cover po valley 3mm def:Layout 1 11-04-2008 10:06 Pagina 1 cover po valley 3mm def:Layout 1 11-04-2008 10:06 Pagina 1 PO VALLEY ENERGY LIMITED ABN 33 087 741 571 PO VALLEY ENERGY LIMITED ABN 33 087 741 571 Registered Office Registered Office Level 28, 40 St. Georges Terrace Level 28, 40 St. Georges Terrace Perth WA 6000 Perth WA 6000 Tel: (08) 9278 2533 Tel: (08) 9278 2533 Annual Report Annual Report ABN 33 087 741 571 2007 ABN 33 087 741 571 2007 PO VALLEY ENERGY LIMITED PO VALLEY ENERGY LIMITED annual report :po valley 11-04-2008 10:57 Pagina II Po Valley Energy Limited A snapshot of the Company Po Valley Energy Limited (PVE) is an emerging gas and oil enterprise growing rapidly from quiet, results-driven beginnings. The Company is on the verge of becoming a significant gas producer in the fast-growing and under-supplied Italian market as it brings its first fields into production – with more to come. PVE is on track to connect its first production wells to Italy’s national pipeline grid. Low production costs, easy connection to the pipeline grid and the strong price for gas in Italy intersect to paint an attractive reward profile for PVE’s investors. annual report :po valley 11-04-2008 10:57 Pagina 1 “ We will now enter 2008 active on the production, appraisal and exploration fronts. Michael Masterman Managing Director Annual Report 2007 ” Contents Corporate Directory Managing Director’s Report Chairman’s Letter to Shareholders 1 3 4 12 15 Lead Auditor’s Independence Declaration 23 24 Corporate Governance Statement Income Statements Directors Report Statements of Recognised Income and Expense Balance Sheets Cash Flow Statement Notes to the Consolidated Financial Statements Directors Declaration Independent Audit Report Shareholder Information 24 25 26 27 51 52 54 CORPORATE DIRECTORY Directors Graham Bradley, Chairman Michael Masterman, Managing Director David McEvoy, Non-Executive Director Byron Pirola, Non-Executive Director Company Secretary Dom Del Borrello Registered Office Level 28, 140 St. George’s Tce Perth WA Australia 6000 Tel: +618 92782533 Rome Office Via Boncompagni, 47 00187 Rome, Italy Tel: +39 06 42014968 Share Registry Link Market Services Limited Level 12, 680 George St Sydney, NSW Australia 2000 Tel: +612 82807424 Solicitors Steinepreis Paganin Level 4, Next Building 16 Milligan St Perth, WA Australia 6000 DLA Paper Via Cordusio 2 20213 Milan, Italy Auditor KPMG Central Park, 152-158 St. George’s Tce Perth, WA Australia 6000 Banks Bankwest 108 St. George’s Tce Perth, WA Australia 6000 Bank of Scotland 155 Bigshopsgate London UK EC2M 34B 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 annual report :po valley 11-04-2008 10:57 Pagina 2 Annual Report 2007 Highlights Continued progress towards Sillaro, Castello and Sant’ Alberto production Preliminary award of production concessions and environmental approvals for Sillaro and Castello Agreement with Edison to take over operatorship of San Vincenzo/Sant’ Alberto and move to 100% ownership Connections to gas pipelines underway with grid operator Surface plant construction contract awarded and 38% complete Programs underway for next phase of exploration and appraisal drilling Bezzecca 1 well to appraise 45bcf structure Fantuzza 1 to test deeper Miocene level in Crocetta Licence (Sillaro) Sillaro 2 to expand future production rates in Sillaro (Pliocene) gas field Six new licences awarded (subject to final grant) Ten attractive gas prospects Two large oil/condensate prospects Environmental clearances achieved on La Prospera, Opera, Podere Gallina, Ossola and Terra del Sole Four new licence applications lodged, including first offshore licence and first gas storage licence Closure of private placement raising $7.88m to institutional investors and a €25m bank finance facility Continued strong Italian gas prices 2 annual report :po valley 11-04-2008 10:57 Pagina 3 Managing Director’s Report Chairman’s Letter to Shareholders To build our pipeline of future opportunities the Company was successful in 2007 in securing the award of six new exploration licences in the Po River Valley region. These now underpin the existing resource and reserve base with a longer term growth platform. The Company has submitted environmental clearance studies for all the additional areas and has also purchased seismic for a number of the new licence areas. Geological and geophysical studies are underway and initial reviews have identified ten gas prospects in our six 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. Also during 2007 and early 2008 the Company applied for four new licence areas including a gas storage licence in joint venture with Star Energy Plc, our first offshore gas target, and a further two onshore licences. The results of these applications should be known in mid-2008. I am also pleased to report that the Company has come to a commercial resolution with Edison in its court challenge to the Ossola licence granted to the Company in 2007. In exchange for a 50% interest in the Ossola licence area, the Company will regain ownership and control of the San Vincenzo licence area and Sant’ Alberto production field application. This is a positive outcome in that the Company can both accelerate exploration of the large-scale oil, condensate and gas targets in the Ossola area whilst also moving decisively in bringing the Sant’ Alberto field into production in 2009. In line with expectations, the Company incurred an operating loss of $ 2.75 million in 2007. Also during the year, the Company raised $7.88 million by way of a private placement of 4,775,000 shares at a price of $1.65 per share to institutional investors. As at 31 December 2007 the Company had available cash of $5.97 million. There were no changes to the board in 2007 except the resignation of Dietmar Greil in May 2007. Dietmar continued to provide consulting services to the Company throughout the year focussing on new opportunity creation and technical advice. We thank Dietmar for his contribution as a director over the past 2 years. 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. I look forward to reporting our future progress during 2008 towards our initial gas production and sales and further steps towards expanding and exploiting our portfolio of gas and oil assets. Graham Bradley Chairman 3 Dear Shareholders On behalf of the board of directors, I am pleased to present the annual report of the Company for 2007. 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 main 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. Good progress has been made on the key steps within our control. During the year we obtained preliminary award of the production concessions for Sillaro and Castello subject to environmental clearances. Agreement on the critical pipeline infrastructure connections was reached with SNAM (the national gas pipeline grid operator) and construction planning and activity is underway. In parallel, we awarded a surface plant equipment construction contract for the Sillaro and Castello fields to SEMAT SpA, a Brescia based Italian contractor, to avoid delays to production once all necessary regulatory approvals are granted. At the time of writing the construction contract was 38% complete. Progress on steps outside our direct control – securing regulatory approvals – has, however, been slower than we hoped. I am pleased, therefore, to report that in early 2008 we have now secured environmental clearance in support of our production plans for both Sillaro and Castello and the Company is now progressing the final steps to secure our production concessions and development plan approvals. In 2007 we also progressed planning for the next phase of our drilling program. Plans to obtain regulatory approvals are now well advanced for our Bezzecca project and also for testing the deeper Miocene structure in the Sillaro field by drilling of a new well – Fantuzza 1. We also plan to drill a second development well – Sillaro 2 – to increase gas production from this field once production commences. annual report :po valley 11-04-2008 10:57 Pagina 4 Annual Report 2007 Managing Director’s Report Overview The great paradox of Italy is that even though the approval process to drive new gas and oil developments into production appears glacial, very rapid growth in assets and opportunities can be achieved. 2007 has been that kind of year. Our exploration portfolio grew exceptionally both in terms of quality and number of projects under management. Every project with the exception of Ossola (50%) is under 100% ownership. At the time of the IPO of the Company in December 2004 we had three gas development fields and limited exploration upside. The three gas development projects are steadily heading into production and are now followed by two larger scale appraisal projects (Bezzecca and Fantuzza), 10 new gas prospects and a further two oil prospects – one of which (Rovagnate) is very large scale. Po Valley Energy’s Development Projects and Licences Po Valley Energy currently operates exclusively in northern Italy exploiting the large hydrocarbon system that was previously the exclusive territory of ENI - the successful Italian Oil and Gas Company founded in the 1950’s by Enrico Mattei. The initial focus of the Company was to develop proven but underdeveloped gas reserves in former ENI discovery/production fields. Over the past two years we have continued to expand our portfolio of projects to include new gas exploration plays and large oil exploration opportunities. EXPANDED PROJECT PIPELINE AND OPERATIONS – 2005 vs 2008 Applications Exploration/ Appraisal Development Appraisal Production Storage 5 0 0 2 8 0 0 2 • Castrocaro • Clodo • Malerba • Bezzecca • Castello • Sillaro • Sant’Alberto 1 offshore gas & 2 onshore gas 6 new licence areas 2 development targets 3 fields moving into production Preparing to bid for new gas storage licences • AR 168-PY (contested) • 10 Gas targets • Cadelbosco di Sopra (contested) • Grattasasso • Gas - 2009 Wells - Pioppette (16bcf) - F. Perino (45bcf) - Donnino (45bcf) • Fantuzza (Sillaro • Sant’Alberto Miocene) • Bezzecca • Castello • Sillaro (Pliocene) • JV with Star Energy Plc (Bagnolo Mella bid) • Existing Storage (Castello 2012) • 2 Oil targets - Rovagnate (200 mbbl res.) - Negrino (40 mbbl res.) 4 annual report :po valley 11-04-2008 10:58 Pagina 5 Managing Director’s Report The production, development and exploration projects identified to date in these licences are shown in the tables below: LICENCE AND GASFIELD OWNERSHIP Crocetta Cascina San Pietro San Vincenzo PVE Share % 100% 100% 100%* PRODUCTION CONCESSION APPLICATIONS Sillaro Sant’Alberto Castello 100% 100%* 100% EXPLORATION PERMIT APPLICATIONS (preliminary award subject to environmental clearances) Terra del Sole La Risorta La Prospera Opera Podere Gallina Ossola 100% 100% 100% 100% 100% 50%* Sillaro, Castello, and Sant’ Alberto have been successfully drilled and are being prepared for production. Po Valley Energy is the 100% owner and operator of all licences, with the exception of the Ossola licence application, which will be operated by Po Valley and 50% owned by Edison, the number two player in the Italian energy market. EXPLORATION PERMIT APPLICATIONS (awaiting preliminary award) AR-168-PY Cadelbosco di Sopra Grattasasso 100% 100% 100% *In recent agreement with Edison, PVE will obtain 100% of San Vincenzo / Sant’ Alberto + 50% of Ossola Sillaro – Crocetta licence (100% PVE) 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 2,200m and the Miocene at around 2,600m. 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. 5 annual report :po valley 11-04-2008 10:58 Pagina 6 Annual Report 2007 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 a production concession subject to environmental approval was received in April 2007. Environmental approval was achieved during Janauary 2008 and the grant of the production concession is expected in the second quarter 2008. An agreement was reached with SNAM Rete Gas, the national pipeline grid operator, to connect the Sillaro development to the pipeline grid. The connection point is about 300 metres from the Sillaro well location and SNAM will construct the connection line and obtain the necessary permits at its own cost. Surface plant has been tendered, and a construction contract awarded to Semat Spa at a cost of €3.4 million. At the end of March 2008 the plant was 38% complete and completed equipment on skids are expected by July 2008. Following the grant of the production concession, the Company will 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 prior to commencing production from this field. Plans are also well advanced to exploit a deeper Miocene structure. 