alberto/San Vincenzo in application at its meeting on 12 April 2007. Agreement late 2008. has been reached with SNAM Rete Gas to connect to the pipeline grid and the grid connection cost will be borne by SNAM. The Castello environmental approval documentation has been submitted and full grant of the production concession is expected in the second half of calendar year 2007. Immediately following grant of the licence and associated development approvals, surface plant will be installed and the field put in production. All engineering work has been completed and tenders have been issued for the key surface plant components. SNAM, the national pipeline grid operator, has commenced its permitting and pipeline construction process. Sant’ Alberto – San Vincenzo Licence (50% PVE) Sant’ Alberto is the third field in the portfolio to process towards commercial gas production. Edison, the operator submitted the production concession application in July 2006. The concession is expected to be put to the Hydrocarbon Commission in mid 2007. Environmental documentation is complete and ready for submission and arrangements are in place for pipeline grid connection. In late 2006 Edison undertook to purchase from ENI additional 2D seismic lines on the Sant’ Alberto gas field structure and process these. The seismic will be analysed to identify new well and overall field development plans. Po Valley Energy expects to drill a 6 Po Valley Energy Annual Report 2006 6 Po Valley Energy Annual Report 2006 Bezzecca – Cascina San Pietro Licence (100% PVE) Bezzecca is the company’s fourth development field. The field, formerly called Pandino, was drilled in the 1950’s by ENI and produced 5bcf. In 2006 some 50 km of seismic data was acquired and a review of the size and structure of Bezzecca completed. The review confirmed the size of the structure – estimated at 45bcf – and confirmed the drill target location for the planned Bezzecca 1 well. Preparatory work is well advanced for the drilling of Bezzecca 1. The drilling program and environmental approval documentation has been submitted and approvals are expected in the second half of 2007. Casing, tubing and well head equipment has been procured and a contract signed for drilling the well. Drill rig availability is expected in early 2008 when the well should be drilled. New Gas prospects A priority of the company in 2006 has been to rapidly grow the portfolio of new gas prospects. Through a highly targeted program Po Valley Energy applied for eight new licence areas in Northern Italy and was successfully granted preliminary award of five of these new licence applications during the year. The new licences cover Ossola and Opera around Milan and La Prospera, La Risorta, and Podere Gallina near Bologna. The company also progressed the Terra del Sole application near Bologna. Environmental clearance documentation has been prepared and submitted for Ossola, Opera, La Prospera, Podere Gallina and Terra del nces Sole and the company expects full grant of these licences rant in mid 2007. Clearance documentation and licence grant procedures are also underway for La Risorta. One of the eight new licence applications, Mazzalasino, has been considered at the last Hydrocarbon Committee y meeting and the company is awaiting the preliminary award of this licence. Initial seismic and geological reviews have been completed on the new licences and the following priority POV final.indd Sec1:6 POV final.indd Sec1:6 24/4/07 4:04:13 PM 24/4/07 4:04:13 PM Managing Director’s Report continued New Oil Plays The Ossola licence north of Milan contains two significant oil/condensate and gas exploration targets. While the Po river valley region is traditionally know for its gas, there have been a number of successful large oil finds and developments including ENI’s nearby Villa Fortuna (50km southwest) discovery with cumulative production to date of 188 million barrels and Malossa oil field (20km south) which produced in 20 years 176bcf of gas and 20 million barrels of condensate. The company was granted preliminary award of the Ossola licence in October 2006 and has quickly moved to complete environmental clearance procedures. Full grant of the licence is expected in the third quarter of 2007. In parallel with the licence grant procedures, the company has commenced the early stage geological and geophysical work to evaluate the licence. Initial reviews of seismic data have highlighted two large oil/ condensate structures – Rovagnate at 3,500 metres and Negrino at 6,000 metres. Edison, an unsuccessful applicant for the Ossola licence ola Os area, has sought to legally challenge the preliminary min pre award by the Ministry of the Ossola application to Po Valley Energy. Po Valley Energy and the Italian Ministry have lodged strong defences, and based on its legal advice Po Valley Energy is confident that the Edison claim will be rejected. list of 8 gas field prospects with resources ranging in size from 10 to 80 bcf have been identified (cid:129) Casa Rossa – Podere Gallina Licence (cid:129) Cembalina – Podere Gallina Licence (cid:129) F. Perino – Podere Gallina Licence (cid:129) Occhia - Opera Licence (cid:129) Ariano – La Risorta Licence (cid:129) Corcreva – La Risorta Licence (cid:129) Dosso Anime – La Risorta licence (cid:129) Pioppette – La Prospera Licence These gas prospects are in Northern Italy and like Sillaro, Castello, and Bezzecca are expected to benefit from high quality gas, close proximity to the pipeline grid, and high Italian gas prices. Detailed geological and geophysical studies are underway and are expected to be completed during the 2007 calendar year. Target well locations will be identified through these studies with a view to drilling the first of the projects in late 2008. POV final.indd Sec1:7 POV final.indd Sec1:7 24/4/07 4:04:15 PM 24/4/07 4:04:15 PM Po Valley Energy Annual Report 2006 7 Po Valley Energy Annual Report 2006 7 Managing Director’s Report continued Remaining Recoverable Reserves (bcf) Field Names Exploration Permit 1. Sant’ Alberto San Vincenzo 2. Sillaro 3. Castello 4. Bezzecca Total Development Crocetta Cascina san Pietro Cascina san Pietro PVE Interest 50% 100% 100% 100% 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 Gas Reserves and Resources Finance The company’s reserves were unchanged during 2006 During the year the company raised $5.85 million in a with Proven and Probable reserves of 105bcf. placement to major institutional shareholders. The funds Based on preliminary seismic reviews and structure definition, gas and oil resources have been estimated for the companies new licence application areas. As have been used to progress Sillaro and Castello towards commercial gas production and to accelerate assessment and development of the highly attractive new projects. these licences are still at the stage of preliminary award, During the year the expenditure of $918,529 was the company will await formal award of the licences written off following the companies decision to expected in the second half of 2007 prior to formalising relinquish the Casone della Sacca licence. resource estimates. Italian Market Gas prices in Italy continued to strengthen through 2006. The price and market conditions remain structurally very strong and disruption continues with The company maintains a solid cash position and is well positioned to capitalise on the significant growth and development opportunities in its portfolio. Very substantial growth has been achieved in the companies asset base with limited use of shareholder’s funds. gas and oil supplies from Russia. During 2007 the company expects to put in place funding facilities for the development of Sillaro, Castello, Italian Reference Gas Prices EUR/cubic metre AUD/'000 cubic feet 0.31 14.54 0.14 7.12 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Source: ENI gas price release and GeEo Newsletter pricing data. European Central Bank average monthly exchange rates. 8 Po Valley Energy Annual Report 2006 8 Po Valley Energy Annual Report 2006 POV final.indd Sec1:8 POV final.indd Sec1:8 24/4/07 4:04:25 PM 24/4/07 4:04:25 PM Managing Director’s Report continued Sant’ Alberto and Bezzecca 1. Extensive discussions current strong oil market conditions there are very few have been held with a number of banks that specialise in markets where we could have achieved the successful Reservoir funding facilities. growth with a minimal call on shareholders funds. Management Progress towards production and growth has continued to be achieved with a small highly skilled management team. The progress and growth options that we have created are a credit to their dedication and perseverance. As the company expands on the operations and development front, we expect to expand and develop the team over the coming twelve months. We do a lot with a small core team, and I wish to join the board in thanking the team for their enormous contribution in 2006. Conclusion Northern Italy is a very lucrative market to hold gas and oil reserves. The gas (and oil) is usually of very high quality, transportation costs are very low and market The company continues to make steady progress towards bringing it’s gas fields into production. While the regulatory environment in Italy poses a development timetable significantly longer than some other non EU environments, the company has successfully navigated every stage of this process to date. The company’s 10 year operating experience in Italy and strong track record represents significant ‘intellectual property’ and provides the basis for a material competitive advantage compared to new entrants seeking to replicate what we have achieved to date. We look forward, with patience, to growing the company further in 2007 and achieving commercial production and revenues in early 2008. prices are exceptionally strong and stable. Furthermore, Michael Masterman we have found that we have been able to very Chief Executive Officer significantly grow our portfolio of assets at a very low 18 April 2007 cost creating major value for our shareholders. In the POV final.indd Sec1:9 POV final.indd Sec1:9 24/4/07 4:04:26 PM 24/4/07 4:04:26 PM Po Valley Energy Annual Report 2006 9 Po Valley Energy Annual Report 2006 9 Corporate Governance Statement The Directors are committed to the principles All Directors, managers and employees are expected to act underpinning the best practice in corporate governance. with the utmost integrity and objectivity, striving at all times The Directors have noted carefully the guidance on the to enhance the reputation and performance of the Company. principles of corporate governance issued by the 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. The Directors’ overriding objective is to increase shareholder value within an appropriate framework 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 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 Audit and Risk Committee 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 (cid:129) 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. (cid:129) 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. which will not be unreasonably withheld. (cid:129) External Audit: The board accepts that it has the responsibility for The Committee discusses with the external auditors the internal control procedures within the Company. overall scope and plans for their audit activities, including Compliance with these procedures covering financial staffing, contractual arrangements and fees. It reviews reporting, quality and integrity of personnel and all audit reports provided by the external auditor. The operation control is to be regularly monitored. A number Committee also specifically reviews any proposed activity of areas are to be subject to regular reporting to the or service by the providers of the external audit unrelated board such as finance, trade practices, industrial relations, to external audit assurance activities. The external auditor environmental compliance, workplace health and safety will be requested to attend annual general meetings, and and insurance matters. be available to answer questions from the shareholders. 