ANNUAL REPORT 2008 PO VALLEY ENERGY LIMITED ABN 33 087 741 571 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 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 during 2009. Low production costs, easy connection to an extensive pipeline grid and the historically strong price for gas in Italy intersect to paint an attractive reward profile for PVE’s investors. CONTENTS 1 3 4 12 16 25 26 26 Corporate Directory Chairman’s Letter to Shareholders Managing Director’s Report Corporate Governance Statement Directors Report Lead Auditor’s Independence Declaration Income Statements Statements of Recognised Income and Expense 27 28 29 55 56 58 Balance Sheets Cash Flow Statements Notes to the Consolidated Financial Statements Directors Declaration Independent Audit Report Shareholder Information CORPORATE DIRECTORY Rome Office Via Boncompagni, 47 00187 Rome, Italy Tel: +39 06 42014968 Directors Graham Bradley, Chairman Michael Masterman, Managing Director David McEvoy, Non-Executive Director Byron Pirola, Non-Executive Director Share Registry Link Market Services Limited Level 4, 80 Stirling St Perth, WA Australia 6000 Tel: +61 2 82807111 Company Secretary Dom Del Borrello Registered Office Level 28, 140 St George’s Tce Perth, WA Australia 6000 Tel: +61 8 92782533 Solicitors Steinepreis Paganin Level 4, 16 Milligan St Perth, WA Australia 6000 DLA Paper Via Cordusio 2 20213 Milan, Italy Auditor KPMG 235 St George’s Tce Perth, WA Australia 6000 Banks Bankwest 108 St George’s Tce Perth, WA Australia 6000 Bank of Scotland 155 Bishopsgate London, UK EC2M 3YB 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. HIGHLIGHTS Continued progress towards maiden gas flows in 2009 from first three production fields • Sillaro and Castello 20 year production concessions awarded • Construction of Sillaro pipeline and connection to Italian grid complete • Sillaro and Castello production plant completed; installation awaiting site access approval Programs underway for next phase of appraisal drilling • Bezzecca-1 well drilled in March 2009 • Sillaro-2 well to expand future production rates in Pliocene gas field • Fantuzza-1 well to test deeper Miocene level in Crocetta Licence (Sillaro) Three new exploration licences awarded in northern Italy • Gas sales contracts awarded for 100% • La Prospera, Terra del Sole and Podere Gallina of Castello and Sillaro production to 2012 exploration licences awarded • Full ownership and operational control of Sant’Alberto field secured Private placement raising $10 million to institutional and sophisticated investors Three new preliminary licences awarded in northern Italy • Cadelbosco di Sopra, Adriatic offshore AR- 168-PY and Grattasasso preliminary licences awarded Letter to Shareholders “Chairman’s Importantly, we expanded our management resources during 2008 with the appointment of Doug Colkin as our Chief Operating Officer and Gianluca De Rosa as our Sen- ior Geophysicist. We also appointed Piero de Spinosa as our Production Supervisor to prepare for our move to pro- duction operations. Considerable progress is being made with geological and geophysical studies to better identify attractive gas and oil targets in our new licence areas. Further details of our expanded portfolio of licences are contained in the Man- aging Director’s report. In March 2009 we spudded our fourth appraisal well Bezzecca-1. The results of this drilling program should be known by the time of the annual general meeting. In line with expectations, the Company incurred a net loss of $6.67 million in 2008. During the year the Com- pany raised $4.69 million through the exercise of 4,090,000 Director and management options. Also, in early 2009, the Company raised a further $10 million (less expenses) by a private placement of 8.33 million shares at $1.20 per share to 17 institutional and profes- sional investors. The Company has received to date, $9 million of the placement proceeds with the balance sub- ject the Company’s to shareholder approval at forthcoming annual general meeting. On behalf of all shareholders, I thank our small but dedi- cated management team for their efforts during 2008. I also thank my Board colleagues for their continued dedi- cation and commitment. Graham Bradley Chairman |3 Dear Shareholders, On behalf of the Board of Directors, I am pleased to pres- ent the Annual Report of the Company for 2008. This time last year we had hoped by now to have at least one of our gas fields in commercial production, but progress towards this objective has been slower than we hoped, due largely to factors outside our direct control. I am pleased to report, however, that in November 2008 the Company secured 20-year production concessions from the Italian government for both our Castello and Sil- laro fields. This represents a major milestone for the Company. As I write this report, our production equipment has been substantially built and we await only final construction approvals in order to begin installing our plant. We confi- dently expect, therefore, to generate our first commercial gas sales in the second-half of 2009. Following a sales tendering process in 2008, we entered into gas offtake sales agreements in early 2009 with two Italian energy groups, each for half of our combined Castello and Sillaro production. These contracts are on favourable terms, and will underpin the Company’s rev- enues from the commissioning phase of our production wells through 2012. 