50km of seismic data was purchased during 2006 and reviewed to confirm the size and structure of the Miocene target and a drill location has been selected. 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 all the necessary casing, tubing and wellhead have been delivered to the Company during 2007. The well is expected to be drilled in the second half of 2008 to a depth of 2,600m. The surface plant and pipeline connection at Sillaro has been sized to service a successful Fantuzza 1 well which is about 2km from the Sillaro field production site. Castello – Cascina San Pietro Licence (100% PVE) 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 engineering was completed during 2006 and on the basis of this work, a production concession application was submitted in September 2006. The Company received production concession approval in April 2007 subject to environmental approval. Environmental approval was achieved during March 2008 and the final production 6 annual report :po valley 11-04-2008 10:58 Pagina 7 concession award is expected in the second quarter of 2008. Agreement has been reached with SNAM Rete Gas to connect to the pipeline grid and the grid connection cost and necessary permits will be borne by SNAM. Immediately following the final grant of the licence and associated field development approvals, surface plant will be installed and the field put in production. As with Sillaro the surface plant contract was awarded to Semat Spa of Italy at a cost of €2.7 million and is currently 38% complete. SNAM, the national pipeline grid operator, has commenced its permitting and pipeline construction process. Managing Director’s Report Sant’ Alberto – San Vincenzo Licence (100% PVE) Sant’ Alberto is the third field in the portfolio to process towards commercial gas production. Edison, the former operator, submitted the production concession application in July 2006 and the Ministry requested more information to support the application process during 2007. With the objective of freeing up the regulatory process, Po Valley Energy reached an agreement with Edison to take over operatorship of the field and move to 100% ownership. Under our operatorship there will be renewed focus getting this field into production. One initiative we will take is to run a new 2D seismic acquisition program in the second quarter of 2008 to further improve field knowledge and support the production application process. 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 of gas. In 2006 some 50km of seismic data was purchased 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 first half of 2008. Casing, tubing and well head equipment was procured and has been delivered to the Company. 7 annual report :po valley 11-04-2008 10:58 Pagina 8 Annual Report 2007 New Gas Prospects A priority of the Company in 2007 has been to continue to grow our portfolio of new prospects. Through a highly targeted program, Po Valley Energy applied for 11 new licence areas in northern Italy and was successfully granted preliminary award of six of these new licence applications during the last two years. Three important licences – Cadelbosco di Sopra, AR 168-PY and Grattasasso were submitted in late 2007/early 2008 and the first two are expected to be considered at the May Hydrocarbon Commission meeting. The new licences cover Ossola and Opera around Milan and La Prospera, La Risorta, and Podere Gallina near Bologna. The Company also received preliminary award during the year for Terra del Sole, south east of Bologna, which was submitted in 2003. Environmental clearance has been received for Ossola, Opera, La Prospera, Podere Gallina and Terra del Sole and the Company expects full grant of these licences in mid 2008. Clearance documentation and licence grant procedures are also underway for the La Risorta licence area. Initial seismic and geological reviews have been completed on the new licences and the following priority list of eight gas field prospects with undiscovered potential ranging in size from 10 to 77bcf have been identified. 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 early 2008. In total 394km of seismic has been purchased and 15 target gas prospects prioritised. The targets for the 2009 drilling program are Fondo Perino in Podere Gallina licence area, Donnino in the Opera licence area, and one of two targets in La Prospera licence area – Pioppette or Gradizza. Target well locations will be identified through these studies with a view to drilling the first of the projects in late 2009. New Oil Prospects 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 discovery (50km southwest) 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. NEW PROSPECTS Prospect Undiscovered potential* bcf Depth (m) Licence Area 77 53 45 45 42 21 16 12 10 5 3 4,300 2,500 2,700 2,200 2,600 1,200 1,100 1,250 1,200 2,600 1,100 Podere Gallina La Risorta Podere Gallina Opera La Risorta La Prospera La Prospera La Risorta Podere Gallina Opera Terra del Sole Casa Rossa Ariano Fondo Perino Donnino D. Delle Anime Gradizza Pioppette Corcreva Cembalina Barona Terra del Sole * Unrisked most likely Total: 329 8 annual report :po valley 11-04-2008 10:58 Pagina 9 Managing Director’s Report 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 2008. 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 structures – Rovagnate at 3,500 metres and Negrino at 6,000 metres, expected to contain oil and condensate. We have reached an joint agreement with Edison for a 50-50 joint venture with Po Valley Energy operating environmental approval stages of the licence prior to first drilling. the licence in the formative geological and In recent applications we have focused on a number of smaller size, but proven undeveloped oil discoveries which we expect to further boost the oil assets in our Italian portfolio. New Gas Storage Projects Storage of gas in former gas production fields is critical component of the Italian and European energy business. Gas is piped into Italy in fixed daily volume contracts and needs to be stored to Field Names 1. Sant’Alberto* 2. Sillaro 3. Castello 4. Bezzecca Total Development Exploration Permit San Vincenzo Crocetta Cascina San Pietro Cascina San Pietro meet the wide variations in consumption between summer and winter and also to meet unexpected peak demand requirements. Po Valley has taken a number of steps through the year to expand into gas storage. In joint venture with Star Energy we have bid under tender for the Bagnolo Mella storage concession in the Po Valley. Star Energy is a specialist operator of storage assets in the UK and has recently been acquired by Petronas for GBP400m (A$1bn). Po Valley Energy expects to increase its storage portfolio in 2008. Gas Reserves and Resources The Company’s reserves were unchanged during 2007 with Proven and Probable reserves of 105bcf. Based on preliminary seismic reviews and structure definition, gas and oil resources have been estimated for the companies new licence application areas. PVE Interest 50% 100% 100% 100% Remaining Recoverable Reserves (bcf) Proven Probable Possible 6.4 10.4 4.6 15.2 36.6 7.1 30.0 1.7 29.2 68.0 8.6 16.3 0.0 0.9 25.8 PVE Total 22.1 56.7 6.3 45.3 130.4 * At 31 Dec. 2007. Reserves will be reviewed as part of 2008 Seismic Program. 9 annual report :po valley 11-04-2008 10:58 Pagina 10 Annual Report 2007 Italian Market Finance Gas prices in Italy continued to strengthen through 2007. The price and market conditions remain structurally very strong and being over 85% import-dependent, the Italian market is short of domestic supply, and with continual disputes between Russia and gas transit countries, energy security remains a national issue. During the year the Company raised $7.88 million in a private placement of 4,775,000 shares to major institutional shareholders. The funds have been used to progress Sillaro and Castello towards commercial gas production and ITALIAN REFERENCE GAS PRICES (US $ ‘000 cubic feet) 11.39 to accelerate assessment and development of the highly attractive new projects. The Company also put in place a €25 million finance facility with the Bank of Scotland which provides an initial borrowing base of €5 million available for putting Sillaro and Castello into production. 12 - 11 - 10 - 9 - 8 - 7 - 6 - 5 - 4 - 3 - 2 - 1 - 4.97 0- - - - - - - - - - - - - - - - - 7 0 - n u J 7 0 - p e S The balance of up to €20 million Senior Debt facility will be available from Bank of Scotland once the Company receives its formal production concessions and final development approvals for the Castello and Sillaro fields. 7 0 - c e D 4 0 - n u J 4 0 - p e S 4 0 - c e D 5 0 - r a M 5 0 - n u J 5 0 - p e S 5 0 - c e D 6 0 - r a M 6 0 - n u J 6 0 - p e S 6 0 - c e D 7 0 - r a M In preparation for maiden gas production, the Company has commenced its gas marketing program. The Company briefed 13 prospective customers and is in the process of a market tender for it’s gas supply and plan to finalise contractual arrangements by the end of the first half of 2008. 10 annual report :po valley 11-04-2008 10:58 Pagina 11 Managing Director’s Report Management Conclusion Having operated in Italy for 10 years the Company is now experienced in Italy’s regulatory process and has successfully managed each stage over a lengthy period. The Company’s presence in Italy and local management team represents significant competitive advantage not enjoyed by newer entrants seeking to find success in the Italian market. The Company has continued to grow its portfolio of assets at a very low cost relative to other oil and gas companies, providing the basis for future shareholder value creation. Italy remains an attractive market with gas and oil being of high quality, an accessible and low cost transportation network and a pricing environment that has been stable and higher than other comparable European countries. Strategically, therefore, the Company is well positioned for accelerating and sustaining growth. Michael Masterman Managing Director & Chief Executive Officer 18 April 2008 11 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 has continued to expand its development activities and is moving to production a number of key recruitments in both areas have been completed during the year. We expect to continue developing the team over the coming twelve months as we enter into production and build the in-house technical skillsets necessary to evaluate the growing portfolio of new targets and opportunities. We do a lot with a small core team, and I wish to join the board in thanking the team for another enormous contribution in 2007. annual report :po valley 11-04-2008 10:58 Pagina 12 Annual Report 2007 Corporate Governance Statement The directors are committed to the principles underpinning the best practice in corporate governance. The directors have noted carefully the guidance on the 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 takes ultimate 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 four directors; three non-executive directors and one executive director. 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 reasonable expense. Prior approval of the Chairman is required which will not be unreasonably withheld. The board accepts that it has the responsibility for internal control procedures within the Company. Compliance with these procedures covering financial reporting, quality and integrity of personnel and operation control is to be regularly monitored. A number of areas are to be subject to regular reporting to the board such as finance, trade practices, industrial relations, environmental compliance, workplace health and safety and insurance matters. All directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the Company. 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 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. 