10 Po Valley Energy Annual Report 2006 POV final.indd Sec1:10 POV final.indd Sec1:10 24/4/07 4:04:28 PM 24/4/07 4:04:28 PM Corporate Governance Statement continued (cid:129) Appointment of External Auditor: Remuneration Committee The board appoints the external auditor. The Committee The Remuneration Committee must have a majority reviews the performance of the external auditor annually, of non-executive directors. The main role of the and can recommend to the board any changes to Remuneration Committee is to: selection it deems appropriate. (cid:129) Internal Control: The Committee examines the adequacy of the nature, (cid:129) review the performance and remuneration of the Chief Executive Ofﬁ cer, and in conjunction with the Chief Executive Ofﬁ cer, review the extent and effectiveness of the internal control processes of engagement, performance and remuneration of the Company. (cid:129) Risk Management: The Committee oversees the risk management framework of the Company, and reviews risk management reports. Processes (cid:129) Communications: senior executives of the Company; and (cid:129) recommend to the board appropriate terms and conditions of engagement and remuneration of Directors within the aggregate limits approved by Shareholders. In assessing the performance of the Chief Executive Officer and senior executives, the Committee gives The Committee maintains free and open communications considerable weight to the contribution of the employee with the external auditors and management. 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. The current members of the committee are Graham Bradley (Chairman) and Byron Pirola. (cid:129) Reporting: The issues discussed at each Committee meeting are reported at the next board meeting (cid:129) 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 ﬁ nancial reporting and practices. (cid:129) 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. POV final.indd Sec1:11 POV final.indd Sec1:11 24/4/07 4:04:29 PM 24/4/07 4:04:29 PM Po Valley Energy Annual Report 2006 11 Corporate Governance Statement continued Nominations Committee The role of the Nominations Committee is to provide recommendations to the board on matters including: permitted to trade in securities, provided that the person is not in possession of price sensitive information and the trading is not for short term or speculative gain. (cid:129) composition of the board and competencies of board Related party matters members; Directors and senior management will be required to (cid:129) appointment and evaluation of the Chief Executive advise the Chairman of any related party contract or Officer; (cid:129) succession planning for board members and senior management; and (cid:129) processes for the evaluation of the performance of the Chief Executive Officers and Directors. The current members of the committee are Graham Bradley (Chairman) and Byron Pirola. Standards and Codes of Conduct All executives and employees are required to abide by laws and regulations, to respect confidentiality and the proper handling of information and act with the highest 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. Shareholder relations 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 the Company. Information on all major developments affecting the company is to be communicated to the shareholders standards of honesty, integrity, objectivity and ethics in all dealings with each other, the Company, customers, through: suppliers and the community. The codes of conduct (cid:129) the Annual Report; will be regularly reviewed and updated as necessary to (cid:129) half yearly reports; ensure they reflect the highest standards of behaviour (cid:129) the Annual General Meeting and other meetings called to obtain approval for board action as appropriate; and (cid:129) the Company’s web site. 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. Share Trading Directors, management and other employees as nominated are not permitted to trade in securities during “black-out” periods which are the six week period prior to the announcement to ASX of the half yearly and annual results. Any trading within the “black-out” periods can only be conducted with the prior written approval of the Chairman. Outside of the “black-out” period directors, management and other employees are 12 Po Valley Energy Annual Report 2006 POV final.indd Sec1:12 POV final.indd Sec1:12 24/4/07 4:04:33 PM 24/4/07 4:04:33 PM Director’s Report The directors present their report together with the financial report of Po Valley Energy Limited (‘the Company” or “PVE”) and of the consolidated entity, being the Company and its controlled entities, for the year ended 31 December 2006. 1. Directors The directors of the Company at any time during or since the end of the financial year are: Directors Date of Appointment M Masterman 22 June 1999 B Pirola G Bradley D McEvoy D Greil 10 May 2002 30 September 2004 30 September 2004 5 August 2005 Information on Directors Michael Masterman Managing Director and CEO, BEcHons, Age 44 Michael is a co-founder of PVE and is based in Europe. d Michael took up the position of Executive Chairman 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 markets issue – the first of its kind for a green fields mining project. Prior to joining Anaconda Nickel, he spent 8 years at McKinsey & Company serving major international resources companies principally in the area of strategy and development. He is also Executive Chairman of Caspian Holdings Plc, an AIM listed company with oil interests in Kazakhstan. David McEvoy Non Executive Director, BSc, Grad Diploma (Appl. Geophysics), Age 60 The board is composed of a majority of non-executive David joined PVE as a Director in September 2004 and is Directors, including the Chairman. The Chairman of the board is based in Sydney. He has over 37 years experience in the elected by the board and is an independent director. Graham Bradley Chairman BA, LLB (Hons), LLM, FAICD, Age 58 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, Graham joined PVE as a director and Chairman in Exploration and Development Vice President for Esso September 2004 and is based in Sydney. He is an Resources Canada and Regional Vice President of Exxon experienced Chief Executive Officer and listed public Exploration Company responsible for Exxon’s exploration company director. Graham previously served as Chief activities in the Far East, USA, Canada and South America. Executive Officer of one of Australia’s major listed funds He was recently the Business Development Vice President management and financial services groups, Perpetual and member of the Management Committee of Exxon Trustees Australia. He was Managing Partner and (subsequently ExxonMobil) Exploration Company, Chief Executive Officer of a national law firm, Blake responsible for new exploration and development Dawson Waldron and was a senior Partner of McKinsey opportunities worldwide. He is currently a Non-Executive & Company. Mr Bradley is currently a director of MBF Director of Woodside Petroleum Limited, Australian Australia and Singapore Telecommunications. He is Worldwide Exploration and Innamincka Petroleum Limited. Chairman of HSBC Bank Australia Limited, Stockland David is a member of the Audit and Risk Committee. Corporation, Film Finance Corporation Australia Limited, Boart Longyear Limited and Proteome Systems Byron Pirola Non Executive Director, BSc, PhD, Age 46 Limited. Graham is Chairman of the Remuneration and Byron is a co-founder of PVE and is based in Sydney. Nomination Committee and member of the Audit and He is currently a Director of Port Jackson Partners Risk Committee. Limited, a Sydney based strategy management consulting firm. Prior to joining Port Jackson Partners in 1992, Byron spent six years with McKinsey & Company working Po Valley Energy Annual Report 2006 13 POV final.indd Sec1:13 POV final.indd Sec1:13 24/4/07 4:04:33 PM 24/4/07 4:04:33 PM Director’s Report continued out of the Sydney, New York and London Offices and across the Asian Region. He has extensive experience in advising CEOs and boards of both large public and small developing companies across a wide range of industries and geographies. Byron is Chairman of the Audit and Risk Committee and member of the Remuneration and Nominations Committee. Dietmar Greil 3. Directors Meetings The number of formal meetings of the Board of Directors Executive Director Technical, MEng Age 53 held during the financial year and the number of Dietmar is a highly experienced petroleum engineer with meetings attended by each director is provided below. over 30 years experience in exploration and development 4. Principal Activities in the oil and gas industry. He has extensive oil and The principal continuing activities of the group in the gas experience having worked for Statoil, Chevron course of the year were; and Pruesagg. Dietmar has been a member of the management team since the Company’s listing in late 2004. Dietmar is also currently the Chief Operating (cid:129) the exploration for gas in the Po Valley region in Italy (cid:129) appraisal and development of gas properties Officer of Caspian Holdings Plc, an AIM listed company 5. Earnings per share with oil interests in Kazakhstan. 2. Company Secretary & Chief Financial Officer Dom Del Borrello, BCom, Age 40 The basic loss per share for the Company was 3.41 cents (2005: 3.19 cents). 