2008 was also marked by a significant expansion in the Company’s portfolio of exploration licences. During 2008 we applied for one new exploration licence and received preliminary awards of three new licences. We also received final awards of three further licences. Our new licences are mainly in the Po River Valley region, but included our first offshore application - over an area in the Adriatic Sea formerly drilled successfully by ENI. Director’s Report years’ production. “Managing production. The surface plant equipment is completed and waiting on skids for installation. The pipeline grid connection for Sillaro is complete and the Castello grid connection should be completed by the time of the annual general meeting. Gas offtake con- tracts are in place with strong Italian gas trading and distribution companies for 100% of our initial three Dear Shareholders, During 2008 we put the building blocks in place to take Po Valley forward into production in 2009. Importantly we were granted 20-year production con- cessions on our Castello and Sillaro gas fields and preparation is well advanced to put these fields into 4| MANAGING DIRECTOR’S REPORT In addition, 2008 was marked by targeted and successful expansion in the number and quality of assets within our Italian energy portfolio, including our first successful pre- liminary licence in the offshore gas fields bordering Italy’s eastern coastline. In total, Po Valley now has under its management three gas fields moving towards production, two gas appraisal projects, 17 gas exploration targets and four oil targets. Development Projects and Licences Po Valley operates mainly in the large hydrocarbon sys- tem in northern Italy that was previously the exclusive domain of ENI - the successful Italian oil and gas com- pany founded in the 1950s by Enrico Mattei. Our initial aim was to find and develop proven but under- developed gas resources in former ENI discovery/pro- duction fields. Over the past two years, we have expanded our portfolio of projects to include new gas exploration plays and oil exploration opportunities. EXPANDED PROJECT PIPELINE AND OPERATIONS – 2008 Applications Exploration/Appraisal Development/Appraisal 1 offshore gas & 2 onshore • Won - AR-168-PY • Won - Cadelbosco • Won - Grattasasso 6 new licence areas 7 discoveries • 17 Gas targets Pioppette/Gradizza F. Perino/Cembalina Donnino • 4 Oil targets Rovagnate Negrino ONSHORE • Bezzecca • Fantuzza (Sillaro Miocene) • Correggio OFFSHORE • Azzurra • Ginevra • Carola • Irma Production/ Development Storage 3 fields moving into production Bid for new gas storage licences • Castello • Sillaro (Pliocene) • Sant’Alberto • JV with Star Energy Plc • Bagnolo Mella bid • Existing Storage |5 The production, development and exploration projects identified to date in our licences areas are shown in the table below. PRODUCTION CONCESSIONS Sillaro Castello Sant'Alberto (Application) LICENCE AND GASFIELD OWNERSHIP Crocetta Cascina San Pietro San Vincenzo Terra del Sole La Prospera Podere Gallina PVE Share% 100% 100% 100% 100% 100% 100% 100% 100% 100% EXPLORATION PERMIT APPLICATIONS (PRELIMINARY AWARD SUBJECT TO ENVIRONMENTAL CLEARANCES) Opera La Risorta Ossola AR-168-PY Cadelbosco di Sopra Grattasasso 100% 100% 50% 100% 100% 100% Castello – Cascina San Pietro Licence (100% PVE) Castello, east of Milan, is scheduled to be the Company’s first gas field in commercial production. The field was drilled in 2005 at a location updip from the former ENI Agnadello well, which produced 13 billion cubic feet of gas (bcf) over a period of five years in the 1980s. The Castello gas field was successfully tested by Po Val- ley in Vitalba #1 well over two gas bearing levels early in 2006. Flow rate testing of the two levels, San A1 and San A2, produced flows of 2.8 million cubic feet per day (mmcf/d) on a 1/4 ” choke. The field will be a single well development connected to the grid some 800 metres away. Environmental approval was granted during March 2008 and the Company was awarded a 20-year production con- cession in November 2008. The surface gas treatment plant contract was awarded to Semat of Italy and is 100% complete, on schedule and within budget, awaiting installation approval. SNAM Rete Gas, Italy’s national pipeline grid operator, is cur- rently undertaking the connection to the pipeline grid. The Company is ready to put the field into commercial production. Castello has Proven and Probable (2P) gas reserves of 6.3 bcf and is expected to have an initial production rate of 2.7 mmcf/d when it is expected to come online around mid 2009. Sillaro – Crocetta Licence (100% PVE) Sillaro, in the Crocetta licence area east of Bologna, is the Company’s largest natural gas field discovered to date. The field was originally explored by ENI between 1955 and 1982 with seven wells drilled in and around the structure. The field contains gas bearing zones in the Pliocene level at a depth of 2,100 metres. The deeper Miocene level, at a depth of 2,500 metres, was previously drilled by ENI and found to have a gas bearing reservoir. Po Valley successfully drilled and tested Sillaro-1d between November 2005 and January 2006, identifying three gas bearing levels over a 100 metre gross interval in the Pliocene sequence. Each of the levels was success- fully tested. This test work, the associated reservoir simulations and development analysis, confirmed a com- mercial gas field development. Flow rate testing of the three productive layers produced at up to 5.4, 4.0 and 3.0 mmcf/d respectively. The Company is progressing its plan to put this field into commercial production. Environmental approval was granted during January 2008 and in November 2008, Po Valley was granted a 20-year production concession over this field. SNAM completed the connection to the pipeline grid, 300 metres from the Sillaro well head, at its cost, in December 2008. The construction contract for surface gas treatment plant was awarded to Italian contractor Semat in 2007 and the plant has been completed on schedule within budget. Po Valley expects installation of surface plant at Sillaro to commence in the third quar- ter of 2009, enabling connection of the plant to the newly installed pipeline grid connection. 