12 annual report :po valley 11-04-2008 10:58 Pagina 13 Corporate Governance Statement 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. External Audit: The Committee discusses with the external auditors the overall scope and plans for their audit activities, including staffing, contractual arrangements and fees. It reviews all audit reports provided by the external auditor. The Committee also specifically reviews any proposed activity or service by the providers of the external audit unrelated to external audit assurance activities. The external auditor will be requested to attend annual general meetings, and be available to answer questions from the shareholders. Appointment of External Auditor: The board appoints the external auditor. The Committee reviews the performance of the external auditor annually, and can recommend to the board any changes to selection it deems appropriate. Processes Communications: The Committee maintains free and open communications with the external auditors and management. Reporting: The issues discussed at each Committee meeting are reported at the next board meeting. Access: In exercising its oversight role, the Committee may investigate any matter relevant to its charter or relating to its role and scope, and for this purpose has full access to the Company’s financial reporting and practices. Charter: The Committee reviews and reassesses this Charter at least annually, and recommends any changes it considers appropriate to the board. The Committee may also undertake any other special duties as requested by the board. The current members of the committee are: Byron Pirola (Chairman), Graham Bradley and David McEvoy. Internal Control: Remuneration Committee The Committee examines the adequacy of the nature, extent and effectiveness of the internal control processes of the Company. Risk Management: The Committee oversees the risk management framework of the Company, and reviews risk management reports. The Remuneration Committee must have a majority of non-executive directors. The main role of the Remuneration Committee is to: ■ review the performance and remuneration of the Chief Executive Officer, and in conjunction with the Chief Executive Officer, review the engagement, performance and remuneration of senior executives of the Company; and ■ recommend to the board appropriate terms and conditions of engagement and remuneration of Directors within the aggregate limits approved by Shareholders. 13 annual report :po valley 11-04-2008 10:58 Pagina 14 Annual Report 2007 In assessing the performance of the Chief Executive Officer and senior executives, the Committee gives considerable weight to the contribution of the employee towards the achievement of key performance indicators of the Company. Where necessary the committee can obtain external advice in respect to the structure and level of remuneration packages. The current members of the committee are Graham Bradley (Chairman) and Byron Pirola. 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. Nominations Committee Share Trading The role of the Nominations Committee is to provide recommendations to the board on matters including: ■ composition of the board and competencies of board members to add value to the Company; ■ appointment and evaluation of the Chief Executive Officer; ■ succession planning for board members and senior management; and ■ processes for the evaluation of the performance of the Chief Executive Officers and Directors. 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 standards of honesty, integrity, objectivity and ethics in all dealings with each other, the Company, customers, suppliers and the community. The codes of conduct will be regularly reviewed and updated as necessary to ensure they reflect the highest standards of behaviour and professionalism. 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 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. Related Party Matters Directors and senior management will be required to advise the Chairman of any related party contract or potential contract. The Chairman will inform the board and the reporting party will be required to remove himself/herself from all discussions and decisions involving the matter. The board may, when appropriate, take further steps to avoid conflicts of interest in related party matters. Shareholder Communications 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 through the: ■ Annual Report; ■ half yearly reports; ■ quarterly activity reports; ■ Annual General Meeting and other meetings called to obtain approval for board action as appropriate; ■ Company’s share registry; and ■ Company’s web site at www.povalley.com 14 annual report :po valley 11-04-2008 10:59 Pagina 15 Directors Report Directors Report The directors present their report together with the financial report of Po Valley Energy Limited (“the Company” or “PVE”) and of the Group, being the Company and its controlled entities, for the year ended 31 December 2007. 1. Directors The directors of the Company at any time during or since the end of the financial year are: Directors M Masterman B Pirola G Bradley D McEvoy Date of Appointment 22 June 1999 10 May 2002 30 September 2004 30 September 2004 D Greil (resigned 22 May 2007) 5 August 2005 Information on Directors The board is composed of a majority of non- executive Directors, including the Chairman. The Chairman of the board is elected by the board and is an independent director. Graham Bradley – Chairman, BA, LLB (Hons), LLM, FAICD, Age 59 Graham joined PVE as a director and Chairman in September 2004 and is based in Sydney. He is an experienced Chief Executive Officer and listed public company director. Graham previously served as Chief Executive Officer of one of Australia’s major listed funds management and financial services groups, Perpetual Trustees Australia. He was Managing Partner and Chief Executive Officer of a national law firm, Blake Dawson Waldron and was a senior Partner of McKinsey & Company. Mr Bradley is currently a director of Singapore Telecommunications Limited. He is Chairman of HSBC Bank Australia Limited, Anglo American Australia Limited, Stockland Corporation Limited, Film Finance Corporation Australia Limited and Boart Longyear Limited. Graham is Chairman of the Remuneration and Nominations Committee and member of the Audit and Risk Committee. Michael Masterman – Managing Director and CEO, BEc (Hons), Age 45 Michael is a co-founder of PVE and is based in Europe. 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 61 David joined PVE as a director in September 2004 and is based in Sydney. He has over 37 years experience in the oil and gas industry since joining Esso Australia Limited in 1969. Key positions held within Exxon affiliates included Esso Australia Limited’s Exploration General Manager, Exploration and Development Vice President for Esso Resources Canada and Regional Vice President of Exxon Exploration Company responsible for Exxon’s exploration activities in the Far East, USA, Canada and South America. He was recently the Business Development Vice President and member of the Management Committee of Exxon (subsequently ExxonMobil) Exploration Company, responsible for new exploration and development opportunities worldwide. He is currently a Non- Executive Director of Woodside Petroleum Limited, Australian Worldwide Exploration and Innamincka Petroleum Limited. David is a member of the Audit and Risk Committee. 15 annual report :po valley 11-04-2008 10:59 Pagina 16 Annual Report 2007 Byron Pirola — Non Executive Director, BSc, PhD, Age 47 Byron is a co-founder of PVE and is based in Sydney. He is currently a director of Port Jackson Partners Limited, a Sydney based strategy management consulting firm. Prior to joining Port Jackson Partners in 1992, Byron spent six years with McKinsey & Company working 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. 2. Company Secretary & Chief Financial Officer Dom Del Borrello, BCom, Age 41 Dom was appointed to the position of Company 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. 3. Directors Meetings The number of formal meetings of the Board of Directors held during the financial year and the number of meetings attended by each director is provided below. 4. Principal Activities The principal continuing activities of the Group in the course of the year were; ■ the exploration for gas and oil in the Po Valley region in Italy ■ appraisal and development of gas and oil fields 5. Earnings per Share The basic loss per share for the Company was 3.12 cents (2006: 3.41 cents). 6.Operating and Financial Review The consolidated loss after income tax amounted to $2,750,257 (2006: $2,825,710). Included in the results from operating activities is an amount totalling $277,238 relating to exploration expenditure written off, of which the majority was for the gas storage application. During 2007 the Company progressed the production concession approvals for Sillaro, Castello (aka “Vitalba”) and Sant’Alberto (aka “Santa Maddalena”) fields. The Company received production concession approvals for Castello and Sillaro during the year subject to environmental clearances. The Company had received the environmental clearance for Sillaro in January 2008 and Castello in March 2008 and is proceeding to full concession award. Following the receipt of the conditional production concession approvals in mid 2007 the Company tendered for the construction and installation of the surface plant and associated equipment for both the Sillaro and Castello gasfields and later awarded a lump sum contract to Semat SpA (“Semat”). As at the end of March 2008 construction is on track and 38% complete. Commencing this work ahead of the final 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 9 9 9 2 2 2 2 9 9 9 n/a n/a n/a n/a 9 9 9 2 2 n/a n/a 9 9 9 2 2 2 2 9 3 2 n/a n/a n/a n/a 16 annual report :po valley 11-04-2008 10:59 Pagina 17 Directors Report production and development approvals required from the Italian ministry will ensure that the Company can move quickly forward with installation once all key regulatory approvals are in place. A key element of necessary infrastructure for production was reaching agreement in early this year with SNAM Rete Gas (“SNAM”) for the construction and connection of its maiden production from the Sillaro and Castello fields into the national Italian gas pipeline operated by SNAM. The Company has also been active on growing its project pipeline and portfolio of assets. During the year two new licence applications were submitted, the first offshore gas target for the Company as well as a gas storage application in joint venture with Star Energy Plc. This is on top of the six new licence areas awarded on a preliminary basis in 2006. All licences are contained within the petroleum provinces in northern Italy where the Company has focused it’s development options. The six licence areas are “Ossola” and “Opera” located near Milan and “La Prospera”, “Podere Gallina”, “La Risorta” and “Terra del Sole” located near Bologna. The Company submitted environmental clearance studies for all the additional areas and has sought Ministerial approval for a grant of the full licences for these additional areas during the year. In parallel with the environmental clearance process, the Company purchased seismic for a number of the new licence areas and geological and geophysical studies are underway on each of the license areas to better define and “prove up” the prospects. The Company has identified 10 new gas and two oil targets. The Company completed a private placement during the year issuing 4,775,000 shares to new institutional shareholders John Hancock Mutual funds and Cranport and to existing shareholders Harbinger Capital Partners and Hunter Hall. Shares were issued at $1.65 per share, raising a total of $7,878,750, before share issue costs. 7. Dividends No dividends have been paid or declared by the Company during the year ended 31 December 2007. 8. Events Subsequent to Reporting Date Subsequent to 31 December 2007, the Group has successfully finalised a €25 million credit facility with Bank of Scotland in the United Kingdom. An initial borrowing base of €5 million will be used to finance the construction programme at the Castello and Sillaro fields, the first fields scheduled to be brought into production. The balance of up to €20 million will be available once the Group has received formal production concessions and final development approval for these fields. 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 Group, the results of those operations, or the state of affairs of the Group. 