6. Operating and financial review The consolidated loss after income tax amounted to Dom was appointed to the position of Company $ 2,825,710 (2005: $2,267,469). Secretary in September 2004 and in September 2006 joined the Company as the Chief Financial Officer. He has significant corporate finance and capital markets experience with a focus on resources companies gained over the past 15 years. During this time he also spent a number of years working for investment bank Goldman Sachs in London. Prior to joining the Company he spent 3 years working with global titanium minerals and zircon producer Iluka Resources , where he was the Group Manager, Treasury and Risk. During 2006 the Company prepared and submitted production concession applications for Sillaro, Castello (aka “Vitalba”) and Sant’ Alberto (aka “Santa Maddalena”) fields. All of these applications are currently sitting with the Italian ministry awaiting technical review and approval. Following the lodgement of the concession applications with the Italian ministry the company awarded an Engineering, Procurement, Construction and Installation G Bradley M Masterman D McEvoy B Pirola D Greil No. of board meetings held No. of board meetings eligible to attend No. of board meetings attended No. of Audit Committee meetings held No. of Audit Committee meetings attended No. of Remuneration Committee meetings held No. of Remuneration Committee meetings attended 8 8 8 2 2 2 2 8 8 8 n/a n/a n/a n/a 8 8 8 2 2 n/a n/a 8 8 8 2 2 2 2 8 8 6 n/a n/a n/a n/a 14 Po Valley Energy Annual Report 2006 POV final.indd Sec1:14 POV final.indd Sec1:14 24/4/07 4:04:33 PM 24/4/07 4:04:33 PM Director’s Report continued contract (“EPCI contract”) for Sillaro and Castello The Company completed a private plac ement late in the gasfields with Orion Energy International (“Orion”). year issuing 3,000,000 shares to Harbinger Management Under the contract, Orion will manage procurement Corporation and Hunter Hall Investment Management at and installation of surface plant equipment and pipeline $1.95 per share, raising $5,850,000. connections for the Sillaro and Castello surface plant. 7. Dividends Commencing this work ahead of the production approvals required from the Italian ministry will ensure that the company can move quickly forward with development once regulatory approvals are in place. A key element of necessary infrastructure for production was secured with the company announcing late in the year that it had reached agreement on its maiden No dividends have been paid or declared by the Company during the year ended 31 December 2006. 8. Events subsequent to reporting date Since 31 December 2006, the consolidated entity has undertaken the following signiﬁ cant events: pipeline connection with the national Italian gas pipeline (cid:129) Edison, an unsuccessful applicant for the Ossola operator SNAMRete Gas, for both the Sillaro and Castello (aka “Vitalba”) fields, ahead of planned initial supply deliveries. Also during the year 8 new licence area applications were submitted, of which the company was awarded with the rights to proceed forward on an exclusive basis for five gas and oil exploration licences applications in Italy. The additional licences cover a total area of 1,610 square kilometres and are all contained within the petroleum provinces in northern Italy where the company has focused it’s development options. Under the terms of the licence award, the Italian Hydrocarbon Commission has advised the company that it can proceed forward on an exclusive basis with 5 major new licence applications in northern Italy. The five licence applications are “Ossola” and “Opera” located near Milan and “La Prospera”, “Podere Gallina” and “La Risorta” located near Bologna. Based on the work initiated by Po Valley to date, the licence areas contain 8 new gas prospects and 2 new oil exploration targets. The company has commenced environmental clearance studies for the additional areas and then plans to seek licence area, has sought to legally challenge the preliminary award by the Ministry of the Ossola application to Po Valley. Po Valley and the Italian Ministry have lodged strong defences at the initial hearing. The company will strongly defend the preliminary award process. The administrative hearing is scheduled for 18 April 2007 and based on legal advice Po Valley is confident that the Edison claim will be rejected. 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 consolidated entity. 9. Likely Developments During 2007 the Company intends to continue to progress engineering and procurement of necessary equipment to bring Sillaro, Castello and the Sant’ Alberto gas fields into production in late 2007 once the company receives ministerial approval for the production concessions. Preparation will also commence to drill Bezzacca 1 in the company’s Cascina san Pietro licence. Ministerial approval for a grant of the full licences for The Company now has an extensive portfolio of these additional areas. In parallel with the environmental exploration and development licences and licence clearance process, the company will conduct geological applications. It will focus on bringing the first 3 projects and geophysical studies on each of the license areas to of Castello, Sillaro and Sant’ Alberto into production, better define and “prove up” the prospects. This will undertake detailed geological evaluation of the new include acquisition and evaluation of the seismic data projects and preparation of drilling programs. ed co erin covering selected target areas. et are POV final.indd Sec1:15 POV final.indd Sec1:15 24/4/07 4:04:38 PM 24/4/07 4:04:38 PM Po Valley Energy Annual Report 2006 15 Director’s Report continued 10. Environmental Regulation Non-Executive Directors The Company’s operations are subject to environmental regulations under both Federal and local municipality legislation in relation to its mining exploration and development activities in Italy. Company management monitor compliance with the relevant environmental legislation. The Directors are not aware of any breaches of legislation during the period covered by this report. 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 remuneration of PVE Non-Executive Directors comprises cash fees and superannuation contributions. There is no current scheme to provide performance based bonuses or retirement benefits to Non-Executive Directors other than superannuation contributions Non-Executive Directors typically do not participate in equity or options schemes of the Company. 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 subject to approval 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 aims to ensure that the level and the Company in late 2004 at $200,000 per annum. composition of remuneration of its directors and executives is sufficient and reasonable for the competitive industry in which the Company operates. The total salary and fees paid in 2006 to non-executive directors was $138,361 (2005:$135,549). The major provisions of the service contracts held with the specified The Remuneration Committee is responsible for directors and executives, in addition to any performance determining and reviewing compensation arrangements related bonuses and/or options are as follows: 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 Specified directors Graham Bradley, Chairman (cid:129) Commencement Date: 19 May 2005 reference to relevant employment market conditions (cid:129) Term of Appointment: 3 years with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality (cid:129) Fixed remuneration for the year ended 31 December, 2006: $60,000 board and executive team. (cid:129) No termination benefits Executive Directors and Senior Executives David McEvoy, Non-executive director 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 (cid:129) Commencement Date: 19 May 2005 (cid:129) Term of Appointment: 3 years (cid:129) Fixed remuneration for the year ended 31 December, 2006: $40,000 including employment insurances and superannuation (cid:129) No termination benefits contributions. In relation to the payment of bonuses, Byron Pirola, Non-executive director share option and other incentive amounts, discretion is exercised by theRemuneration Committee having regard to the overall performance of the Company and of the relevant individual during the period. (cid:129) Commencement Date: 30 May 2006 (cid:129) Term of Appointment: 3 years (cid:129) Fixed remuneration for the year ended 31 December, 2006: $40,000 (cid:129) No termination benefits 16 Po Valley Energy Annual Report 2006 POV final.indd Sec1:16 POV final.indd Sec1:16 24/4/07 4:04:39 PM 24/4/07 4:04:39 PM Director’s Report continued Michael Masterman, Chief Executive Ofﬁ cer (cid:129) Payment of termination benefit on termination by and Managing Director the employer (other than for gross misconduct) equal (cid:129) Commencement Date: 14 December 2004 (cid:129) Term of Agreement: 2 years with a further 1 year extension at the option of the executive (cid:129) Fixed remuneration inclusive of superannuation for the year ended 31 December, 2006: $240,000 (cid:129) Payment of termination benefit on termination by the employer (other than for gross misconduct)equal to one years total fixed remuneration Dietmar Greil, Technical Director (cid:129) Commencement Date: 1 January 2005 (Executive Agreement) and 30 May 2006 (Director Agreement) (cid:129) Term of Agreement: 2 years with a further 1 year extension at the option of the Executive to one years total fixed remuneration Specified Executive Dom Del Borrello, Company Secretary and Chief Financial Officer (cid:129) Commencement Date: 1 September 2006 (cid:129) Term of Agreement: The services of Mr Del Borrello are provided through a service contract with a management company for 2 years with a further 1 year extension at the option of either the Company or the service company. (cid:129) Fixed Service contract fee of EUR7,000 per calendar month (cid:129) Payment of termination benefit on termination by the Company (other than for gross misconduct) (cid:129) Fixed remuneration for the year ended 31 December, equal to three month service fee 2006: EUR100,000 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. Speciﬁ ed directors G Bradley (Chairman) D McEvoy B Pirola M Masterman (CEO) D Greil (appointed 5 Aug 2005 as a director) Speciﬁ ed executives D Del Borrello 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Salary & fees $ Bonus $ Superannuation beneﬁ ts $ Value of options $ Total $ Proportion of remuneration performance related % Value of options as proportion of remuneration % 58,345 57,163 40,008 39,198 40,008 39,198 240,046 255,877 166,699 149,714 74,701 33,058 - - - - - - 83,350 - 33,340 - - - - - - - - - - - - - - - - - - - - - 96,636 280,986 57,982 168,592 58,345 57,163 40,008 39,198 40,008 39,198 420,032 536,863 258,021 318,306 12,464 28,099 87,165 61,157 - - - - - - 19.8% - 12.9% - - - - - - - - - 23% 52% 22% 53% 14% 46% Short term incentive bonuses awarded as remuneration to specified