6| MANAGING DIRECTOR’S REPORT Po Valley plans to drill a second well, Sillaro-2, into the Pliocene gas reservoir, designed to produce from multiple levels to increase overall flows rates, optimise total field recovery and increase reserves. Sillaro-2 will be drilled from the existing Sillaro-1d drill-site prior to commencing production from this field. The Sillaro field has Proven and Probable (2P) gas reserves of 14 bcf, and is expected to have an initial gas production rate from its two wells of 3.8 mmcf/d when it is expected to begin production in the final quarter of 2009. Plans are also well advanced to exploit the deeper Miocene structure beneath the Sillaro gas field. A total of 50 kilometres of seismic data were purchased during 2006 and reviewed to confirm the size and structure of the Miocene target and a drill location for this well, Fan- tuzza-1, has been selected. The planned 2,600 metres deep Fantuzza-1 well will be Po Valley’s first test of this deeper structure, previously successfully drilled and tested by ENI. The Company is awaiting final environ- mental approvals, with the well expected to be drilled following production and cash flows from Castello and Sillaro. The surface plant and pipeline connection at Sil- laro has been sized to take advantage of success at Fantuzza-1, located about two kilometres from the Sillaro field production site. Edison, the then operator, submitted the production con- cession application in July 2006. In March 2008, Po Valley reached an agreement with Edison to take over operatorship of the field and move to 100% ownership. We plan to complete a new 2D seis- mic acquisition program in the second half of 2009, to improve field knowledge and support our production licence application. Our renewed focus on the field aims to achieve commercialisation by the second half of 2010. Bezzecca – Cascina San Pietro Licence (100% PVE) Bezzecca, east of Milan, is the Company’s fourth appraisal well. Formerly called Pandino, the field was drilled in the 1950s by ENI and produced 5 bcf. In 2006, 50 kilometres of seismic data were purchased and we completed a review of the size and structure of the Bezzecca field. The review confirmed the size of the structure, about 5 to 10 times the size of Castello and confirmed the drilling location for the planned Bezzecca well (drilling commenced in March 2009). Sant’ Alberto – San Vincenzo Licence (100% PVE) Sant’ Alberto, north of Bologna, is the third field in the portfolio to progress towards commercial gas production. Significant progress was made during 2008 to grow our portfolio of new gas prospects all in northern Italy. In November, Po Valley was granted six year exploration licences for its La Prospera and Terra del Sole prospects New Prospects |7 near Bologna. The two new licences expand our portfolio of exploration licences to nine. Following extensive geo- logical studies and seismic interpretation, we have defined three priority gas targets in the La Prospera licence - Gradizza, Pioppette and Capitello. The most advanced of these is the Gradizza prospect, a shallow (1,000 metre) anticlinal structure with a strong “bright spot” and good seismic definition. It contains estimated P50 potential resources of 7 bcf. Seismic reprocessing and further work is underway on the Pioppette and Capitello structures and on the Castrocaro prospect in Terra del Sole licence area. Another recent success is the grant of a six year explo- ration licence for the Podere Gallina permit near Bologna. The permit covers 506 square kilometres. Following inte- grated geological and seismic interpretation studies, the Company has defined three priority gas targets in Podere Gallina - Fondo Perino, Cembalina and Casa Rossa. The most advanced of these is Fondo Perino, a faulted anticli- nal structure at a depth of approximately 1,500 metres and which contains estimated P50 potential resources of 22 bcf of gas. The Cembalina structure, which has the potential to be of similar size, will be the subject of fur- ther geological and geophysical study, including possible seismic acquisition, during 2009. The Company also received preliminary award of three fur- ther exploration permits in 2008; Cadelbosco di Sopra near Modena, Grattasasso also near Modena and an offshore Adriatic permit, AR-168-PY “Azzurra”. The Cadelbosco per- mit area contains the Correggio gas discovery previously produced by ENI and estimated to contain remaining P50 gas resources of 35 bcf. In addition to other exploration potential, the permit area also contains the Bagnolo in Piano oil discovery with estimated remaining P50 resources of 5 million barrels of oil (“mmbbl”). The Grattasasso permit, adjacent to the Cadelbosco di Sopra permit, contains the Ravizza oil field which is esti- mated to contain P50 resources of 5 mmbbl. The preliminary award of exploration licence, AR-168- PY “Azzurra”, is the first offshore licence area sought for the Company. It covers an area of 526 square kilometres situated in the Adriatic Sea off Italy's east coast, in shal- low water (30 metres) adjacent to the large ENI Agostino and Porto Garibaldi gas fields. ENI previously drilled and tested positive gas flows in separate wells during the 1980s and 1990s; Azzurra-1, Ginevra-1dir, Irma-1 and Carola-1 prior to relinquishing the area. The licence area also has extensive 3D seismic coverage acquired during the 1990s. 2009 Exploration Focus Initial seismic and geological reviews have been com- pleted on all of our new licences in northern Italy. Some 17 gas prospects have been mapped with P50 potential resources ranging in size from 2.5 to 50 bcf. Like Sil- laro, Castello and Bezzecca these gas prospects are expected to yield high quality gas, benefit from close proximity to the national pipeline grid and high Italian gas prices. Detailed geological and geophysical studies are under- way and are expected to be completed during 2009. In total, 394 kilometres of seismic has been purchased. The priority targets for the 2010 drilling program are Fondo Perino in the Podere Gallina licence area and two targets in the La Prospera licence area – Gradizza and Cem- balina. Final well locations will be identified through these studies with a view to lodging drilling applications late in 2009. 