9. Likely Developments During 2008 the Company intends to complete the construction of the equipment for the Castello and Sillaro fields. Once it receives final development approval it will install the equipment on site and bring these fields into production. It is also expected that the Company will drill a production well Sillaro 2 and later in the year the appraisal wells for Bezzecca 1 and Fantuzza 1 targets. The Company now has an extensive portfolio of exploration and development licences and has also continued to make further new licence applications. This portfolio has over 10 identified gas and two oil targets. The Company will undertake detailed geological and geophysical studies of the new projects and preparation of drilling programs. 10. Environmental Regulation 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. 17 annual report :po valley 11-04-2008 10:59 Pagina 18 Annual Report 2007 11. Remuneration Report The Remuneration Report outlines the remuneration arrangements which were in place during the year, and remain in place as at the date of this report, for the Directors and executives of the Company. Remuneration Policy The Company aims to ensure that the level and composition of remuneration of its directors and executives is sufficient and reasonable for the competitive industry in which the Company operates. The Remuneration Committee is responsible for determining and reviewing compensation arrangements for the Directors, the Chief Executive Officer and the executive team. The Remuneration Committee assesses the appropriateness of the nature and amount of entitlements of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. Executive Directors and Senior Executives The remuneration of PVE Executive Directors and senior executives comprises some or all of the following elements: fixed salary; short term incentive bonus based on performance; long term incentive shares and/or option scheme; and other benefits including employment insurances and superannuation contributions. In relation to the payment of bonuses, share option and other incentive amounts, discretion is exercised by the Remuneration Committee having regard to the overall performance of the Company and of the relevant individual during the period. 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 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 in late 2004 at $200,000 per annum. The total salary and fees paid in 2007 to Non-Executive Directors was $137,104 (2006 $138,361). The major provisions of the service contracts held with the specified directors and executives, in addition to any performance related bonuses and/or options are as follows: Specified directors: Graham Bradley, Chairman ■ Commencement Date: ■ Term of Appointment: ■ Fixed remuneration for the year ended 31 December, 2007: ■ No termination benefits 30 May 2007 3 years $60,000 David McEvoy, Non-executive director ■ Commencement Date: ■ Term of Appointment: ■ Fixed remuneration for the year ended 31 December, 2007: ■ No termination benefits 30 May 2007 3 years $40,000 Byron Pirola, Non-executive director ■ Commencement Date: ■ Term of Appointment: ■ Fixed remuneration for the year ended 31 December, 2007: ■ No termination benefits 30 May 2006 3 years $40,000 Michael Masterman, Managing Director and Chief Executive Officer ■ Commencement Date: ■ Term of Agreement: 2 years with a further 1 year extension at the option of the Executive. 14 December 2004 ■ The agreement has been extended to 14 December 2008. ■ Fixed remuneration for the year ended 31 December, 2007: ■ Payment of termination benefit on $300,000 termination by the employer (other than for gross misconduct) equal to one years total fixed remuneration. Specified Executive Dom Del Borrello, Company Secretary and Chief Financial Officer 1 September 2006 ■ Commencement Date: ■ 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. ■ Fixed Service contract fee of €14,000 per calendar month since 1 October 2007. Prior to that date the contract fee was €7,000 per calendar month. ■ Payment of termination benefit on termination by the Company (other than for gross misconduct) equal to three month service fee or six months in event of change of control. 18 annual report :po valley 11-04-2008 10:59 Pagina 19 Directors Report 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 Group other than those listed. Salary & fees Bonus Superannuation benefits Proportion of remuneration Value of options Total performance related % Value of options as proportion of remuneration % SPECIFIED DIRECTORS G Bradley (Chairman) 2007 58,484 D McEvoy B Pirola 2006 2007 2006 2007 2006 58,345 39,262 40,008 39,358 40,008 - - - - - - M Masterman (CEO) 2007 295,572 176,862 2006 240,046 83,350 D Greil (resigned 22 May 2007) 2007 54,530 - 2006 166,699 33,340 SPECIFIED EXECUTIVES D Del Borrello 2007 174,201 43,052 Total Total 2006 74,701 - 2007 661,407 219,914 2006 619,807 116,690 - - - - - - - - - - - - - - - 58,484 - 58,345 - 39,262 - 40,008 - 39,358 - 40,008 - 474,434 96,636 420,032 - 54,530 - - - - - - 37.3% 19.8% - - - - - - - - 23.0% - 57,982 258,021 12.9% 22.0% 32,978 250,231 17.2% 12,464 87,165 - 13.2% 14.0% 32,978 914,299 167,082 903,579 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. Analysis of Bonuses Included in Remuneration Details of the vesting profile of the short-term incentive cash bonus awarded as remuneration to each director and specified executives are detailed below. Short term incentive bonus Included in remuneration 2007 $ (a) % vested in year DIRECTORS AND SPECIFIED EXECUTIVES M Masterman D Greil (resigned 22 May 07) D Del Borrello 176,862 - 43,052 100% 100% (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 2007 financial year. 19 annual report :po valley 11-04-2008 10:59 Pagina 20 Annual Report 2007 Equity Instruments All options refer to options over ordinary shares of Po Valley Energy Limited, which are exercisable on a one-for-one basis. Options over Equity Instruments Granted as Compensation Details on options over ordinary shares in the Company that were granted as compensation to each key management personnel during the reporting period and details on options that vested during that period are as follows: No of options granted during Grant date 2007 Fair value per option at grant date ($) Exercise price No. of options per option Expiry date vested during ($) 2007 DIRECTORS G Bradley D McEvoy B Pirola M Masterman D Greil (resigned 22 May 2007) EXECUTIVES D Del Borrello - - - - - - - - - - - - - - - - - - No of options Fair value per granted during Grant date option at grant 2006 date ($) Exercise price per option ($) - - - - - - - - - - - - - - - DIRECTORS G Bradley D McEvoy B Pirola M Masterman D Greil EXECUTIVES D Del Borrello - - - - - - - - - - - - - - - - - - - - - - 62,426 No. of options Expiry date vested during 2006 - - - - - 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 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. 20 annual report :po valley 11-04-2008 10:59 Pagina 21 Directors Report Exercise of Options Granted as Compensation During the reporting period, no shares were issued on the exercise of options previously granted as compensation. Analysis of Options Over Equity Instruments Granted as Compensation Details of vesting profiles of the options granted as remuneration to each director of the Company and key management personnel are detailed below: Number Date Granted % vested in year % forfeited in year Financial year in which grant vests Value yet to vest NON-EXECUTIVE DIRECTORS G Bradley D McEvoy B Pirola EXECUTIVE DIRECTORS 1,000,000 15-Oct-2004 500,000 15-Oct-2004 200,000 15-Oct-2004 M Masterman 750,000 15-Oct-2004 D Greil (resigned 22 May 2007) 450,000 15-Oct-2004 SPECIFIED EXECUTIVES D Del Borrello 75,000 15-Oct-2004 75,000 30-Nov-2006 75,000 30-Nov-2006 100% 100% 100% 100% 100% 100% 50% 33% - - - - - - - - 31 Dec 2006 31 Dec 2006 31 Dec 2006 31 Dec 2006 31 Dec 2006 31 Dec 2006 31 Dec 2008 31 Dec 2009 - - - - - - $18,157 $25,305 Further details of Director and Executive Remuneration are set out in Note 25 to the Financial Statements and form part of this report. 12. Directors’ Interests At the date of this report, the direct and indirect interests of the Directors in the shares and options of the Company were: OPTIONS OVER ORDINARY SHARES Ordinary Shares $1.00 expiring 31 Oct 08 $1.25 expiring 31 Oct 08 378,981 21,573,844 129,593 12,010,821 715,890 4,788,444 500,000 388,778 1,000,000 - 500,000 200,000 - - - - - 1,500,000 - - 900,000 - - - G Bradley M Masterman D McEvoy B Pirola D Greil (resigned 22 May 2007) J Masterman1 I Masterman1 G Masterman1 1.Related parties to M Masterman 21 annual report :po valley 11-04-2008 10:59 Pagina 22 Annual Report 2007 13. Share Options Details of share options over ordinary shares issued during the year and on issue at 31 December 2007 are set out in Note 17 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. The Company’s Corporate Governance Statement and disclosures are contained elsewhere in the annual report. 15. Indemnification and Insurance of Officers and Auditors The Company has agreed to indemnify current Directors against any liability or legal costs incurred by a Director as an officer of the Company or entities within the Group or in connection with any legal proceeding involving the Company or entities within the Group 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. 22 18. Lead Auditor’s Independence Declaration The lead auditor’s independence declaration is set out on page 23 and forms part of the Directors’ report for the financial year ended 31 December 2007. This report has been made in accordance with a resolution of Directors. Graham Bradley Chairman Sydney, NSW Australia 17 March 2008 annual report :po valley 11-04-2008 10:59 Pagina 23 PO VALLEY ENERGY LIMITED Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 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 financial year ended 31 December 2007 there have been: no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. (i) (ii) KPMG B C Fullarton Partner Perth 17 March 2008 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. 23 annual report :po valley 11-04-2008 10:59 Pagina 24 Annual Report 2007 PO VALLEY ENERGY LIMITED Income Statements for the year ended 31 December 2007 Other income Employee benefit expense Depreciation and amortisation expense Corporate overheads Resource property costs written off Other expenses Results from operating activities Finance income Finance expenses Net finance income (Loss) / Profit before income tax expense Income tax expense (Loss) / Profit for the period Basic / Diluted loss per share NOTES 3 4 14 5 15 3 7 8 9 CONSOLIDATED COMPANY 2007 238,737 2006 33,455 2007 2006 655,218 548,635 (1,261,254) (1,088,279) (323,570) (196,073) (19,023) (11,698) - - (1,580,841) (1,060,267) (567,646) (460,406) (277,238) (905,111) - - (186,936) (6,946) (150,508) (6,071) (3,086,555) (3,038,846) (386,506) (113,915) 338,992 (2,694) 336,298 214,756 (1,620) 213,136 (2,750,257) (2,825,710) - - 322,271 200,173 - 322,271 (64,235) - - 200,173 86,258 - (2,750,257) (2,825,710) (64,235) 86,258 (3.12) (3.41) The income statements are to be read in conjunction with the accompanying notes to the financial statements. Statement of Recognized Income & Expense for the year ended 31 December 2007 Foreign exchange translation differences Net income and expense recognised directly in equity Profit / (Loss) for the year NOTES 19 Total recognised income and expense for the year (2,284,234) (2,077,125) CONSOLIDATED COMPANY 2007 2006 2007 2006 466,023 466,023 748,585 748,585 (2,750,257) (2,825,710) - - - - (64,235) (64,235) (86,258) 86,258 The statements of recognised income and expense are to be read in conjunction with the accompanying notes to the financial statements. 