executives is related to performance hurdles established by the Remuneration Committee. The performance hurdles are a combination of company targets and objectives specific to the executive. POV final.indd Sec1:17 POV final.indd Sec1:17 24/4/07 4:04:40 PM 24/4/07 4:04:40 PM Po Valley Energy Annual Report 2006 17 Director’s Report continued Analysis of bonuses included in remuneration Equity instruments All options refer to options over ordinary shares of Po Details of the vesting profile of the short-term incentive Valley Energy Limited, which are exercisable on a one cash bonus awarded as remuneration to each director and for-one basis. specified executives are detailed here. Short term incentive bonus Directors Included in Options over equity instruments granted as compensation Details on options over ordinary shares in the Company remuneration % vested in year that were granted as compensation to each key M Masterman D Greil $ (a) 83,350 33,340 100% 100% management personnel during the reporting period and details on options that vested during that period are as follows: (a) Amounts included in remuneration for the financial year represent the amount that vested in the financial year based on achievement of personal goals and satisfaction of specified performance criteria. No amounts vest in future financial years in respect of the bonus schemes for the 2006 financial year. No of options Fair value per Exercise price No. of options granted during 2006 Grant date option at grant date ($) per option ($) Expiry date vested during 2006 Directors G Bradley D McEvoy B Pirola M Masterman D Greil Executives D Del Borello - - - - - - - - - - - - - - - - - - - - - - - - - 1,000,000 500,000 200,000 750,000 450,000 150,000 30 Nov 2006 $0.70 $1.95 1 Dec 2010 75,000 No of options granted during 2005 Grant date Fair value per option at grant date ($) Exercise price No. of options per option ($) Expiry date vested during 2005 Directors G Bradley D McEvoy B Pirola M Masterman D Greil Executives D Del Borello - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 750,000 450,000 75,000 No options have been granted since the end of the financial year. The options were provided at no cost to the recipients. All options expire on the earlier of their expiry date or termination of the individual’s employment. For options granted in the current year, the earliest exercise date is 1 December 2008. 18 Po Valley Energy Annual Report 2006 POV final.indd Sec1:18 POV final.indd Sec1:18 24/4/07 4:04:40 PM 24/4/07 4:04:40 PM Director’s Report continued Exercise of options granted as compensation Analysis of options over equity instruments granted as compensation During the reporting period, no shares were issued Details of vesting profiles of the options granted as on the exercise of options previously granted as remuneration to each director of the Company and key compensation. management personnel are detailed below: Number Date granted % vested in year in year which grant vests Value yet to vest % forfeited Financial year in Non-executive directors G Bradley D McEvoy B Pirola 1,000,000 15 Oct 2004 500,000 15 Oct 2004 200,000 15 Oct 2004 Executive directors M Masterman 750,000 15 Oct 2004 750,000 15 Oct 2004 D Griel 450,000 15 Oct 2004 450,000 15 Oct 2004 100 % 100 % 100 % - 100% - 100% - - - - - - - 31 Dec 2006 31 Dec 2006 31 Dec 2006 31 Dec 2005 31 Dec 2006 31 Dec 2005 31 Dec 2006 - - - - - - - Number Date granted % vested in year in year which grant vests Value yet to vest % forfeited Financial year in Speciﬁ ed executives D Del Borello 75,000 75,000 15 Oct 2004 15 Oct 2004 75,000 30 Nov 2006 75,000 30 Nov 2006 - 100% - - - - - - 31 Dec 2005 31 Dec 2006 31 Dec 2008 31 Dec 2009 - - $52,828 $52,828 Further details of Director and Executive Remuneration are set out in Note 23 to the Financial Statements and form part of this report. POV final.indd Sec1:19 POV final.indd Sec1:19 24/4/07 4:04:41 PM 24/4/07 4:04:41 PM Po Valley Energy Annual Report 2006 19 Director’s Report continued Po Valley Energy Limited Po Valley E tements Notes to the Consolidated Financial Statements Not or th for the year ended 31 December 2006 r ended 31 December 2006 inanci 12. Directors’ interests At the date of this report, the direct and indirect 15. Indemnification and insurance of officers and auditors interests of the Directors in the shares and options of the The Company has agreed to indemnify current Directors Company were: against any liability or legal costs incurred by a Director 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 21,464,242 - 1,500,000 500,000 200,000 - - - - - - 900,000 - - - D McEvoy B Pirola D Greil 129,593 12,010,821 695,989 J Masterman1 I Masterman 1 G Masterman1 4,788,444 500,000 388,778 1. Related parties to M Masterman 13. Share Options Details of share options over ordinary shares issued during the year and on issue at 31 December 2006 are set out in Note 15 to the Financial Statements and form part of this report. No options have been exercised or forfeited between the end of the financial year and the date 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. as an officer of the Company or entities within the consolidated entity or in connection with any legal proceeding 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 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 services in addition to their statutory duties as auditors to the Company. 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 21 and forms part of the Directors’ report for the ﬁ nancial year ended 31 December 2006. This report has been made in accordance with a resolution of Directors. The Company’s Corporate Governance Statement and disclosures are contained elsewhere in the annual report. Graham Bradley, Chairman Sydney, NSW Australia 12 March 2007 20 Po Valley Energy Annual Report 2006 POV final.indd Sec1:20 POV final.indd Sec1:20 24/4/07 4:04:41 PM 24/4/07 4:04:41 PM Po Valley Energy Limited Po Valley Po Valley Energy Limited Notes to the Consolidated Financial Statements olidated Financ Note Lead Auditor’s Independence Declaration under Section 307C of the Corporation Act 2001 006 for the year ended 31 December 2006 ateme 31 Decemb Co 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 2006 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 B C FULLARTON, Partner Perth 12 March 2007 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. POV final.indd Sec1:21 POV final.indd Sec1:21 24/4/07 4:04:42 PM 24/4/07 4:04:42 PM Po Valley Energy Annual Report 2006 21 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Income Statements for the year ended 31 December 2006 Notes to the Consolidated Financial Statements s t Not Notes to the Consolidated Financial Statements tementss s or th for the year ended 31 December 2006 r ended 31 December 2006 n inanci CONSOLIDATED COMPANY Revenue Other income NOTES 2 3(a) 2006 214,756 33,455 2005 512,952 78,112 2006 200,173 548,635 2005 471,436 - Employee beneﬁ t expense 4 (1,088,279) (1,176,455) (196,073) (561,972) Depreciation and amortisation expense 12 Overheads costs Finance costs Resource property costs written off Other expenses 3(b) (Loss) / Proﬁ t before income tax expense (11,698) (1,060,267) (1,620) (905,111) (6,946) (12,095) (804,474) (29,700) (745,403) (90,406) - (460,406) - - - (412,864) (27,825) - (6,071) (331,366) (2,825,710) (2,267,469) 86,258 (862,591) Income tax expense 6 - - - - (Loss) / Proﬁ t for the period (2,825,710) (2,267,469) 86,258 (862,591) Basic / Diluted loss per share 7 (3.41) (3.19) The income statements are to be read in conjunction with the accompanying notes to the financial statements. NOTES 2006 2005 2006 2005 CONSOLIDATED COMPANY Foreign exchange translation differences 17 748,585 (787,954) Net income and expense recognised directly in equity 748,585 (748,954) - - - - Proﬁ t / (Loss) for the year (2,825,710) (2,267,469) 86,258 (862,591) Total recognised income and expense for the year (2,077,125) (3,055,423) 86,258 (862,591) The statements of recognised income and expense are to be read in conjunction with the accompanying notes to the ﬁ nancial statements. 22 Po Valley Energy Annual Report 2006 POV final.indd Sec1:22 POV final.indd Sec1:22 24/4/07 4:04:43 PM 24/4/07 4:04:43 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Balance Sheets as at 31 December 2006 Notes to the Consolidated Financial Statements olidated Financ Note 006 for the year ended 31 December 2006 ateme 31 Decemb Co NOTES 2006 2005 2006 2005 CONSOLIDATED COMPANY Current Assets Cash and cash equivalents Trade and other receivables 8 9 5,082,323 10,437,245 5,008,195 8,667,320 2,241,481 1,035,392 49,194 27,109 Total Current Assets 7,323,804 11,472,637 5,057,389 8,694,429 Non-Current Assets Investments Receivables Plant & Equipment Resource Property Costs 10 11 12 13 18,713 2,100,375 838,595 1,939,540 494,542 29,254,350 27,032,818 - 10,922,204 10,749,314 27,735,881 18,580,545 - - - - Total Non-Current Assets 32,212,033 29,466,900 38,658,085 29,329,859 Total Assets 39,535,837 40,939,537 43,715,474 38,024,288 Current Liabilities Payables Provisions 14 16 645,658 83,167 5,980,010 36,454 205,188 561,324 - - Total Current Liabilities 728,825 6,016,464 205,188 561,324 Total Liabilities Net Assets Equity Issued Capital Reserves 728,825 6,016,464 205,188 561,324 38,807,012 34,923,073 43,510,286 37,462,964 44,354,162 38,589,171 44,354,162 38,589,171 221,899 (526,686) - - Accumulated Losses (5,749,049) (3,139,412) (843,876) (1,126,207) Total Equity 17 38,807,012 34,923,073 43,510,286 37,462,964 The balance sheets are to be read in conjunction with the accompanying notes to the ﬁ nancial statements. Po Valley Energy Annual Report 2006 23 POV final.indd Sec1:23 POV final.indd Sec1:23 24/4/07 4:04:43 PM 24/4/07 4:04:43 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley E Cash Flow Statement Notes to the Consolidated Financial Statements s t Not Notes to the Consolidated Financial Statements tementss s for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 n inanci NOTES 2006 2005 2006 2005 CONSOLIDATED COMPANY Cash ﬂ ows from operating activities Payments to suppliers and employees Interest received Interest paid Net cash outﬂ ow from (1,813,813) (1,331,529) 214,757 (1,620) 512,952 (38,763) (494,967) 200,173 - (484,170) 471,435 (36,887) operating activities 22 (1,600,676) (857,340) (294,794) (49,622) Cash ﬂ ows from investing activities Payments for non-current assets (343,521) (487,628) Advances for well equipment (897,583) - Payments for exploration expenditure (7,953,445) (14,252,182) Payments for investments (18,713) Payment for investment in controlled entity Amounts advanced to controlled entities - - - - - - - - - (172,890) - - - - - (8,606,700) (17,120,613) Net cash outﬂ ow from investing activities Cash ﬂ ows from ﬁ nancing activities Proceeds from the issues of shares Payments for share issue costs Repayment of borrowings Net cash outﬂ ow from ﬁ nancing activities (9,213,262) (14,739,810) (8,779,590) (17,120,613) 5,850,000 (434,759) - 8,750,000 (161,195) (504,098) 5,850,000 (434,759) - 8,750,000 (161,195) (504,098) 5,415,241 8,084,707 5,415,241 8,084,707 Net decrease in cash held (5,398,697) (7,512,443) (3,659,143) (9,085,528) Cash and cash equivalents at 1 January Effects of exchange rate ﬂ uctuations on cash held Cash and cash equivalents 10,437,245 18,030,792 8,667,320 17,821,432 43,775 (81,104) 18 (68,584) at 31 December 8 5,082,323 10,437,245 5,008,195 8,667,320 The statements of cash ﬂ ows are to be read in conjunction with the accompanying notes to the ﬁ nancial statements. 