8| MANAGING DIRECTOR’S REPORT 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. These include ENI’s nearby Villa Fortuna discovery (50 kilometres southwest) which has produced over of 188 mmbl and the Malossa oil field (20 kilometres south) which produced 176 bcf of gas and 20 million bar- rels of condensate over a 20-year period. Po Valley was granted preliminary award of the Ossola licence in October 2006 and has worked since then to complete environmental clearance procedures. Final grant of this licence is now expected during 2009. In parallel with the licence grant process, we have com- menced early stage geological and geophysical work to evaluate the licence area. Initial reviews of seismic data have highlighted two large oil/condensate structures – Rovagnate at 3,500 metres and Negrino at 6,000 metres. The Company has reached joint agreement with Edison for a 50- 50 joint venture, with Po Valley responsible for operating the field in the formative geological and environmental approval stages of the licence prior to first drilling. New Gas Storage Project Storage of gas in former gas production fields is a critical component of the Italian and European energy sectors. Gas is piped into Italy in fixed daily volumes and must be stored to meet the wide variations in summer/winter gas con- sumption levels and to service unexpected peak demand requirements (eg a sharp reduction in temperature). In joint venture with Star Energy, a subsidiary of Petronas International Corporation Ltd, we bid late in 2007 under tender for the Bagnolo Mella storage concession in the Po Valley region. The joint venture is still awaiting the out- come of the bid process by the Italian Energy Ministry. Field Names 1. Sant’Alberto 2. Sillaro/Fantuzza 3. Castello 4. Bezzecca Total Development Exploration Permit San Vincenzo Crocetta Cascina San Pietro Cascina San Pietro PVE Interest 100% 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 |9 sumers. Elettrogas was ranked 14th by sales among gas wholesalers in the Italian market in 2007, with an annual turnover of around €244 million. The terms of both offtake agreements are similar and cover both the commissioning period and initial output years from these two fields. The agreements provide strong project support, customer alliances and contract pricing for Po Valley’s maiden production period. Capital Management During 2008, a total of A$4.69 million was raised through the exercise of 4.09 million Executive and Director options issued at the time of the 2004 IPO. Since year-end 2008, the Company announced on 23 Feb- ruary 2009 a private placement of 8.33 million ordinary shares at A$1.20 per share to institutional and sophisti- cated investors. This placement raised A$10 million (less expenses). As at the date of this report, the Company had received A$9 million of the placement proceeds with the balance subject to shareholder approval at the Company’s forthcoming annual general meeting. The new funds will be used to drill our Bezzecca gas appraisal well and to maintain low debt levels as we take our Castello and Sillaro gas fields into production. Po Valley utilised the Bank of Scotland finance facility to fund construction of production surface plants for Castello and Sillaro and the facility was drawn to €5.0 million (A$9.3 million) at 31 December 2008. Bank of Scotland has confirmed that the Company will be able to access second tranche funds upon provision of formal Italian Market Thanks to comparatively strong gas prices, an extensive pipeline grid and high margin gas field development, Italy continues to be a highly attractive gas market, despite global economic uncertainty. Italian gas prices in €/Cm EUR/cubic metre 0.50 – 0.45 – 0.40 – 0.35 – 0.30 – 0.25 – 0.20 – 0.15 – 0.10 – USD or AUD/’000 cubic feet – 28,00 – 24,00 – 20,00 – 16,00 – 12,00 – 8,00 0.05 – – ____________________ 9 0 r a M 6 0 r a M 7 0 c e D 7 0 r a M 4 0 p e S 5 0 p e S 8 0 p e S 6 0 p e S 7 0 p e S 5 0 r a M 8 0 r a M 6 0 c e D 4 0 c e D 5 0 c e D 8 0 c e D 4 0 n u J 5 0 n u J 8 0 n u J 6 0 n u J 7 0 n u J 4,00 Eur prices AUD prices USD prices Italy imports more than 85% of its gas supplies. Late in 2008 we again saw Russia shut-off gas supply to the Ukraine, highlighting Europe’s dependence from exter- nal supplies, re-enforcing at the same time the strategic importance of domestic production within the walls of Europe. This bodes well for the future value of the Com- pany’s domestic gas and oil. Gas Offtake Sale During 2008, Po Valley conducted a tender process that in early 2009 culminated in the forward sale of 100% of its planned production from its Castello and Sillaro gas fields through to 2012. The bidding for the output from these two fields was strong, with 11 bidders tabling offers. Contracts for half our production were awarded to each of Italtrading S.p.A. and Elettrogas S.p.A., both Ital- ian energy groups with strong presences in Italy’s energy supply and distribution sector. Italtrading S.p.A. is an established gas, energy and renewable trading and wholesale company and is part of the AFIN Group, a private company (founded in 1956) with a turnover of around €500 million. Elettrogas S.p.A. owns retail gas and electricity distribution networks to over 40 towns in northern and central Italy. It distributes gas through 632 delivery points directly to Italian con- 10| documentation from the relevant authorities approving civil works and drilling on the Sillaro and Castello fields. Cash at bank at the end of December 2008 was A$5.2 million. Management Po Valley’s small management team is continuing with patience and tenacity to expand development activities and move the Company’s first fields to production. A number of key appointments were completed during 2008 to strengthen our team and to handle our increased pipeline of development projects. Doug Colkin, a petro- leum geologist with more than 34 years experience, including 17 years with Enterprise Oil, joined the Com- pany as Chief Operating Officer. During the year, Piero De Spinosa was appointed Produc- tion Supervisor. With over 41 years operational experience, including Mobil Oil Refinery and Expro North Sea, Piero will guide Po Valley through the commissioning and