24 annual report :po valley 11-04-2008 10:59 Pagina 25 PO VALLEY ENERGY LIMITED Balance Sheets as at 31 December 2007 CONSOLIDATED CONSOLIDATED COMPANY COMPANY NOTES 2007 2006 2007 2006 10 11 12 13 14 15 16 18 CURRENT ASSETS Cash and equivalents Financial assets Trade and other receivables Total Current Assets NON-CURRENT ASSETS Investments Receivables Other assets Plant & equipment Resource property costs Total Non-Current Assets Total Assets CURRENT LIABILITIES Payables Provisions Total Current Liabilities Net Assets EQUITY Issued capital Reserves 5,970,964 5,082,323 5,918,433 5,008,195 621,584 - - - 2,476,701 2,241,481 22,722 49,194 9,069,249 7,323,804 5,941,155 5,057,389 - 18,713 13,563,529 10,922,204 1,463,402 2,100,375 31,946,660 27,735,881 35,722 - 8,709 3,529,261 838,595 33,846,412 29,254,350 - - - - - 38,874,797 32,212,033 45,518,898 38,658,085 47,944,046 39,535,837 51,460,053 43,715,474 3,432,851 230,072 3,662,923 645,658 83,167 728,825 255,657 205,188 - - 255,657 205,188 44,281,123 38,807,012 51,204,396 43,510,286 52,079,529 44,354,162 52,079,529 44,354,162 687,922 221,899 - - Accumulated losses (8,486,328) (5,769,049) (875,133) (843,876) Total Equity 19 44,281,123 38,807,012 51,204,396 43,510,286 The balance sheets are to be read in conjunction with the accompanying notes to the financial statements. 25 annual report :po valley 11-04-2008 10:59 Pagina 26 Annual Report 2007 PO VALLEY ENERGY LIMITED Cash Flow Statements for the year ended 31 December 2007 CONSOLIDATED COMPANY NOTES 2007 2006 2007 2006 CASH FLOWS FROM OPERATING ACTIVITIES Payments to suppliers and employees (2,226,216) (1,813,813) (520,673) (494,967) Interest received Interest paid 329,560 (2,694) 214,757 (1,620) 304,476 200,173 - - Net cash outflow from operating activities 24 (1,899,350) (1,600,676) (216,197) (294,794) CASH FLOWS FROM INVESTING ACTIVITIES Payments for non-current assets Payments for well equipment Payments on security deposits Payments for exploration and development expenditure Payments for investments Payment for investment in controlled entity Amounts advanced to controlled entities (37,898) (343,521) (1,754,941) (897,583) (639,093) - (2,335,305) (7,953,445) (18,713) - - - - - - - - - - - - - - - - (2,641,325) (172,890) (3,785,978) (8,606,700) (150,508) - Loans to other entities (150,508) Net cash outflow from investing activities (4,917,745) (9,213,262) (6,577,811) (8,779,590) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the issues of shares Payments for share issue costs 7,878,750 5,850,000 7,878,750 5,850,000 (395,979) (434,759) (395,979) (434,759) Net cash inflow from financing activities 7,482,771 5,415,241 7,482,771 5,415,241 Net increase / (decrease) in cash held 665,676 (5,398,697) 688,763 (3,659,143) Cash and cash equivalents at 1 January 5,082,323 10,437,245 5,008,195 8,667,320 Effects of exchange rate fluctuations on cash held 222,965 43,775 221,475 18 Cash and cash equivalents at 31 December 10 5,970,964 5,082,323 5,918,433 5,008,195 The cash flow statements are to be read in conjunction with the accompanying notes to the financial statements. 26 annual report :po valley 11-04-2008 10:59 Pagina 27 PO VALLEY ENERGY LIMITED Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 1: Summary of Significant Accounting Policies (a) REPORTING ENTITY (d) FUNCTIONAL AND PRESENTATION CURRENCY Po Valley Energy Limited (“the Company” or “PVE”) is a Company domiciled in Australia. The address of the Company’s registered office is Level 28, 140 St Georges Terrace, Perth WA 6000. The consolidated financial statements of the Company for the year ended 31 December 2007 comprises the Company and its subsidiaries (together referred to as the “Group” and individually as “Group entities”) and the Group’s interest in associated and jointly controlled entities. The Group primarily is involved in the exploration for gas and oil in the Po Valley region in Italy and appraisal and development of gas and oil properties. (b) 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 Group and the financial report of the Company comply with International Financial Reporting Standards (IFRS) and interpretations adopted by the International Accounting Standards Board (IASB). The financial statements were approved by the Board of Directors on 17 March 2008. (c) BASIS OF MEASUREMENT These consolidated financial statements have been prepared on the basis of historical cost, except for financial assets and liabilities recognised at fair value. The consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. (e) USE OF ESTIMATES AND JUDGEMENTS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. 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 financial year are discussed below. 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 relevant capitalised amount will be written off to the Income Statement. The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements, and have been applied consistently by Group entities. 27 annual report :po valley 11-04-2008 10:59 Pagina 28 Annual Report 2007 Note 1: Summary of Significant Accounting Policies (continued) (f) PRINCIPLES OF CONSOLIDATION (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Group 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 accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. In the Company’s financial statements, investments in subsidiaries are carried at cost. (ii) Joint Controlled operations and assets The interest of the Group in unincorporated joint ventures and jointly 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. (iii) Transactions eliminated on consolidation Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (g) TAXATION Income tax expense comprises current and deferred tax. Income tax expense 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 taxable profit; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (h) IMPAIRMENT (i) Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available- for-sale financial asset is calculated by reference to its fair value. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed in groups that share similar credit risk characteristics. All impairment losses are recognised in profit or loss. Any cumulative loss in respect of an available-for-sale financial asset recognised previously in equity is transferred to profit or loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available- for-sale financial assets that are debt 28 annual report :po valley 11-04-2008 10:59 Pagina 29 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 1: Summary of Significant Accounting Policies (continued) securities, the reversal is recognised in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised in equity. (ii) Non-financial assets The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash- generating units. An impairment loss is recognised if the carrying amount of an asset or its cash- generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash- generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and them to reduce the carrying amount of the other assets in the unit on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (i) PROPERTY, PLANT AND EQUIPMENT (i) Recognition and measurement Items of property, plant and equipment are recorded at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to acquisition of the asset. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised within “other income” in profit or loss. When revalued assets are sold, the amounts included in the revaluation reserve are transferred to retained earnings. (ii) Depreciation Depreciation is recognised in profit or loss on a straight- line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives of each class of asset fall within the following ranges: Office furniture & equipment 3 – 5 years 3 – 5 years 2007 2006 Well equipment which is not ready for use is not depreciated. The residual value, the useful life and the depreciation method applied to an asset are reviewed at each reporting date. (j) FINANCIAL INSTRUMENTS (i) Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings and trade and other payables. Non-derivative financial instruments are recognised initially as fair value plus, for instruments not at fair value through profit and loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below. 29 annual report :po valley 11-04-2008 10:59 Pagina 30 Annual Report 2007 Note 1: Summary of Significant Accounting Policies (continued) (j) FINANCIAL INSTRUMENTS (CONTINUED) A financial instrument is recognised if the Group becomes a party to the contractual provisions of the instrument. Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Regular way purchases and sales of financial assets are accounted for at trade date, i.e. the date the Group commits itself to purchase or sell the asset. Financial liabilities are derecognised if the Group’s obligation specified in the contract expire or are discharged or cancelled. Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Accounting for finance income and expense is discussed in note (1). Held-to-maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-to-maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Available-for-sale financial assets The Group’s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, and foreign exchange gains and losses on available-for-sale monetary items, are recognised directly in a separate component of equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. Financial assets at fair value through profit and loss An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial instruments are designated at fair value through profit or loss if the Group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Group’s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss when incurred. Financial instruments at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit and loss. Other Other non-derivative financial instruments are measured at amortised costs using the effective interest method, less any impairment losses. (ii) Share Capital Ordinary Shares Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Dividends Dividends are recognised as a liability in the period in which they are declared. (k) RESOURCE PROPERTIES Resource property costs are intangible assets and are accumulated in respect of each separate area of interest. Resource property costs are carried forward where right of tenure of the area of interest is current and they are expected to be recouped through sale or successful development and exploitation of the area of interest, or, where exploration and evaluation activities in the area of interest have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves. Resource properties include the cost of acquiring and developing resource properties, mineral rights and exploration, evaluation and development expenditure relating to an area of interest. Resource properties are amortised using the unit of production basis over the 30 annual report :po valley 11-04-2008 10:59 Pagina 31 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 1: Summary of Significant Accounting Policies (continued) 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. 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 shown as a deduction from profit. (l) FINANCE INCOME AND EXPENSES Finance income comprises foreign currency gains and interest income on funds invested and is recognised as it accrues in profit or loss, using the effective interest method. Finance expenses comprise interest expense on borrowings or other payables and foreign currency losses. (m) EMPLOYEE BENEFITS (i) Long-term service benefits The group’s net obligation in respect of long-term service benefits is the amount of future benefit 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 Group’s obligations. undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers compensation insurance and payroll tax. (iii) Superannuation The Group contributes to defined contribution superannuation plans. Contributions are recognised as an expense as they are due. (iv) Share-based payments The executive and employee share option plan grants options to employees as part of their remuneration. The fair value of options granted is recognised as an employee expense with a corresponding increase in retained earnings. The fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. The fair value of the options granted is measured, using 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 reflect the actual number of share options that vest except where forfeiture is only due to share prices not achieving the threshold for vesting. When a Company grants options over its shares to employees of subsidiaries, the fair value at the grant date is recognised as an increase in investment in subsidiaries, with a corresponding increase in equity over the vesting period of the grant. (n) FOREIGN CURRENCY (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is Po Valley Energy Limited’s functional and presentation currency. (ii) Wages, salaries, annual leave, sick (ii) Transactions and balances leave and non-monetary benefits 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 from employees services provided to reporting date, are calculated at 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. 