24 Po Valley Energy Annual Report 2006 POV final.indd Sec1:24 POV final.indd Sec1:24 24/4/07 4:04:43 PM 24/4/07 4:04:43 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 Po Valley Energy Limited (“the Company” or “PVE”) period or in the period of the revision and future is a company domiciled in Australia. The consolidated periods if the revision affects both current and future financial report of the Company for the year ended periods. 31 December 2006 comprises the Company and its subsidiaries (together referred to as the “Consolidated Entity”). The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next The financial report was authorised for issuance on financial year are discussed below. 12 March 2007. (a) STATEMENT OF COMPLIANCE The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards and the Corporations Act 2001. The consolidated financial report of the consolidated entity also complies with IFRSs and interpretations adopted by the International Accounting Standards Board. (b) BASIS OF PREPARATION The financial report is presented in Australian dollars. Resource Property Costs The Group’s accounting policy for resource property costs is set out below. The application of this policy necessarily requires management to make certain estimates and assumptions as to future events and circumstances, in particular, the assessment of whether economic quantities of resources and reserves have been found. Any such estimates and assumptions may change as new information becomes available. If, after having capitalised expenditure under our policy, we conclude that we are unlikely to recover the expenditure by future exploitation or sale, then the This financial report has been prepared on the basis of relevant capitalised amount will be written off to the historical cost, except for financial assets and liabilities Income Statement. recognised at fair value. The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial report. The accounting policies have been applied consistently by consolidated entities. (c) 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. (d) PRINCIPLES OF CONSOLIDATION Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The consolidated financial statements incorporate the assets and liabilities of all entities controlled by Po Valley Energy Limited (“parent entity”) as at 31 December 2006 and the results of all controlled entities for the year then ended. Po Valley Energy Limited and its controlled entities together are referred to in this financial report as the consolidated entity. POV final.indd Sec1:25 POV final.indd Sec1:25 24/4/07 4:04:44 PM 24/4/07 4:04:44 PM Po Valley Energy Annual Report 2006 25 Po Valley Energy Limited Po Valle Po Valley Energy Limited Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements ements Notes to the Consolidated Financial Statements for the year ended 31 December 2006 or the r ended 31 December 2006 for the year ended 31 December 2006 nanci i NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued 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. The effects of all transactions between entities in the consolidated entity are eliminated in full. 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. (f) 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 and is recognised in the income statement. 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 Joint Controlled operations and assets impairment, assets are grouped at the lowest levels for The interest of the Company and of the consolidated which there are separately identifiable cash flows (cash entity in unincorporated joint ventures and jointly generating units). controlled assets are brought to account by recognising in its financial statements the assets it controls, the liabilities that it incurs, the expenses it incurs and its share of income that it earns from the sale of goods or services by the joint venture. (e) 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: the initial recognition of assets or liabilities that affect neither accounting nor Financial assets The recoverable amount of the consolidated entity’s receivables carried at amortised is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. Impairment of receivables is not recognised until objective evidence is available that a loss event has occurred. Significant receivables are individually assessed for impairment. Impairment testing of significant receivables that are not assessed as impaired individually is performed by placing them into portfolios of significant receivables with similar risk profiles and undertaking a collective assessment of impairment. Non-significant receivables are not individually assessed. Instead, impairment testing is performed by placing non-significant receivables in portfolios of similar risk profiles, based on objective evidence from historical experience adjusted for any effects of conditions existing at each balance sheet date. taxable profit; and differences relating to investments (g) CASH AND CASH EQUIVALENTS 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. For purposes of the cash ﬂ ow 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. 26 Po Valley Energy Annual Report 2006 POV final.indd Sec1:26 POV final.indd Sec1:26 24/4/07 4:04:45 PM 24/4/07 4:04:45 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued Cumulative exploration and evaluation expenditure which no longer satisfies the above policy is no longer carried forward as an asset, but is charged against, and (h) 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: 2005 2004 Ofﬁ ce furniture & equipment 3 – 5 years 3 – 5 years The residual value, the useful life and the depreciation method applied to an asset are reassessed annually. Well equipment which is not ready for use is not depreciated. (i) 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 their amortised cost. (j) 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. shown as a deduction from profit. (k) REVENUE RECOGNITION Interest revenue Interest revenue is recognised as it accrues, taking into account the effective yield on the ﬁ nancial asset. (l) TRADE AND OTHER RECEIVABLES Trade receivables and other receivables are recorded stated at their cost less impairment losses. (m) EMPLOYEE BENEFITS Long-term service beneﬁ ts The consolidated entity’s net obligation in respect of long-term service beneﬁ ts is the amount of future beneﬁ t that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including on-costs and expected settlement dates, and is discounted using the rates attached to the Commonwealth Government bonds at the balance sheet date which have maturity dates approximating to the terms of the consolidated entity’s obligations. Wages, salaries, annual leave, sick lieave and non-monetary beneﬁ ts Liabilities for employee benefits for wages, salaries, annual leave and sick leave that are expected to be settled within 12 months of the reporting date represent present obligations resulting form employees services provided to reporting date, are calculated at undiscounted amounts based on remuneration wage and salary rates that the consolidated entity expects to pay as at reporting date including related on-costs, such as workers compensation insurance and payroll Resource properties include the cost of acquiring and tax. developing resource properties, mineral rights and exploration, evaluation and development expenditure relating to an area of interest. Superannuation The consolidated entity contributes to deﬁ ned contribution superannuation plans. Contributions are Resource properties are amortised using the unit of recognised as an expense as they are made. production basis over the economically recoverable reserves. Amortisation of resource properties commences from the date when commercial production commences. When there is low 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. POV final.indd Sec1:27 POV final.indd Sec1:27 24/4/07 4:04:45 PM 24/4/07 4:04:45 PM Po Valley Energy Annual Report 2006 27 Po Valley Energy Limited Po Valley E Po Valley Energy Limited Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements Notes to the Consolidated Financial Statements for the year ended 31 December 2006 or th r ended 31 December 2006 for the year ended 31 December 2006 inanci NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued Share-based payments The executive and employee share option plan grants 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. options to employees as part of their remuneration. (o) EARNINGS PER SHARE 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 an options pricing model; taking into account the market related vesting conditions upon which the options were granted. The amount recognised as an expense is adjusted to reﬂ ect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. (n) FOREIGN CURRENCY Functional and presentation currency Items included in the ﬁ nancial 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 ﬁ nancial statements are presented in Australian dollars, which is Po Valley Energy Limited’s functional and presentation currency. Transactions and balance 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. Group companies 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 Basic earnings per share (“EPS”) is calculated by dividing the net proﬁ t 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 classiﬁ ed 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 ﬁ nancing 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. (p) OTHER TAXES Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST) and value added tax (VAT) except where the amount of GST or VAT incurred is not recoverable from the taxation authority. In these circumstances, the GST or VAT is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST or VAT included. The net amount of GST or VAT recoverable from, or payable to, the relevant taxation authority is included as a current asset or liability in the balance sheet. Cash ﬂ ows are included in the statement of cash ﬂ ows on a gross basis. The GST and VAT components of cash ﬂ ows arising from investing and ﬁ nancing activities which are recoverable from, or payable