start- up phase of operations through to production. Gianluca De Rosa, a Senior Geophysicist with over 10 years experience at ENI also joined the Company in 2008. I join with the Directors on behalf of shareholders in thank- ing the management team for its contribution in 2008. Conclusion The granting in 2008 of the 20-year production concessions for Castello and Sillaro was a major milestone towards our first gas production. These concessions position Po Valley at the forefront of new gas field development in Italy. The Company accounted for two of only three new on-shore pro- duction concessions granted in Italyin the past five years and the first such concessions granted in northern Italy since the oil and gas sector was deregulated in 1998. Whilst the regulatory environment in Italy causes devel- opment timetables to be significantly longer than in some other markets, the Company has successfully navigated every stage of the approval process over the past four years. We now have 10 years of operating experience in Italy and a track record that represents valuable ‘intel- lectual property’ and is a source of competitive advantage MANAGING DIRECTOR’S REPORT over new entrants seeking to replicate what we have achieved. With the Company on the cusp of maiden production and with a growing portfolio of assets, Po Valley is strategi- cally well positioned to deliver future value-creation and momentum for shareholders. Michael Masterman Managing Director & Chief Executive Officer |11 Governance Statement “Corporate The key responsibilities of the Board are to review, advance and approve PVE’s objectives and strategies, business plan and annual budget, exploration and devel- opment programmes and capital management. The Board monitors PVE’s businesses, financial performance and corporate governance, overseeing the financial position of PVE and reports to shareholders, ensuring effective management processes and that control systems are in place. The Board has the right to appoint and appraise the CEO and oversees the senior management team in terms of performance evaluation, succession planning and remuneration. Directors have the right, in connection with their duties and responsibility as Directors, to seek independent pro- fessional advice at the Company’s reasonable expense. Prior approval of the Chairman is required which will not be unreasonably withheld. The Board takes ultimate responsibility for corporate gov- ernance and operates in accordance with the Company’s Constitution. The Board accepts that it has the responsibility for establishing a culture of high ethical, environmental, health and safety standards and internal control proce- dures within the Company. Compliance with these procedures covering financial reporting, quality and integrity of personnel and compliance with external reg- ulations, including applicable laws and statutes of jurisdictions outside Australia where PVE operates and internal codes of conduct are 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. 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. Po Valley Energy (PVE) and its Board of Directors are committed to achieving the highest standards of corpo- rate governance and acknowledge that this is essential in creating and building sustainable value for shareholders. The Directors have noted carefully the guidance on the principles of corporate governance issued by the ASX and support the intent of these principles, noting that some recognition is required in their practical application given the size and scope of operations of the Company at this time. Information of our corporate governance prac- tices and policies is available on the Company’s web site, www.povalley.com. A description of the Company’s main corporate gover- nance practices is set out below. The Board The Board and management believe their primary respon- sibility is to maintain and grow the value of the Company for its shareholders, while respecting the legitimate inter- ests and expectations of employees, customers, creditors, the communities in which PVE operates and other stake- holders. The Board comprises four Directors; three Non-Executive Directors and one Executive Director. Two Directors, includ- ing 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. One-third of the Board is subject to re-election at each annual general meeting. 12| CORPORATE GOVERNANCE STATEMENT Audit and Risk Committee The Audit and Risk Committee provides advice and assis- tance 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, con- trols and risk management systems; including periodic discussions with management and external auditors, and seeks assurance of compliance with relevant regulatory and statutory requirements. FINANCIAL REPORTS The Committee oversees the Company’s financial report- ing process and reports on the results of its activities to the Board. Specifically the Committee reviews, with man- agement and the external auditor, the Company’s annual and interim financial statements and reports to Share- holders, seeking assurance that the external auditor is satisfied with the disclosures and content of those finan- cial statements. EXTERNAL AUDIT The Committee discusses with the external auditors the overall scope and plans for their audit activities, includ- ing staffing, contractual arrangements and fees. It reviews all audit reports provided by the external audi- tor. The Committee also specifically reviews any pro- posed 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 gen- eral meetings and be available to answer questions from the shareholders. APPOINTMENT OF EXTERNAL AUDITOR The Board appoints the external auditor. Candidates for the position of external auditor of PVE must be able to demonstrate independence from PVE and an ability to maintain independence through the engagement period. Further, the successful candidate must have arrange- ments in place for the rotation of the audit engagement partner on a regular basis. The Committee reviews the performance of the external auditor