31 annual report :po valley 11-04-2008 10:59 Pagina 32 Annual Report 2007 Note 1: Summary of Significant Accounting Policies (continued) (n) FOREIGN CURRENCY (CONTINUED) (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 flows are included in the statement of cash flows on a gross basis. The GST and VAT components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant taxation authority are classified as operating cash flows. Non-monetary assets and liabilities denominated in foreign currencies are translated at the date of transaction or the date fair value was determined, if these assets and liabilities are measured at fair value. Foreign currency differences arising on retranslation are recognised in profit and loss, except for differences arising on the retranslation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognised directly in equity. (iii) 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 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. (o) EARNINGS PER SHARE Basic earnings per share (“EPS”) is calculated by dividing the net profit attributable to members of the parent entity for the reporting period, after excluding any costs of servicing equity (other than ordinary shares and converting preference shares classified as ordinary shares for EPS calculation purposes), by the weighted average number of ordinary shares of the Company, adjusted for any bonus issue. Diluted EPS is calculated by dividing the basic EPS earnings, adjusted by the after tax effect of financing costs associated with dilutive potential ordinary shares and the effect on revenues and expenses of conversion to ordinary shares associated with dilutive potential ordinary shares, by the weighted average number of ordinary shares and dilutive potential ordinary shares adjusted for any bonus issue. 32 annual report :po valley 11-04-2008 10:59 Pagina 33 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Currency risk The Group is exposed to foreign currency risk on purchases that are denominated in a currency other than the respective functional currencies of consolidated entities. The currency giving rise to this risk is primarily Euro. In respect to monetary assets held in currencies other than AUD, the Group ensures that the net exposure is kept to an acceptable level by minimising their holdings in the foreign currency where possible by buying or selling foreign currencies at spot rates where necessary to address short term imbalances. Commodity price risk Commodity price risk will arise on future gas production. (iii) Liquidity Risk The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due. The Company has raised equity during the year to support its development and exploration activities. It has further raised funding post balance date with a bank finance facility with Bank of Scotland. Note 2: Financial Risk Management Exposure to credit, market and liquidity risks arise in the normal course of the consolidated entity’s business. (i) Credit risk The Group invests in short term deposits and trades with recognised, creditworthy third parties. The Group has had no exposure to bad debts. However there is a concentration of credit risk with short term receivables due from two entities (see Note 11 & Note 13). Cash and short term deposits are made with institutions that have a credit rating of at least A1 from Standard & Poors and A from Moody’s. The Company is not trading with any customers for gas sales, but management have a credit policy in place whereby credit evaluations are performed on all future customers and parties the Company and its subsidiaries deal with. The exposure to credit risk is monitored on an on going basis. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. (ii) Market Risk Interest rate risk Investments in short term receivables and payables are not exposed to interest rate risk. As at the end of the financial year the Group did not have any borrowings. Any future borrowings will be at a floating rate. 33 annual report :po valley 11-04-2008 10:59 Pagina 34 Annual Report 2007 Note 3: Other Income And Other Expenses (A) OTHER INCOME: Foreign exchange gains Other (B) OTHER EXPENSES: Foreign exchange losses Impairment losses Fair value movement on financial assets CONSOLIDATED COMPANY 2007 2006 2007 2006 230,374 8,363 238,737 - 655,218 548,635 33,455 33,455 - - 655,218 548,635 - 6,946 - 6,071 169,428 17,508 186,936 - - 150,508 - - - 6,946 150,508 6,071 Note 4: Employee Benefit Expenses Wages and salaries Equity based compensation 1,073,429 187,825 892,206 196,073 1,261,254 1,088,279 135,745 187,825 323,570 - 196,073 196,073 Note 5: Corporate Overheads CORPORATE OVERHEADS COMPRISES: Company administration and compliance Professional fees Office costs Travel and entertainment Other expenses Note 6: Auditors’ Remuneration Remuneration for audit or review of the financial reports of the parent entity or any entity in the group: Auditors of the Company – KPMG Australia The auditors received no other benefits 213,941 797,401 240,247 199,057 130,195 157,524 480,867 224,629 146,081 51,166 183,084 293,172 25,507 65,090 793 126,527 250,265 43,532 40,082 - 1,580,841 1,060,267 567,646 460,406 57,005 54,000 57,005 54,000 34 annual report :po valley 11-04-2008 10:59 Pagina 35 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 7: Finance Income And Expense Interest income Finance income Interest expense Finance expense Net finance income CONSOLIDATED COMPANY 2007 2006 2007 2006 338,992 338,992 2,694 2,694 214,756 214,756 1,620 1,620 322,271 322,271 - - 200,173 200,173 - - 336,298 213,136 322,271 200,173 Note 8: Income Tax Expense The income tax expense on pre tax accounting reconciles to the income tax expense in the financial statements as follows: (Loss) / Profit from ordinary activities before income tax expense (2,750,257) (2,825,710) (64,235) Prima facie income tax calculated at 30% (825,077) (847,713) (19,271) Tax effect of permanent differences Foreign tax losses not brought to account - 673,110 58,822 708,983 - - 86,258 25,877 58,822 - Tax losses and temporary differences not brought to account as income tax benefit 151,967 79,908 19,271 (84,699) Income tax attributable to loss - - - - The directors estimate that the potential future income tax benefit in Australia at 31 December 2007 in respect of tax losses and temporary differences not brought to account is 1,018,171 698,266 1,014,781 694,939 This benefit for tax losses will only be obtained if: (i) the relevant Company derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; (ii) the relevant Company continues to comply with the conditions for deductibility imposed by tax legislation; and (iii) No changes in tax legislation adversely affect the relevant Company in realising the benefit from the deductions for the losses. 35 annual report :po valley 11-04-2008 11:00 Pagina 36 Annual Report 2007 Note 9: Loss per Share Basic loss per share (cents) CONSOLIDATED COMPANY 2007 (3.12) 2006 (3.41) 2007 2006 The calculation of basic loss per share was based on the loss attributable to shareholders of $2,750,257 (2006: $2,825,710) and a weighted average number of ordinary shares outstanding during the year of 88,019,609 (2006: 82,976,712). Diluted loss per share is the same as basic loss per share. The number of weighted average shares is calculated as follows: No. of days Number of shares on issue at beginning of the year 51,320 shares issued on 22 May 2007 4,325,000 shares issued on 22 June 2007 450,000 shares issued on 31 July 2007 89,403 shares issued on 8 August 2007 3,000,000 shares issued on 3 November 2006 Note 10: Cash and Cash Equivalents 365 221 191 153 145 58 2007 2006 Weighted average number 85,500,000 82,500,000 31,019 2,263,219 188,630 36,741 - - - - - 476,712 88,019,609 82,976,712 Cash at bank and on hand 5,970,964 5,082,323 5,918,433 5,008,195 CONSOLIDATED COMPANY 2007 2006 2007 2006 36 annual report :po valley 11-04-2008 11:00 Pagina 37 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 11: Trade And Other Receivables Sundry debtors Vendor advances for well equipment Indirect taxes receivable (a) CONSOLIDATED COMPANY 2007 112,388 - 2,364,313 2,476,701 2006 97,668 897,583 1,246,230 2,241,481 2007 17,794 - 4,928 22,722 2006 43,351 - 5,843 49,194 The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 21. (a) INCLUDED IN RECEIVABLES ARE ITALIAN INDIRECT TAXES RECOVERABLE AS FOLLOWS: Current Non-current 2,359,385 1,463,402 1,237,387 2,100,375 - - - - 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 group’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 12: Investments Shares in unlisted entities, at fair value Shares in controlled entities, at cost - - - 18,713 - - - 13,563,529 10,922,204 18,713 13,563,529 10,922,204 The investments held in controlled entities are included in the financial statements at cost at 31 December 2007 and are as follows: Name: Country of Incorporation Class of Shares 2007 2006 Investment Investment Holding % Northsun Italia S.p.A (“NSI”) Po Valley Operations Pty Limited (“PVO”) Italy Australia Ordinary Ordinary 12,847,639 10,206,314 715,890 715,890 13,563,529 10,922,204 100 100 37 annual report :po valley 11-04-2008 11:00 Pagina 38 Annual Report 2007 Note 13: Non-Current Assets - Receivables CONSOLIDATED COMPANY Indirect taxes receivable (refer Note 11(a)) 1,463,402 2,100,375 2007 2006 2007 - 2006 - Loans – Controlled Entities (i) - - 31,946,660 27,735,881 1,463,402 2,100,375 31,946,660 27,735,881 (i) These loans are unsecured, interest free and repayable on demand in Euro. Note 14: Property Plant & Equipment OFFICE 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: OFFICE 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 Foreign exchange difference Carrying amount at end of year 164,392 (108,736) 55,656 3,473,605 3,529,261 130,884 (94,506) 36,378 802,217 838,595 36,378 31,175 28,761 18,603 (19,023) (11,698) 7,126 55,656 802,217 2,662,484 8,904 3,473,605 3,529,261 712 36,378 465,781 324,917 11,519 802,217 838,595 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 38 annual report :po valley 11-04-2008 11:00 Pagina 39 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 15: Resource Property Costs RESOURCE PROPERTY COSTS Exploration Phase Development Phase RECONCILIATION OF CARRYING AMOUNT OF RESOURCE PROPERTIES Exploration Phase CONSOLIDATED COMPANY 2007 2006 2007 2006 13,622,554 29,254,350 20,223,858 - 33,846,412 29,254,350 Carrying amount at beginning of year 29,254,350 27,032,818 Foreign exchange difference Exploration expenditure Transfer to Development phase Exploration expenditure written off Carrying amount at end of year Development Phase 257,452 656,474 2,544,730 2,470,169 (18,156,740) - (277,238) (905,111) 13,622,554 29,254,350 Carrying amount at beginning of year - Development expenditure transferred from exploration phase 18,156,740 Development expenditure Foreign exchange difference Carrying amount at end of year 2,012,224 54,894 20,223,858 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Note 16: Trade and Other Payables Trade payables and accruals Other payables 3,418,510 14,341 3,432,851 633,682 11,976 645,658 255,657 205,188 - - 255,657 205,188 The Group’s exposure to currency and liquidity risks related to trade and other payables are disclosed in note 21. 39 annual report :po valley 11-04-2008 11:00 Pagina 40 Annual Report 2007 Note 17: 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 25. 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. 