to, the relevant taxation authority are classiﬁ ed as operating cash ﬂ ows. 28 Po Valley Energy Annual Report 2006 POV final.indd Sec1:28 POV final.indd Sec1:28 24/4/07 4:04:46 PM 24/4/07 4:04:46 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 2: REVENUE CONSOLIDATED COMPANY 2006 2005 2006 2005 Interest income 214,756 512,952 200,173 471,436 NOTE 3: OTHER INCOME AND OTHER EXPENSES (a) Other Income: Provisions written back Foreign exchange gains - unrealised Other (b) Other Expenses: Foreign exchange losses Realised Unrealised - - 33,455 33,455 72,052 - 6,060 78,112 - 548,635 - 548,635 - - - - 6,946 - 81,104 9,302 6,071 68,584 - 262,782 6,946 90,406 6,071 331,366 NOTE 4: EMPLOYEE BENEFIT EXPENSES Wages and salaries Equity based compensation 892,206 196,073 614,483 561,972 - - 196,073 561,972 1,088,279 1,176,455 196,073 561,972 NOTE 5: AUDITORS’ REMUNERATION Remuneration for audit or review of the ﬁ nancial reports of the parent entity or any entity in the consolidated entity: Auditors of the Company – KPMG Australia 54,000 46,566 54,000 26,704 POV final.indd Sec1:29 POV final.indd Sec1:29 24/4/07 4:04:47 PM 24/4/07 4:04:47 PM Po Valley Energy Annual Report 2006 29 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 inanci NOTE 6: INCOME TAX EXPENSE CONSOLIDATED COMPANY 2006 2005 2006 2005 The income tax expense on pre tax accounting reconciles to the income tax expense in the ﬁ nancial statements as follows: (Loss) / Proﬁ t from ordinary activities before income tax expense (2,825,710) (2,267,469) 86,258 (862,591) Prima facie income tax calculated at 30% (847,713) (680,240) 25,877 (258,777) Tax effect of permanent differences Foreign tax losses not brought to account Tax losses and temporary differences not 58,822 708,983 168,592 465,634 58,822 168,592 - - brought to account as income tax beneﬁ t 79,908 46,014 (84,699) 90,185 Income tax attributable to loss - - - - The directors estimate that the potential future income tax beneﬁ t in Australia at 31 December 2006 in respect of tax losses and temporary differences not brought to account is 698,266 411,776 694,939 408,467 This beneﬁ t for tax losses will only be obtained if: (i) the relevant company derives future assessable income of a nature and of an amount sufﬁ cient to enable the beneﬁ t 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 beneﬁ t from the deductions for the losses NOTE 7: LOSS PER SHARE Basic loss per share(cents) (3.41) (3.19) The calculation of basic loss per share was based on the loss attributable to shareholders of $2,825,710 (2005: $2,267,469) and a weighted average number of ordinary shares outstanding during the year of 82,976,712 (2005: 71,165,753). Diluted loss per share is the same as basic loss per share. NOTE 8: CASH AND CASH EQUIVALENTS Cash at bank and on hand 5,082,323 10,437,245 5,008,195 8,667,320 30 Po Valley Energy Annual Report 2006 POV final.indd Sec1:30 POV final.indd Sec1:30 24/4/07 4:04:47 PM 24/4/07 4:04:47 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 9: TRADE AND OTHER RECEIVABLES Sundry debtors Vendor advances for well equipment Indirect taxes receivable (a) CONSOLIDATED COMPANY 2006 2005 2006 2005 97,668 897,583 132,712 - 1,246,230 902,680 2,241,481 1,035,392 43,351 17,500 - 5,843 49,194 - 9,609 27,109 (a) Included in receivables are Italian indirect taxes recoverable as follows: Current1 Non-current 237,387 893,072 2,100,375 1,939,540 - - - - The indirect taxes relate to Italian Value Added Tax (“VAT”), which is typically 20% of invoiced amounts (with certain exceptions). The extent of VAT that has not been recovered from the Italian authorities is recognised on the balance sheet as a receivable. Po Valley expects to recover this receivable through reducing VAT remitted on sales, reducing the consolidated entity’s obligation to pay employee taxes to the authorities and/or applying for an annual refund (capped at the lowest amount of VAT credits generated in any of the past 3 years). The current portion receivable is estimated to be recoverable in the next twelve months. NOTE 10: INVESTMENTS Shares in unlisted entities, at fair value Shares in controlled entities, at cost 18,713 - 18,713 - - - - - 10,922,204 10,749,314 10,922,204 10,749,314 The investments held in controlled entities are included in the ﬁ nancial statements at cost at 31 December 2006 are as follows:- Name: Country of Incorporation Class of Shares 2006 Investment 2005 Investment Holding % Northsun Italia S.p.A (“NSI”) Italy Ordinary 10,206,314 10,033,424 Po Valley Operations Pty Ltd (“PVO”) Australia Ordinary 715,890 715,890 100 100 10,922,204 10,749,314 POV final.indd Sec1:31 POV final.indd Sec1:31 24/4/07 4:04:48 PM 24/4/07 4:04:48 PM Po Valley Energy Annual Report 2006 31 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 nanci i NOTE 11: NON- CURRENT ASSETS - RECEIVABLES CONSOLIDATED COMPANY 2006 2005 2006 2005 Indirect taxes receivable (refer Note 9(a)) 2,100,375 1,939,540 - - Loans – Controlled Entities (i) - - 27,735,881 18,580,545 2,100,375 1,939,540 27,735,881 18,580,545 (i) These loans are unsecured, interest free and repayable on demand in Euro. NOTE 12: PROPERTY PLANT & EQUIPMENT Ofﬁ ce Furniture & Equipment: At cost Accumulated depreciation Well Equipment: At cost Reconciliations: Reconciliation of the carrying amounts for each class of Plant & equipment are set out below: Ofﬁ ce Furniture & Equipment: Carrying amount at beginning of year Additions Depreciation expense Foreign exchange difference Carrying amount at end of year Well Equipment: Carrying amount at beginning of year Additions Transfer to resource property costs Foreign exchange difference Carrying amount at end of year 130,884 (94,506) 36,378 109,571 (80,810) 28,761 802,217 465,781 838,595 494,542 28,761 18,603 20,220 20,636 (11,698) (12,095) 712 - 36,378 28,761 465,781 324,917 829,647 465,781 - (829,647) 11,519 - 802,217 465,781 838,595 494,542 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 32 Po Valley Energy Annual Report 2006 POV final.indd Sec1:32 POV final.indd Sec1:32 24/4/07 4:04:48 PM 24/4/07 4:04:48 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 13: RESOURCE PROPERTY COSTS CONSOLIDATED COMPANY 2006 2005 2006 2005 Resource Property costs Exploration Phase 29,254,350 27,032,818 Reconciliation of carrying amount of resource properties Exploration Phase Carrying amount at beginning of year 27,032,818 12,157,809 Foreign exchange difference 656,474 (688,806) Transfer from property plant & equipment - 829,647 Exploration expenditure Exploration expenditure written off 2,470,169 15,479,571 (905,111) (745,403) Carrying amount at end of year 29,254,350 27,032,818 NOTE 14: TRADE AND OTHER PAYABLES - - - - - - - - - - - - Trade payables and accruals 633,682 5,951,015 205,188 561,324 Taxes payable 11,976 28,995 - - 645,658 5,980,010 205,188 561,324 POV final.indd Sec1:33 POV final.indd Sec1:33 24/4/07 4:04:49 PM 24/4/07 4:04:49 PM Po Valley Energy Annual Report 2006 33 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 nanci i NOTE 15: 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 23. 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. 2006 2005 Number of Weighted average exercise price $ options Number of Weighted average exercise price $ options Balance at beginning of year 3,000,000 Granted Exercised (a) 150,000 - Balance at end of year (b) 3,150,000 Exercisable at end of year 3,150,000 $1.25 $1.95 - 3,000,000 - - 3,000,000 3,000,000 $1.25 - - (a) Details of options granted during the reporting period pursuant to EIOS. Number granted Granted date Vesting date Expiry date Exercise price 2006 150,000 30 November 2006 50% 1 December 2008 50% 1 December 2009 1 December 2010 $1.95 2005 - - - - - - (b) Options held at the end of the reporting period pursuant to EIOS. Number of Options Grant date Vesting date Expiry date Exercise price $ 1,500,000 1,500,000 150,000 15 Oct 2004 15 Oct 2004 15 Dec 2005 15 Dec 2006 30 Nov 2006 50% 1 Dec 2008 31 Oct 2008 31 Oct 2008 1 Dec 2010 $1.25 $1.25 $1.95 50% 1 Dec 2009 34 Po Valley Energy Annual Report 2006 POV final.indd Sec1:34 POV final.indd Sec1:34 24/4/07 4:04:49 PM 24/4/07 4:04:49 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 16: PROVISIONS CONSOLIDATED COMPANY 2006 2005 2006 2005 The aggregate employee beneﬁ t liability recognised and included in the ﬁ nancial statement is as follows: Provision for employee beneﬁ ts: Current Other provisions: Provision for legal claim NOTE 17: CAPITAL AND RESERVES - 36,454 83,167 - - - - - Reconciliation of movement in capital and reserves Attributable to equity holders of the parent Consolidated – 2006 Issued Capital Translation Reserve Accumulated losses Balance at 1 January 2006 38,589,171 (526,686) (3,139,412) Total recognised income and expense Equity-settled transactions Shares issued Share issue costs - - 5,850,000 (85,009) 748,585 (2,825,710) - - - 196,073 - - Total 34,923,073 (2,077,125) 196,073 5,850,000 (85,009) Balance at 31 December 2006 44,354,162 221,899 (5,769,049) 38,807,012 Consolidated – 2005 Issued Capital Translation Reserve Accumulated losses Balance at 1 January 2005 30,276,671 261,268 (1,433,915) Total recognised income and expense Equity-settled transactions Shares issued Share issue costs - - 8,750,000 (437,500) (787,954) (2,267,469) - - - 561,972 - - Total 29,104,024 (3,055,423) 561,972 8,750,000 (437,500) Balance at 31 December 2005 38,589,171 (526,686) (3,139,412) 34,923,073 POV final.indd Sec1:35 POV final.indd Sec1:35 24/4/07 4:04:50 PM 24/4/07 4:04:50 PM Po Valley Energy Annual Report 2006 35 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 i inanci NOTE 17: CAPITAL AND RESERVES continued Reconciliation of movement in capital and reserves Company Issued Accumulated losses Capital 2006 Total Issued Accumulated losses Capital 2005 Total Balance at 1 January 38,589,171 (1,126,207) 37,462,964 30,276,671 (825,588) 29,451,083 Total recognised income and expense - 86,258 86,258 Equity-settled transactions 196,073 196,073 - - (862,591) (862,591) 561,972 561,972 Shares issued Share issue costs 5,850,000 (85,009) - - 5,850,000 8,750,000 (85,009) (437,500) - - 8,750,000 (437,500) Balance at 31 December 44,354,162 (843,876) 43,510,286 38,589,171 (1,126,207) 37,462,964 Share Capital - Company Opening balance - 1 January Shares issued during the year: Share issue at 70c each on 22.11.2005 Share issue at 70c each on 23.12.2005 2006 Number 82,500,000 - - Share issue at $1.95 each on 3.11.2006 3,000,000 2005 Number 70,000,000 10,500,000 2,000,000 - Closing balance – 31 December 85,500,000 82,500,000 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 18: FINANCIAL REPORTING BY SEGMENTS The Company operates primarily as a gas explorer and in one geographical location, being Italy. 