annually and can rec- ommend to the Board any changes to selection it deems appropriate. INTERNAL CONTROL The Committee examines the adequacy of the nature, extent and effectiveness of the internal control processes of the Company. RISK MANAGEMENT Risk recognition and management are viewed as integral to the Company's objectives of creating and maintaining shareholder value, and the successful execution of the Company’s strategies in gas exploration and development. The Board as a whole is responsible for oversight of the processes by which risk is considered for both ongoing operations and prospective actions. In specific areas, it is assisted by the Audit and Risk Committee. Management is responsible for establishing procedures which provide assurance that major business risks are identified, consis- tently assessed and appropriately addressed. |13 Processes Remuneration Committee COMMUNICATIONS The Committee maintains free and open communications with the external auditors and management. The Committee regularly meets with the external audi- tors without representatives of management to discuss the adequacy of the Company’s disclosures and policies, and to satisfy itself regarding the external auditor’s inde- pendence from 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 inves- tigate any matter relevant to its charter or relating to its role and scope, and for this purpose has full access to the Company’s records, personnel and any required external support. 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 under- take any other special duties as requested by the Board. The current members of the committee are: Byron Pirola (Chairman), Graham Bradley and David McEvoy. The Remuneration Committee must have a majority of Non-Executive Directors and provides assistance to the Board in relation to remuneration policies and practices and remuneration of the CEO, other senior executives and Non-Executive Directors. The Commitee recommends to the Board appropriate terms and conditions of engagement and remuneration of Directors within the aggregate limits approved by Share- holders. 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 Com- pany. 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. Nominations Committee The role of the Nominations Committee is to provide rec- ommendations to the Board on matters including: • Composition of the Board and competencies of Board members to add value to the company; • Suitable candidates for the Board having regard to the skills desired and skills represented; • Appointment and evaluation of the Chief Executive Officer; 14| CORPORATE GOVERNANCE STATEMENT • Succession planning for Board members and senior 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 him- self/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 Com- pany is to be communicated to the shareholders through: • Annual report; • Half yearly reports; • Quarterly activity reports; • The annual general meeting and other meetings called to obtain approval for Board action as appropriate; • The Company’s share registry; and • The Company’s web site at www.povalley.com. 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 pro- fessionalism. Continuous disclosure The Company's disclosure policy and procedures are designed to comply with all applicable laws and regula- tions, in particular, the ASX Listing Rules. To ensure that investors can readily have sufficient information to ascribe to a fair value to the Company's securities, under- stand the Company's objectives and strategies and examine the Company's financial position and growth prospects. In this context, the legitimate information needs of investors are balanced with the Company's need to retain confidentiality of commercially sensitive of pro- prietary information. Share Trading Directors, management and other employees as nomi- nated 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. |15 Report 30 September 2004 “Directors MICHAEL MASTERMAN — MANAGING DIRECTOR AND CEO, BEc (Hons), Age 46 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 Ana- conda 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 join- ing Anaconda Nickel, he spent eight years at McKinsey & Company serving major international resources compa- nies 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 the US. 22 June 1999 10 May 2002 30 September 2004 The Directors present their report together with the finan- cial 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 2008. 1. Directors The Directors of the Company at any time during or since the end of the financial year are: DATE OF APPOINTMENT DIRECTORS M Masterman B Pirola G Bradley D McEvoy Information on Directors The Board is composed of a majority of Non-Executive Direc- tors, 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 60 Graham joined PVE as a Director and Chairman in Septem- ber 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 Aus- tralia’s major listed funds management and financial services groups, Perpetual Trustees Australia. He was Managing Part- ner 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, Stock- land Corporation Limited and Boart Longyear Limited. Graham is Chairman of the Remuneration and Nomination Committee and member of the Audit and Risk Committee. 16| DAVID MCEVOY — NON EXECUTIVE DIRECTOR, BSc, Grad Diploma (Appl. Geophysics), Age 62 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 Develop- ment Vice President and member of the Management Committee of Exxon (subsequently ExxonMobil) Explo- ration 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 Petro- leum Limited. David is a member of the Audit and Risk Committee. DIRECTORS REPORT BYRON PIROLA — NON EXECUTIVE DIRECTOR, BSc, PhD, Age 48 Byron is a co-founder of PVE and is based in Sydney. He is currently a Director of Port Jackson Partners Limited, a Syd- ney based strategy management consulting firm. Prior to joining Port Jackson Partners in 1992, Byron spent six years with McKinsey & Company working out of the Syd- ney, 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 compa- nies 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, MAICD, Age 43 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 17 years. During this time he also spent a number of years work- ing for investment bank Goldman Sachs in London. Prior to joining the Company he spent three years working with global titanium minerals and zircon producer Iluka Resources, where he was the Group Manager, Treas- ury and Risk. 3. Directors Meetings The number of formal meetings of the Board of Directors held during the financial year and the number of meet- ings 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 7.26 cents (2007: 3.12 cents). 