2007 2006 Number of options Weighted average exercise price $ Number of options Weighted average exercise price $ Balance at beginning of year 3,150,000 $1.28 3,000,000 Granted Exercised Balance at end of year Exercisable at end of year (a) (b) - - 3,150,000 3,000,000 (a) Options granted during the reporting period pursuant to EIOS. Number granted Grant date Vesting date Expiry date Exercise price $1.28 $1.25 2007 - - - - - 150,000 - 3,150,000 3,000,000 $1.25 $1.95 - $1.28 $1.25 2006 150,000 30 November 2006 50% 1 December 2008 50% 1 December 2009 1 December 2010 $1.95 (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 40 15 Oct 2004 15 Dec 2005 31 Oct 2008 15 Oct 2004 15 Dec 2006 31 Oct 2008 30 Nov 2006 50% 1 Dec 2008 50% 1 Dec 2009 1 Dec 2010 $1.25 $1.25 $1.95 annual report :po valley 11-04-2008 11:00 Pagina 41 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 18: Provisions OTHER PROVISIONS: Provision for legal claim Employee leave entitlements Note 19: Capital and Reserves CONSOLIDATED COMPANY 2007 2006 2007 2006 168,180 61,892 230,072 83,167 - 83,167 - - - - - - Reconciliation of movement in capital and reserves attributable to equity holders of the parent Consolidated – 2007 Issued Capital Translation Reserve Accumulated losses Total Balance at 1 January 2007 44,354,162 Total recognised income and expense Equity-settled transactions Shares issued Share issue costs Balance at 31 December 2007 Consolidated – 2006 - 154,847 7,878,750 (308,230) 52,079,529 221,899 466,023 - - - (5,769,049) 38,807,012 (2,750,257) (2,284,234) 32,978 - - 187,825 7,878,750 (308,230) 44,281,123 687,922 (8,486,328) Balance at 1 January 2006 38,589,171 (526,686) (3,139,412) 34,923,073 Total recognised income and expense Equity-settled transactions Shares issued Share issue costs Balance at 31 December 2006 - - 5,850,000 (85,009) 44,354,162 748,585 (2,825,710) (2,077,125) - - - 196,073 - - 221,899 (5,769,049) 196,073 5,850,000 (85,009) 38,807,012 Reconciliation of movement in capital and reserves 2007 Company Issued Capital Accumulated losses Total Issued Capital 2006 Accumulated losses Total Balance at 1 January 44,354,162 (843,876) 43,510,286 38,589,171 (1,126,207) 37,462,964 Total recognised income and expense - (64,235) (64,235) - 86,258 86,258 Equity-settled transactions 154,847 32,978 187,825 196,073 196,073 Shares issued Share issue costs 7,878,750 (308,230) - - 7,878,750 5,850,000 (308,230) (85,009) - - 5,850,000 (85,009) Balance at 31 December 52,079,529 (875,133) 51,204,396 44,354,162 (843,876) 43,510,286 41 annual report :po valley 11-04-2008 11:00 Pagina 42 Annual Report 2007 Note 19: Capital and Reserves (continued) SHARE CAPITAL – COMPANY Opening balance - 1 January Shares issued during the year: Share issue at $1.44 each on 22.5.07 Share issue at $1.65 each on 22.6.07 Share issue at $1.65 each on 2.8.07 Share issue at $1.37 each on 8.8.07 Share issue at $1.95 each on 3.11.06 Closing balance – 31 December 2007 Number 2006 Number 85,500,000 82,500,000 51,230 4,325,000 450,000 89,403 - 90,415,633 - - - - 3,000,000 85,500,000 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 20: Financial Reporting by Segments The Group operates primarily as a gas and oil exploration and development Company in one geographical location, being Italy. Note 21: Financial Instruments (a) Interest Rate Risk Exposures The Group’s exposure to interest rate risk for classes of financial assets and financial liabilities is set out below: GROUP: 2007 FINANCIAL ASSETS Cash assets Financial assets RECEIVABLES - Current - Non current Other assets FINANCIAL LIABILITIES Payables Provisions GROUP: 2006 FINANCIAL ASSETS Cash assets RECEIVABLES - Current - Non current FINANCIAL LIABILITIES Payables Provisions Floating Interest Rate Fixed interest Maturing in 1 year or < Non-Interest bearing Total 691,893 621,584 - - - - - 5,278,670 - - - - - - 401 - 2,476,701 1,463,402 35,722 (3,432,851) (230,072) 313,303 5,970,964 621,584 2,476,701 1,463,402 35,722 (3,432,851) (230,072) 6,905,450 Floating Interest Rate Fixed interest Maturing in 1 year or < Non-Interest bearing Total 221,702 4,680,621 - 5,028,323 - - - - - - - - 2,241,481 2,100,375 (645,658) (83,167) 3,613,301 2,241,481 2,100,375 (645,658) (83,167) 8,695,354 Net financial assets/(liabilities) 1,313,477 5,278,670 42 Net financial assets/(liabilities) 221,702 4,680,621 annual report :po valley 11-04-2008 11:00 Pagina 43 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 21: Financial Instruments (continued) COMPANY: 2007 FINANCIAL ASSETS Cash assets RECEIVABLES - Current - Non current Other assets FINANCIAL LIABILITIES Payables COMPANY: 2006 FINANCIAL ASSETS Cash assets RECEIVABLES - Current - Non current FINANCIAL LIABILITIES Payables Floating Interest Rate Fixed interest Maturing in 1 year or < Non-Interest bearing Total 663,709 5,254,724 - 5,918,433 - - - - - - - - 22,722 31,946,660 8,709 (255,657) 31,722,434 22,722 31,946,660 8,709 (255,657) 37,640,867 Net financial assets/(liabilities) 663,709 5,254,724 Floating Interest Rate Fixed interest Maturing in 1 year or < Non-Interest bearing Total 147,574 4,60,621 - 5,008,195 Net financial assets/(liabilities) 147,574 4,860,621 - - - - - - 49,194 27,735,881 (205,188) 27,579,887 49,194 27,735,881 (205,188) 32,588,082 Fair Value Sensitivity Analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit and loss, and the Group does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would not affect the profit or loss. A change in 100 basis points in interest rates would have increased or decreased the Group’s equity by $51,000 (2006: $32,000) and the Company’s equity by $51,000 (2006: $32,000) Cash flow Sensitivity Analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2006. Effect in thousands of AUD’s Group Company Group Company PROFIT OR LOSS EQUITY 31 December 2007 Variable rate instruments 31 December 2006 Variable rate instruments 4 45 4 36 - - - - 43 annual report :po valley 11-04-2008 11:00 Pagina 44 Annual Report 2007 Note 21: Financial Instruments (continued) (b) Credit Risk Exposure to credit risk The group is not exposed to significant credit risk. Credit risk with respect to cash is held with recognised financial intermediaries with acceptable credit ratings. The carrying amount of the Group’s and Company’s financial assets represents the maximum credit exposure and is shown in the tables above. Impairment losses An impairment loss of $150,508 in respect of a loan receivable was recognised during the current year due to some uncertainty of recoverability. (c) Liquidity risk The financial liabilities of the Group and the Company comprises trade and other payables. The contractual cash flows, all of which are expected within 6 months, equate to the book value. (d) Net Fair Values of Financial Assets and Liabilities The carrying amounts of financial assets and liabilities as disclosed in the balance sheet equate to their estimated net fair value. (e) Foreign Currency Risk The Group is exposed to foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than Australian Dollars. The currency giving rise to this risk is primarily Euro. Amounts receivable/(payable) in foreign currency which are not effectively hedged: Cash Current – Receivables Financial assets CONSOLIDATED COMPANY 2007 2006 2007 74,128 2,074,496 2,127,027 2,514,522 621,585 2,192,288 - Non-current – Receivables 1,463,402 2,100,375 Other assets Current – Payables Provisions 27,014 3,266,425 230,072 - 385,996 83,167 The following significant exchange rates applied during the year: 2006 104 - - - - 5,801 - - - - - 88,933 - Euro (€) AVERAGE RATE REPORTING DATE SPOT RATE 2007 0.6112 2006 0.5998 2007 0.5946 2006 0.6012 44 annual report :po valley 11-04-2008 11:00 Pagina 45 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 21: Financial Instruments (continued) Sensitivity Analysis A 10 percent strengthening of the Australian dollar against the Euro (€) at 31 December would have increased (decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2007. 31 December 2007 Euro (€ ‘000) 31 December 2006 Euro (€ ‘000) CONSOLIDATED COMPANY Equity Profit or loss Equity Profit or loss (115) (367) (181) (1) - - (181) (1) A 10 percent weakening of the Australian dollar against the Euro (€) at 31 December would have the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. Note 22: Commitments and Contingencies (i) Exploration Commitments As a result of the application for extensions to the licence areas of San Vincenzo, Crocetta and Cascino san Pietro the Group 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 €2,000,000 to €2,400,000. (ii) Other commitments The Group has entered into a contract with civil contractor SEMAT SpA that undertakes the final engineering design, procurement, construction and installation of both the Sillaro and Castello production surface plants. In addition to this contact the Group has a contract with engineering firm Orion Energy which is responsible for the supervision and project management of the above contract. Both contracts are fixed price contracts totalling €6.4 million. The Group has entered into a contract with SNAM Rete Gas (“SNAM”) for SNAM to construct the pipeline connections to both the Sillaro and Castello field. The Group has provided bank guarantees to the value of €380,000, that are secured by investment bonds (disclosed as financial assets), to SNAM in the event that the Company does not connect to the SNAM grid. The bank guarantees will be released by SNAM upon completion of the pipeline and the Group entering into a connection/entry contract for of the fields to the SNAM grid. 45 annual report :po valley 11-04-2008 11:00 Pagina 46 Annual Report 2007 Note 23: Joint Ventures As at the 31 December, 2007 the Group held interests in the following Joint Ventures and permits in Italy: Titles of Permits granted Participation percentages Other registered holders and relevant percentages Assets and liabilities of the Joint Venture at 31 December 2007 were as follows: Titles of Permits granted Resource Property Costs San Vincenzo NSI 32.5% PVO 17.5% Edison 50% San Vincenzo 1,909,878 As at the 31 December, 2006 the Group held interests in the following Joint Ventures and permits in Italy: Titles of Permits granted Participation percentages Other registered holders and relevant percentages Assets and liabilities of the Joint Ventures at 31 December 2006 were as follows: Titles of Permits granted Resource Property Costs San Vincenzo NSI 32.5% PVO 17.5% Edison 50% San Vincenzo 1,791,757 Note 24: Reconciliation of Cash Flows from Operating Activities (Loss) / Profit for the period (2,750,257) (2,825,710) (64,235) CONSOLIDATED COMPANY 2007 2006 2007 2006 86,258 ADJUSTMENT FOR NON-CASH ITEMS: Foreign exchange loss Foreign exchange gains Share-based payments Depreciation – office furniture & equipment Exploration expenditure written off Impairment losses Fair value movement on financial assets CHANGE IN OPERATING ASSETS AND LIABILITIES: (Increase) decrease in receivables Decrease (Increase) in other assets Increase (decrease) in trade and other creditors Increase in provisions and accruals 6,946 - 6,071 (221,475) - (646,276) (548,635) 187,825 19,023 277,238 169,428 17,508 (66,004) (35,722) 372,232 130,854 196,073 11,698 905,111 - - 33,980 - (33,870) 50,622 187,825 196,073 - - 150,508 - 25,555 (8,709) 37,896 101,239 - - - - (25,850) - (12,620) 3,909 Net cash outflow from operating activities (1,899,350) (1,600,676) (216,197) (294,794) 46 annual report :po valley 11-04-2008 11:00 Pagina 47 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 25: 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 sufficient and reasonable for the competitive industry in which the Company operates. The Remuneration Committee is responsible for determining and reviewing compensation arrangements for the Directors, the Chief Executive Officer and the executive team. The Remuneration Committee assesses the appropriateness of the nature and amount of entitlements of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. Executive Directors and Senior Executives The remuneration of PVE executive directors and senior executives comprises some or all of the following elements: fixed salary; short term incentive bonus based on performance; long term incentive shares and/or option scheme; and other benefits including employment insurances and superannuation contributions. In relation to the payment of bonuses, share option and other incentive amounts, discretion is exercised by the Remuneration Committee having regard to the overall performance of the Company and of the relevant individual during the period. 