36 Po Valley Energy Annual Report 2006 POV final.indd Sec1:36 POV final.indd Sec1:36 24/4/07 4:04:50 PM 24/4/07 4:04:50 PM Po Valley Energy Limited Po Valley Po Valley Energy Limited Notes to the Consolidated Financial Statements Note Notes to the Consolidated Financial Statements for the year ended 31 December 2006 006 for the year ended 31 December 2006 olidated Financ ateme 31 Decemb Co NOTE 19 : 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 ﬁ nancial assets and ﬁ nancial liabilities is set out below: 2006 Weighted Average Interest Rate Floating Interest Rate Fixed interest Maturing in 1 year or< Non- Interest bearing Total Financial Assets Cash assets 3.68% 221,702 4,860,621 - 5,082,323 Receivables - Current - Non current Financial Liabilities Payables Provisions - - - - Net ﬁ nancial assets/(liabilities) 5,082,323 - - - - 2,241,481 2,100,375 2,241,481 2,100,375 (645,658) (645,658) (83,617) (83,617) 3,613,031 8,695,354 2005 Weighted Average Interest Rate Floating Interest Rate Fixed interest Maturing in 1 year or< Non- Interest- bearing Total Financial Assets 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 1,035,392 1,939,540 (5,980,010) (5,980,010) (36,454) (36,454) Net ﬁ nancial assets/(liabilities) 8,853,410 1,583,835 (3,041,532) 7,395,713 (b) Credit Risk Exposures The consolidated entity is not exposed to signiﬁ cant credit risk. Credit risk with respect to cash is held with recognised ﬁ nancial intermediaries with acceptable credit ratings. (c) Net Fair Values of Financial Assets and Liabilities The carrying amounts of ﬁ nancial assets and liabilities as disclosed in the balance sheet 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. POV final.indd Sec1:37 POV final.indd Sec1:37 24/4/07 4:04:51 PM 24/4/07 4:04:51 PM Po Valley Energy Annual Report 2006 37 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 nanci i NOTE 19 : FINANCIAL INSTRUMENTS continued Amounts receivable/(payable) in foreign currency which are not effectively hedged: Cash Current – Receivables Non-current – Receivables Current – Payables CONSOLIDATED COMPANY 2006 2005 2006 2005 74,128 1,747,322 104 745 2,192,288 1,025,783 2,100,375 1,939,540 - - 385,996 5,418,686 5,801 - - - NOTE 20: COMMITMENTS AND CONTINGENCIES (i) Exploration Commitments Under its exploration licence for Casone della Sacca, the Company was required to drill one well by March 2006. The company relinquished this exploration area during 2006. As a result of the application for extensions to the licence areas of San Vincenzo, Crocetta and Cascino san Pietro the company is required to drill one well in each of these licences by January 2010. The estimated cost of drilling one dry well is in the range of €1,800,000 to €2,000,000. (ii) Contingencies There are no material contingencies that have not been provided for in the ﬁ nancial report. (iii) Other commitments The company has entered into a contract that provides engineering design, procurement and supervision of the construction and installation of both the Sillaro and Castello production surface plants. The contract is for a lump sum amount of €336,000 which consist separable portions. 38 Po Valley Energy Annual Report 2006 POV final.indd Sec1:38 POV final.indd Sec1:38 24/4/07 4:04:51 PM 24/4/07 4:04:51 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 21: JOINT VENTURES As at the 31 December, 2006 the consolidated entity held interests in the following Joint Ventures and permits in Italy: Titles of Permits granted San Vincenzo Participation percentages NSI 32.5% Other registered holders and relevant percentages Edison 50% PVO 17.5% Assets and liabilities of the Joint Venture at 31.12.2006 were as follows: Resource Property Costs 1,791,757 Receivables Payables Net Assets - - 1,791,757 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 NSI 32.5% Other registered holders and relevant percentages Edison 50% PVO 17.5% Assets and liabilities of the Joint Ventures at 31.12.2005 were as follows: Resource Property Costs Receivables Payables Net Assets 1,560,176 75,537 (26,491) 1,609,222 POV final.indd Sec1:39 POV final.indd Sec1:39 24/4/07 4:04:52 PM 24/4/07 4:04:52 PM Po Valley Energy Annual Report 2006 39 Po Valley Energy Limited Po Valley E Po Valley Energy Limited Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements Notes to the Consolidated Financial Statements for the year ended 31 December 2006 or th r ended 31 December 2006 for the year ended 31 December 2006 nanci i NOTE 22: RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES (Loss) / Proﬁ t for the period Adjustment for non-cash items: Foreign exchange loss Foreign exchange gains Share-based payments Depreciation – ofﬁ ce furniture & equipment Exploration expenditure written off Change in operating assets and liabilities: CONSOLIDATED COMPANY 2006 2005 2006 2005 (2,825,710) (2,267,469) 86,258 (862,591) 6,071 6,946 90,406 (548,635) 331,366 - 196,073 11,698 905,111 - 561,972 12,095 745,403 - 196,073 561,972 - - - - (Increase) decrease in receivables 33,980 (122,088) (25,850) (Increase in shareholder loans for interest Increase (decrease) in trade and other creditors Increase in provisions and accruals - (33,870) 50,622 (9,062) 116,641 14,762 37,118 (9,062) - (12,620) (108,425) 3,909 - Net cash outﬂ ow from operating activities (1,600,676) (857,340) (294,794) (49,622) NOTE 23: KEY MANAGEMENT PERSONNEL DISCLOSURE a) Remuneration Remuneration Policy The Company aims to ensure that the level and composition of remuneration of its directors and executives is sufﬁ cient 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 Ofﬁ cer and the executive team. The Remuneration Committee assesses the appropriateness of the nature and amount of entitlements of such ofﬁ cers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder beneﬁ t from the retention of a high quality board and executive team. Executive Directors and Senior Executives The remuneration of PVE executive directors and senior executives comprises some or all of the following elements: ﬁ xed salary; short term incentive bonus based on performance; long term incentive shares and/or option scheme; and other beneﬁ ts 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. 40 Po Valley Energy Annual Report 2006 POV final.indd Sec1:40 POV final.indd Sec1:40 24/4/07 4:04:52 PM 24/4/07 4:04:52 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 23: KEY MANAGEMENT PERSONNEL DISCLOSURE continued Non-Executive Directors The remuneration of PVE Non-Executive Directors comprises cash fees and superannuation contributions. There is no current scheme to provide performance based bonuses or retirement beneﬁ ts to Non-Executive Directors other than superannuation contributions. Non-Executive Directors typically do not participate in equity or options schemes of the Company. 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 subject to approval 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 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. The major provisions of the service contracts held with the speciﬁ ed directors and executives, in addition to any performance related bonuses and/or options are as follows: Speciﬁ ed directors Graham Bradley, Chairman (cid:129) Commencement Date: 19 May 2005 (cid:129) Term of Appointment: 3 years (cid:129) Fixed remuneration for the year ended 31 December, 2006: $60,000 (cid:129) No termination beneﬁ ts David McEvoy, Non-executive director (cid:129) Commencement Date: 19 May 2005 (cid:129) Term of Appointment: 3 years (cid:129) Fixed remuneration for the year ended 31 December, 2006: $40,000 (cid:129) No termination beneﬁ ts Byron Pirola, Non-executive director (cid:129) Commencement Date: 30 May 2006 (cid:129) Term of Appointment: 3 years (cid:129) Fixed remuneration for the year ended 31 December, 2006: $40,000 (cid:129) No termination beneﬁ ts Michael Masterman, Chief Executive Ofﬁ cer and Managing director (cid:129) Commencement Date: 14 December 2004 (cid:129) Term of Agreement: 2 years with a further 1 year extension at the option of the executive (cid:129) Fixed remuneration inclusive of superannuation for the year ended 31 December, 2006: $240,000 (cid:129) 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, Technical director (cid:129) Commencement Date: 1 January 2005 (Executive) and 30 May 2006 (Director) (cid:129) Term of Agreement: 2 years with a further 1 year extension at the option of the Executive (cid:129) Fixed remuneration for the year ended 31 December, 2006: EUR100,000 (cid:129) Payment of termination beneﬁ t on termination by the employer (other than for gross misconduct) equal to one years total ﬁ xed remuneration POV final.indd Sec1:41 POV final.indd Sec1:41 24/4/07 4:04:53 PM 24/4/07 4:04:53 PM Po Valley Energy Annual Report 2006 41 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 inanci NOTE 23: KEY MANAGEMENT PERSONNEL DISCLOSURE continued Speciﬁ ed Executive Dom Del Borrello, Company Secretary and Chief Financial Ofﬁ cer (cid:129) Commencement Date: 1 September 2006 (cid:129) Term of Agreement: The services of Mr Del Borrello are provided through a service contract with a management company for 2 years with a further 1year extension at the option of either the Company or the Service company. (cid:129) Fixed Service contract fee of EUR7,000 per calendar month (cid:129) Payment of termination beneﬁ t on termination by the Company (other than for gross misconduct) equal to three month service fee The remuneration details of each director and speciﬁ ed executives during the year is presented in the table below. Salary & Fees Bonus Super- annuation Beneﬁ ts Value of Options(1) Speciﬁ ed directors G Bradley (Chairman) 2006 D McEnvoy B Pirola 2005 2006 2005 2006 2005 58,345 57,163 40,008 39,198 40,008 39,198 - - - - - - M Masterman (CEO) 2006 240,046 83,350 D Greil Speciﬁ ed directors D Del Borrello 2005 2006 2005 2006 2005 2006 2005 255,877 166,699 149,714 74,701 33,058 619,807 574,208 - 33,340 - - - 116,690 - - - - - - - - - - - - - - - Total 58,345 57,163 40,008 39,198 40,008 39,198 420,032 536,863 258,021 318,306 - - - - - - 96,636 280,986 57,982 168,592 12,464 28,099 87,165 61,157 167,082 903,579 477,677 1,051,885 (1) The fair value of options was calculated at the date of issue using a Black-Scholes Option Pricing Model, taking 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. Options granted in 2004 expire 31 October 2008, options granted in 2006 expire 1 December 2010. Each option entitles the holder to purchase one share. 