6. Operating and Financial Review The consolidated loss after income tax amounted to $6,665,925 (2007: $ 2,750,257). Included in the results from operating activities is an amount totalling $1,402,192 (2007: $277,238) relating to exploration and development expenditure expensed, of which the major- ity was for project management costs. During the year the Company progressed significantly towards maiden gas production from the Castello and Sil- laro fields with the granting of 20 year production concessions for both fields. Construction of the surface plant equipment for these fields and associated skids were 100% complete at the end of September 2008 and the company was awaiting final approval to enter site and commence installation of the equipment. Also during the period, the Company concluded a commercial agreement with Edison to take over the full operatorship and ownership of the San Vincenzo exploration licence area and associated Sant’ Alberto production concession application. As part of this agreement, Edison will participate on a 50/50 basis, in the awarded Ossola licence area, where the Company is pursuing large-scale oil and gas/condensate targets. Environmental approval was received for the drilling of the Bezzecca-1 appraisal project during the year and site access was granted to the drilling contractor in late February, 2009. No. of board meetings held 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 G Bradley M Masterman D McEvoy B Pirola 13 13 2 2 3 3 13 13 n/a n/a n/a n/a 13 12 2 2 n/a n/a 13 13 2 2 3 3 |17 At the time of finalising this report Bezzecca-1 well would have been spudded in March and drilling will be underway. The Company has also submitted environmental clear- ance for the Fantuzza-1 appraisal well and approval to drill this well is expected later in 2009. Significant work progressed on the new licence applica- tions with the purchase and evaluation of seismic lines on the La Prospera, Opera and Podere Gallina exploration licences. The Company also secured during the period the preliminary award, subject to environmental clearance, of three new licences – the offshore licence area AR-168- PY (“Azzurra”) in the northern Adriatic, Cadelbosco di Sopra and Grattasasso in the onshore Po Valley. The Company issued 262,463 shares to employees pur- suant to the employees share purchase plan. These shares were issued at a price of $1.85. During the year $1,700,000 director options at $1.00 each and $2,390,000 management options at $1.25 each, expiring 31 October 2008 were exer- cised. The proceeds received by the Company on exercising these options to shares were a total $4,687,500. The Company utilised the €25 million Bank of Scotland finance facility, which was drawn to $9,311,316 (€5,000,000) as at the end of 31 December 2008. 7. Dividends No dividends have been paid or declared by the Company during the year ended 31 December 2008. 8. Events Subsequent to Reporting Date The Company announced on 23 February 2009 a private placement of 8,333,333 ordinary shares at $1.20 per share to institutional and sophisticated investors, seek- ing to raise $10,000,000. As at the date of this report, the Company had received $9,000,000 of the placement pro- ceeds with the balance subject to shareholder approval at the Company’s annual general meeting. It also contracted to sell all gas production until 2012 from the Castello and Sillaro fields to Italtrading SpA and Elettrogas SpA, both Italian gas trading and distribution businesses on a 50/50 shared basis. 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 opera- tions, or the state of affairs of the Group. 9. Likely Developments During 2009 the Company intends to complete the instal- lation of the equipment for the Castello and Sillaro fields and bring these fields into production. It is also expected that the Company will drill an appraisal well for the Bezzecca 1 target during March 2009. The Company now has an extensive portfolio of explo- ration and development licences and has also continued to make further new licence applications. This portfolio has three production development fields, seven discoveries and 17 defined gas exploration prospects. 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 leg- islation in relation to its mining exploration and development activities in Italy. Company management monitor compliance with the relevant environmental leg- islation. The Directors are not aware of any breaches of legislation during the period covered by this report. 