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 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 in late 2004 at $200,000 per annum. The following were key management personnel of the Group 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 specified directors and executives, in addition to any performance related bonuses and/or options are as follows: Specified directors Graham Bradley, Chairman ■ Commencement Date: 30 May 2007 ■ Term of Appointment: 3 years ■ Fixed remuneration for the year ended 31 December, 2007: $60,000 ■ No termination benefits David McEvoy, Non-executive director ■ Commencement Date: 30 May 2007 ■ Term of Appointment: 3 years ■ Fixed remuneration for the year ended 31 December, 2007: $40,000 ■ No termination benefits Byron Pirola, Non-executive director ■ Commencement Date: 30 May 2006 ■ Term of Appointment: 3 years ■ Fixed remuneration for the year ended 31 December, 2007: $40,000 ■ No termination benefits Michael Masterman, Managing Director and Chief Executive Officer ■ Commencement Date: 14 December 2004 ■ Term of Agreement: 2 years with a further 1 year extension at the option of the executive ■ Agreement extended by the Company to 14 December 2008. ■ Fixed remuneration inclusive of superannuation for the year ended 31 December, 2007: $300,000 ■ Payment of termination benefit on termination by the employer (other than for gross misconduct) equal to one years total fixed remuneration Specified Executive Dom Del Borrello, Company Secretary and Chief Financial Officer ■ Commencement Date: 1 September 2006 ■ 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. ■Fixed Service contract fee of €14,000 per calendar monthsince 1 October 2007. Prior to that date the contract fee was €7,000 per calendar month. ■ Payment of termination benefit on termination by the Company (other than for gross misconduct) equal to three month service fee or six months for change of control. 47 annual report :po valley 11-04-2008 11:00 Pagina 48 Annual Report 2007 Note 25: Key Management Personnel Disclosure (continued) The remuneration details of each director and specified executives during the year is presented in the table below: Salary & fees Bonus Superannuation benefits Value of options (1) Total SPECIFIED DIRECTORS G Bradley (Chairman) D McEvoy B Pirola M Masterman (CEO) D Greil (resigned 22 May 07) SPECIFIED EXECUTIVES D Del Borrello Total Total 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2006 58,484 58,345 39,262 40,008 39,358 40,008 - - - - - - 295,572 176,862 240,046 83,350 54,530 - 166,699 33,340 174,201 43,052 74,701 - 661,407 219,914 619,807 116,690 - - - - - - - - - - - - - - - - - - - - - 96,636 - 57,982 32,978 12,464 32,978 167,082 58,484 58,345 39,262 40,008 39,358 40,008 472,434 420,032 54,530 258,021 250,231 87,165 914,299 903,579 (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. The value of the options are amortised over the vesting period, the amount above is the amortised value in the current period for options granted in prior years. The directors and executives were appointed on the following dates M Masterman 22 June 1999 10 May 2002 B Pirola 30 September 2004 G Bradley 30 September 2004 D McEvoy 5 August 2005 (resigned 22 May 2007) D Greil D Del Borrello 30 September 2004 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. (b) Options and rights over equity instruments granted as remuneration or exercised All options refer to options over ordinary shares of Po Valley Energy Limited, which are exercisable on a one-for-one basis. During the reporting period, no options over ordinary shares were issued , exercised or forfeited. 48 annual report :po valley 11-04-2008 11:00 Pagina 49 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Note 25: Key Management Personnel Disclosure ( continued) (c) Option holdings The movement during the reporting period in the number of options over ordinary shares in the Company held directly or indirectly by each specified director and specified executive, including their personally-related entities, is as follows: SPECIFIED DIRECTORS G Bradley M Masterman D McEvoy B Pirola D Greil (resigned 22 May 2007) SPECIFIED EXECUTIVES D Del Borrello SPECIFIED DIRECTORS G Bradley M Masterman D McEvoy B Pirola D Greil (resigned 22 May 2007) SPECIFIED EXECUTIVES D Del Borrello Held at 31 Dec 2006 Issued Held at 31 Dec 2007 1,000,000 1,500,000 500,000 200,000 900,000 300,000 - - - - - - 1,000,000 1,500,000 500,000 200,000 900,000 300,000 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 The details of the options held at 31 December 2007 are as follows: SPECIFIED DIRECTORS G Bradley M Masterman D McEvoy B Pirola D Greil (resigned 22 May 2007) SPECIFIED EXECUTIVES D Del Borrello $1.00 exercise $1.25 exercise $1.95 Exercise price, expiring price, expiring price, expiring Total - 2007 Total – 2006 31Oct 08 31Oct 08 31 Dec 10 1,000,000 - - 1,500,000 500,000 200,000 - - - - 900,000 150,000 1,700,000 2,550,000 - - - - - 1,000,000 1,500,000 500,000 200,000 900,000 1,000,000 1,500,000 500,000 200,000 900,000 150,000 150,000 300,000 300,000 4,400,000 4,400,000 49 annual report :po valley 11-04-2008 11:00 Pagina 50 Annual Report 2007 Note 25: Key Management Personnel Disclosure (continued) d) Equity holdings and transactions The movement during the reporting period in the number of ordinary shares of the Company, held directly indirectly by each specified director and specified executive, including their personally-related entities is as follows: Held at 31 Dec 2006 Purchased Share based payments Sold Held at 31 Dec 2007 323,981 21,464,242 129,593 12,010,821 55,000 50,000 - - 695,989 19,901 - 59,062 - - - 64,796 - 29,801 - - - - - - 378,981 21,573,844 129,593 12,010,821 715,890 94,597 SPECIFIED DIRECTORS G Bradley M Masterman (i) D McEvoy B Pirola (i) D Greil (resigned 22 May 2007) SPECIFIED EXECUTIVES D Del Borrello(i) (i) Included above are shares held by related parties Held at 31 Dec 2006 Purchased Sold Held at 31 Dec 2007 RELATED ENTITIES J Masterman1 I Masterman1 G Masterman1 1 Related parties to M Masterman (e) Other transactions with the Company 4,788,444 500,000 388,778 - - - - - - 4,788,444 500,000 388,778 A total amount of $14,429 (2006: $21,859 ) 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. During the year, the Company entered into a loan agreement with ENX Limited which is 48% owned by the Company and which is related to Michael Masterman and Dom Del Borrello. The total loan receivable from ENX Limited at the year end was $150,508. The balance has been written off as impaired for the year. Note 26: Subsequent Event Subsequent to 31 December 2007, the Group has successfully finalised a €25 million credit facility with Bank of Scotland in the United Kingdom. An initial borrowing base of €5 million will be used to finance the construction programme at the Costello and Sillaro fields, the first fields scheduled to be brought into production. The balance of up to €20 million will be available once the Group has received formal production concessions and final development approval for these fields. 50 annual report :po valley 11-04-2008 11:00 Pagina 51 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 Directors Declaration 1. In the opinion of the directors of Po Valley Energy Ltd (“the Company”): (i) the financial statements and notes, as set out on pages 24 to 50 and the remuneration disclosures that are contained in the Remuneration report in the Directors’ report, are in accordance with the Corporations Act 2001, including: (ii) giving a true and fair view of the Company and the Group’s financial position as at 31 December 2007 and of their performance, for the financial year ended on that date. (iii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (iv) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1; 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 Officer and Chief Financial Officer for the financial year ended 31 December 2007 pursuant to Section 295A of the Corporations Act 2001. Dated at Sydney this 17th day of March 2008. Signed in accordance with a resolution of the directors: Graham Bradley Chairman Byron Pirola Non-Executive Director 51 annual report :po valley 11-04-2008 11:00 Pagina 52 Annual Report 2007 PO VALLEY ENERGY LIMITED Independent Audit Report Independent auditor’s report to the members of Po Valley Energy Limited Report on the financial report We have audited the accompanying financial report of Po Valley Energy Limited (the Company), which comprises the balance sheets as at 31 December 2007, and the income statements, statements of recognised income and expense and cash flow statements for the year ended on that date, a summary of significant accounting policies and other explanatory notes 1 to 26 and the directors’ declaration of the Group comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the Company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards (including the Australian Accounting Interpretations), a view which is consistent with our understanding of the Company’s and the Group’s financial position and of their performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 52 KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. annual report :po valley 11-04-2008 11:00 Pagina 53 Auditor’s opinion In our opinion: (a) the financial report of Po Valley Energy Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Company’s and the Group’s financial position as at 31 December 2007 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 1. KPMG B C Fullarton Partner Perth 17 March 2008` KPMG, an Australian partnership, is part of the KPMG International network. KPMG International is a Swiss cooperative. 53 annual report :po valley 11-04-2008 11:00 Pagina 54 Annual Report 2007 Shareholder Information Additional information required by the Australian Stock Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information was prepared based on share registry information processed up to 29 February, 2008. Shareholdings Substantial Shareholders Name Michael Masterman Harbinger Capital Management Hunter Hall Investment Management Pty Ltd Beronia Investments Pty Ltd (1) Joan Masterman John Hancock Fund Number of ordinary shares held Percentage of capital held % 21,573,844 16,158,244 13,904,300 12,010,821 4,788,444 3,500,000 23.86% 17.87% 15.38% 13.28% 5.30% 3.87% (1) Interests associated with Non-Executive Director, Byron Pirola Distribution of Share and Option Holdings Size of Holdings Number of holders 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - over Number of ordinary shareholders with less than a marketable parcel 55 170 93 133 41 492 7 Voting Rights of Shares and Options Refer to Note 17 and Note 19. On-Market Buy-Back There is no current on-market buy-back. Number of holders Number of options 0 0 0 4 8 12 0 0 0 150,000 4,700,000 4,850,000 Number of shares 35,445 506,168 769,164 3,864,308 85,240,548 90,415,633 1,098 54 annual report :po valley 11-04-2008 11:00 Pagina 55 Twenty Largest Shareholders 1 Michael Masterman 2 Citicorp Nominees Pty Limited 3 Cogent Nominees Pty Limited 4 ANZ Nominees Limited 5 Joan Masterman 6 Equity Trustees Limited 7 National Nominees Limited 8 Beronia Investments Pty Ltd9 HSBC Custody Nominees 10 Ken Ambrecht 11 Bond Street Custodians Limited 12 Bond Street Custodians Limited 13 Holly Gibson 14 Dietmar Greil 15 Merrill Lynch Nominees Pty Limited 16 Nicola Forrest 17 HSBC Custody Nominees Limited 18 Tucabia Investments Pty Ltd 19 McDonald Petroleum Pty Ltd 20 George Gurney Masterman Option holders – Unquoted 1 Michael Masterman 2 Graham Bradley 3 Dietmar Greil 4 Options issued under the PVE Employee Incentive Option Scheme1 5 David McEvoy 6 Byron Pirola Number of ordinary shares held Percentage of capital held % 21,398,844 15.486,244 13,894,126 8,216,200 4,788,444 3,310,376 3,139,031 2,189,221 1,500,000 1,224,649 1,021,600 1,000,000 760,000 605,890 545,493 500,000 451,807 406,109 400,000 388,778 23.67% 17.13% 15.37% 9.09% 5.30% 3.66% 3.47% 2.42% 1.66% 1.35% 1.13% 1.11% 0.84% 0.67% 0.60% 0.55% 0.50% 0.45% 0.44% 0.43% 81,226,812 89.84% 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 Number of restricted Securities Date of Release 75,000 75,000 1 December 2008 1 December 2009 55 annual report :po valley 11-04-2008 11:00 Pagina 56 Annual Report 2007 Notes 56 cover po valley 3mm def:Layout 1 11-04-2008 10:06 Pagina 1 cover po valley 3mm def:Layout 1 11-04-2008 10:06 Pagina 1 PO VALLEY ENERGY LIMITED ABN 33 087 741 571 PO VALLEY ENERGY LIMITED ABN 33 087 741 571 Registered Office Registered Office Level 28, 40 St. Georges Terrace Level 28, 40 St. Georges Terrace Perth WA 6000 Perth WA 6000 Tel: (08) 9278 2533 Tel: (08) 9278 2533 Annual Report Annual Report ABN 33 087 741 571 2007 ABN 33 087 741 571 2007 PO VALLEY ENERGY LIMITED PO VALLEY ENERGY LIMITED