42 Po Valley Energy Annual Report 2006 POV final.indd Sec1:42 POV final.indd Sec1:42 24/4/07 4:04:53 PM 24/4/07 4:04:53 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 23: KEY MANAGEMENT PERSONNEL DISCLOSURE continued The directors and executives were appointed on the following dates M Masterman 22 June 1999 B Pirola G Bradley D McEvoy D Greil 10 May 2002 30 September 2004 30 September 2004 5 August 2005 D Del Borrello 30 September 2004 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, 150,000 options over ordinary shares were issued and no options were exercised or forfeited. (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 speciﬁ ed director and speciﬁ ed executive, including their personally-related entities, is as follows: Speciﬁ ed directors G Bradley M Masterman D McEvoy B Pirola D Greil Speciﬁ ed executives D Del Borrello Held at 31 Dec 2005 Issued Held at 31 Dec 2006 1,000,000 1,500,000 500,000 200,000 900,000 - - - - - 1,000,000 1,500,000 500,000 200,000 900,000 150,000 150,000 300,000 POV final.indd Sec1:43 POV final.indd Sec1:43 24/4/07 4:04:54 PM 24/4/07 4:04:54 PM Po Valley Energy Annual Report 2006 43 Po Valley Energy Limited Po Valley Energy Limited Po Valley E Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements for the year ended 31 December 2006 for the year ended 31 December 2006 or th r ended 31 December 2006 nanci i NOTE 23: KEY MANAGEMENT PERSONNEL DISCLOSURE continued The details of the options held at 31 December 2006 are as follows: $1.00 exercise price expiring 31 Oct 08 $1.25 exercise price expiring 31 Oct 08 $1.95 exercise price expiring 31 Dec 10 Speciﬁ ed directors G Bradley M Masterman D McEvoy B Pirola D Greil Speciﬁ ed executives D Del Borrello 1,000,000 - 500,000 200,000 - - - 1,500,000 - - 900,000 - - - - - Total 1,000,000 1,500,000 500,000 200,000 900,000 150,000 150,000 300,000 1,700,000 2,550,000 150,000 4,400,000 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 speciﬁ ed director and speciﬁ ed executive, including their personally-related entities is as follows: Speciﬁ ed directors G Bradley M Masterman (i) D McEvoy B Pirola (i) D Greil Speciﬁ ed executives D Del Borrello Held at 31 Dec 2005 323,981 21,339,242 129,593 12,010,821 695,989 90,715 i) Included above are shares held by related parties Purchased Sold Held at 31 Dec 2006 323,981 21,464,242 129,593 12,010,821 695,989 - - - - - 25,919 64,796 - 125,000 - - - - 44 Po Valley Energy Annual Report 2006 POV final.indd Sec1:44 POV final.indd Sec1:44 24/4/07 4:04:54 PM 24/4/07 4:04:54 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Notes to the Consolidated Financial Statements Notes to the Consolidated Financial Statements Note for the year ended 31 December 2006 for the year ended 31 December 2006 006 olidated Financ ateme 31 Decemb Co NOTE 23: KEY MANAGEMENT PERSONNEL DISCLOSURE continued Held at Related Entities J Masterman 1 I Masterman 1 G Masterman 1 31 Dec 2005 Purchased 4,788,444 500,000 388,778 - - - Held at Sold - - - 31 Dec 2006 4,788,444 500,000 388,778 1. Related parties to M Masterman (e) Other transactions with the Company A total amount of $21,859 (2005: $35,858) 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. POV final.indd Sec1:45 POV final.indd Sec1:45 24/4/07 4:04:54 PM 24/4/07 4:04:54 PM Po Valley Energy Annual Report 2006 45 Po Valley Energy Limited Po Valley E Po Valley Energy Limited Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements Directors’ Declaration or th for the year ended 31 December 2006 r ended 31 December 2006 nanci i 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 22 to 45, 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 2006 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 its debts as and when they become due and payable. 2. The directors have been given the declarations by the Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer for the ﬁ nancial year ended 31 December 2006 pursuant to Section 295A if the Corporations Act 2001. Dated at Sydney this 12 day of March 2007. Signed in accordance with a resolution of the directors: Graham Bradley, Chairman Byron Pirola, Non-Executive Director 46 Po Valley Energy Annual Report 2006 POV final.indd Sec1:46 POV final.indd Sec1:46 24/4/07 4:04:55 PM 24/4/07 4:04:55 PM Po Valley Energy Limited Po Valley Energy Limited Po Valley Independent Audit Report Notes to the Consolidated Financial Statements Note 006 for the year ended 31 December 2006 olidated Financ ateme 31 Decemb Co Independent audit report to members of Po Valley Energy Limited Scope The ﬁ nancial report and directors’ responsibility The ﬁ nancial report comprises the income statements, statements of recognised income and expense, balance sheets, statement of cash ﬂ ows, accompanying notes to the ﬁ nancial statements, and the directors’ declaration for both Po Valley Energy Limited (the “Company”) and Po Valley Energy Limited and its subsidiaries (the “group”), for the year ended 31 December 2006. The group comprises both the Company and the subsidiaries it controlled during that year. The directors of the Company are responsible for the preparation and true and fair presentation of the ﬁ nancial report in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the ﬁ nancial report. Audit approach We conducted an independent audit in order to express an opinion to the members of the Company. Our audit was conducted in accordance with Australian Auditing Standards in order to provide reasonable assurance as to whether the ﬁ nancial report is free of material misstatement. The nature of an audit is inﬂ uenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected. We performed procedures to assess whether in all material respects the ﬁ nancial report presents fairly, in accordance with the Corporations Act 2001, Australian Accounting Standards and other mandatory ﬁ nancial reporting requirements in Australia, a view which is consistent with our understanding of the Company’s and the group’s ﬁ nancial position, and of their performance as represented by the results of their operations and cash ﬂ ows. We formed our audit opinion on the basis of these procedures, which included: (cid:129) examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the ﬁ nancial report, and (cid:129) assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of signiﬁ cant accounting estimates made by the directors. While we considered the effectiveness of management’s internal controls over ﬁ nancial reporting when determining the nature and extent of our procedures, our audit was not designed to provide assurance on internal controls. KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. POV final.indd Sec1:47 POV final.indd Sec1:47 24/4/07 4:04:56 PM 24/4/07 4:04:56 PM Po Valley Energy Annual Report 2006 47 Po Valley Energy Limited Independent Audit Report Audit opinion In our opinion, the ﬁ nancial report of Po Valley Energy Limited is in accordance with: a) the Corporations Act 2001, including: i. giving a true and fair view of the Company’s and the group’s ﬁ nancial position as at 31 December 2006 and of their performance for the ﬁ nancial year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; and b) other mandatory ﬁ nancial reporting requirements in Australia. KPMG B C FULLARTON, Partner Perth 12 March 2007 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. 48 Po Valley Energy Annual Report 2006 POV final.indd Sec1:48 POV final.indd Sec1:48 24/4/07 4:04:56 PM 24/4/07 4:04:56 PM Po Valley Energy Limited Shareholder Information for the year ended 31 December 2006 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, 2007. SHAREHOLDINGS Substantial Shareholders Name Michael Masterman Harbinger Capital Management Hunter Hall Investment Management Pty Ltd Beronia Investments Pty Ltd1 Joan Masterman 1Interests associated with Non-Executive Director, Byron Pirola Distribution of Share and Option Holdings Number of ordinary shares held Percentage of capital held % 21,464,242 15,708,244 13,479,300 12,010,821 4,788,444 25.10% 18.37% 15.76% 14.04% 5.60% 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 holders 37 140 98 138 37 450 Number of shares 23,876 454,450 838,202 3,964,603 80,218,869 85,500,000 Number of holders Number of options 0 0 0 4 7 11 0 0 0 150,000 4,700,000 4,850,000 Number of ordinary shareholders with less than a marketable parcel Nil Voting Rights of Shares and Options Refer to Note 15 and Note 17. On-Market Buy-Back There is no current on-market buy-back. POV final.indd Sec1:49 POV final.indd Sec1:49 24/4/07 4:04:57 PM 24/4/07 4:04:57 PM Po Valley Energy Annual Report 2006 49 Po Valley Energy Limited Po Valley E Po Valley Energy Limited Notes to the Consolidated Financial Statements t Not Notes to the Consolidated Financial Statements tements Shareholder Information for the year ended 31 December 2006 or th r ended 31 December 2006 for the year ended 31 December 2006 nanci i Number of ordinary shares held Percentage of capital held % Twenty Largest Shareholders 1 Citicorp Nominees Pty Limited 2 Michael Masterman 3 4 5 6 7 8 9 Beronia Investments Pty Ltd Joan Masterman Equity Trustees Limited HSBC Custody Nominees – GSI ECSA Ken Ambrecht Holly Gibson Lauri Macri 10 Dietmar Greil 11 Beronia FS Pty Ltd 11 Beronia FS Pty Ltd 11 Nicola Forrest 12 HSBC Custody Nominees 13 McDonald Petroleum Pty Ltd 14 George Gurney Masterman 15 Mellior Pty Ltd 16 Beronia Investments Pty Ltd 17 Chris & Betsy Carr 18 Graham Bradley 18 NorthSun Energy Limited 19 Lisa White 20 Tucabia Investments Pty Ltd Option holders – Unquoted 1 Michael Masterman 2 3 4 5 6 Graham Bradley Dietmar Greil Options issued under the PVE Employee Incentive Option Scheme 1 David McEvoy Byron Pirola 27,857,948 21,464,242 10,389,821 4,788,444 3,185,376 1,500,000 1,224,649 910,000 840,000 695,989 500,000 500,000 500,000 406,909 400,000 388,778 380,742 371,000 370,000 323,981 323,981 304,323 285,000 32.58% 25.10% 12.15% 5.60% 3.73% 1.75% 1.43% 1.06% 0.98% 0.81% 0.58% 0.58% 0.58% 0.48% 0.47% 0.45% 0.45% 0.43% 0.43% 0.38% 0.38% 0.36% 0.33% 77,911,183 91.12% Number of ordinary options held Percentage of Options held % 1,500,000 1,000,000 900,000 750,000 500,000 200,000 4,850,000 30.93% 20.62% 18.55% 15.47% 10.31% 4.12% 100% 1 No person holds 20% or more of these securities, other than as disclosed above. The total number of option holders is 11. Restricted Securities Class Executive – unlisted Options Executive – unlisted Options 50 Po Valley Energy Annual Report 2006 Number of restricted Securities 75,000 75,000 Date of Release 1 December 2008 1 December 2009 POV final.indd Sec1:50 POV final.indd Sec1:50 24/4/07 4:04:57 PM 24/4/07 4:04:57 PM Po Valley Po Valley Energy Limited Note Notes to the Consolidated Financial Statements 006 for the year ended 31 December 2006 olidated Financ ateme 31 Decem Co Notes: POV final.indd Sec1:51 POV final.indd Sec1:51 24/4/07 4:04:57 PM 24/4/07 4:04:57 PM Po Valley Energy Annual Report 2006 51 Notes: 52 Po Valley Energy Annual Report 2006 POV final.indd Sec1:52 POV final.indd Sec1:52 24/4/07 4:04:58 PM 24/4/07 4:04:58 PM POV final.indd Sec1:53 POV final.indd Sec1:53 24/4/07 4:04:58 PM 24/4/07 4:04:58 PM PO VALLEY ENERGY LIMITED A.B.N. 33 087 741 571 Registered Ofﬁ ce Level 28, 140 St. Georges Terrace Perth WA 6000 Tel: (08) 9278 2533 POV final.indd Cov1 POV final.indd Cov1 24/4/07 4:02:47 PM 24/4/07 4:02:47 PM

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