11. Remuneration Report-Audited 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 Direc- tors and Executives of the Company. Remuneration Policy The Company aims to ensure that the level and composi- tion of remuneration of its Directors and Executives is sufficient and reasonable for the competitive industry in which the Company operates. Other than these matters there were no events between The Remuneration Committee is responsible for deter- mining and reviewing compensation arrangements for 18| DIRECTORS REPORT the Directors, the Chief Executive Officer and the execu- tive team. The Remuneration Committee assesses the appropriateness of the nature and amount of entitlements of such officers on a periodic basis by reference to rele- vant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality Board and executive team. The total salary and fees paid in 2008 to Non-Executive Directors was $146,437 (2007: $137,104). Service Contracts The major provisions of the service contracts held with the specified Directors and executives, in addition to any per- formance related bonuses and/or options are as follows. Executive Directors and Senior Executives DIRECTORS: The remuneration of PVE Executive Directors and senior executives comprises some or all of the following ele- ments; fixed salary, short term incentive bonus based on performance, long term incentive shares and/or option scheme and other benefits including employment insur- ances 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 com- prises 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 made subject to approval by share- holders. The shareholders approved the maximum agreed remuneration for Non-Executive Directors at a meeting of the Company in late 2004 at $200,000 per annum. GRAHAM BRADLEY, CHAIRMAN • Commencement Date: • Term of Appointment: • Fixed remuneration for the year ended 31 December, 2008: • 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 30 May 2007 3 years 31 December, 2008: • No termination benefits $40,000 BYRON PIROLA, NON-EXECUTIVE DIRECTOR • Commencement Date: • Term of Appointment: • Fixed remuneration for the year ended 30 May 2008 3 years 31 December, 2008: • No termination benefits $40,000 MICHAEL MASTERMAN, MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER • Commencement Date: • Term of Agreement: 14 December 2008 Ongoing contract at same terms as original contract • Fixed remuneration for the year ended 31 December, 2008: €200,000 • Payment of termination benefit on termination by the employer (other than for gross misconduct) equal to one years total fixed remuneration. |19 EXECUTIVES: DOUG COLKIN, CHIEF OPERATING OFFICER DOM DEL BORRELLO, CHIEF FINANCIAL OFFICER & COMPANY SECRETARY • Commencement Date: 1 April 2008 • Term of Agreement: The services of Mr. Colkin are pro- vided through a service contract with a management company for one year with a further one year extension at the option of either the Company or the service com- pany. • 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 two years with a further one year extension at the option of either the Company or the service company. • Fixed Service contract fee of €14,000 per calendar • Fixed Service contract fee of €14,583 per calendar month. month. • Payment of termination benefit on termination by the Company (other than for gross misconduct) equal to three month service fee. • 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. Directors and Executive Officers’ Remuneration (Company and Consolidated) 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. Short-term Post- Employment Share-based payments Salary Accom- & fees modation Car Other STI Cash Superan- Shares nuation Bonus benefits Options Total Proportion of remuneration performance related Value of options as proportion of remuneration $ $ $ $ $ % Directors G Bradley, Chairman Non-Executive D McEvoy Non-Executive B Pirola Non-Executive M Masterman Chief Executive Officer 2008 2007 2008 2007 2008 2007 2008 2007 $ 62,759 58,484 41,839 39,262 41,839 39,358 250,865 295,572 D Greil (resigned 22 May 2007) 2007 54,530 - - - - - - - - - - - - - - - - - - - - - - - - - 58,575 21,294 8,410 - 94,928 - - - - - - - - - - - - 2008 228,803 47,613 292,874 174,201 - - 2008 2007 2008 2007 918,979 106,188 21,294 8,410 661,407 - 94,928 Specified Executives D Colkin Appointed 1 April 2008 D Del Borrello Company Secretary Total 20| - - - - - - - - - - - - - - - - - - - - 57,388 - 120,147 58,484 57,388 - 57,388 - 99,227 39,262 99,227 39,358 - - - - - - 290,992 81,934 95,647 - 725,783 472,434 28% 37% - - - 54,530 19,129 295,545 - - 121,669 43,052 31,352 32,978 445,895 250,231 27% 17% 412,661 318,292 1,785,824 914,299 32,978 124,986 % 47% - 58% - 58% - 13% - - 6% 7% 13% DIRECTORS REPORT Notes in Relation to the Table of Directors’ and Executive Officers’ Remuneration A. Short term incentive bonuses awarded as remuneration to specified executives is related to performance hurdles estab- lished by the Remuneration Committee. The performance hurdles are a combination of company targets and objectives specific to the executive. B. The fair value of the options is calculated at the date of grant using a binomial option-pricing model (for options granted in 2008) and Black-Scholes formula (for options granted in 2006) and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options recognised in this reporting period. Market conditions have been taken into account within the valuation model. The following factors and assumptions were used in determining the fair value of options on grant date. Grant Date 31 May 2008 30 Nov 2006 Option Life per option Fair value Exercise price Price of shares on grant date Expected volatility Risk free interest rate 3.00 years 3.92 years $0.49 $0.70 $1.75 $1.95 $1.73 $1.66 40% 53% 6.75% 5.80% Analysis of Bonuses Included in Remuneration Equity Instruments Details of the vesting profile of the short-term incentive bonus awarded as remuneration and included in share based payments to each Director and specified executives are detailed below. All options refer to options over ordinary shares of Po Valley Energy Limited, which are exercisable on a one- for-one basis. SHORT TERM INCENTIVE BONUS Directors and specified executives Included in remuneration 2008 $ (a) % vested in year M Masterman D Del Borrello 202,781 121,669 100% 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 2008 financial year. |21 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 per- sonnel during the reporting period and details on options that vested during that period are as follows. No of options granted during 2008 Grant date Fair value per option at grant date ($) Exercise price per option ($) Expiry date No. of options vested during 2008 2007 Directors G Bradley D McEvoy B Pirola M Masterman Executives D Colkin D Del Borrello 600,000 600,000 600,000 1,000,000 30 May 2008 30 May 2008 30 May 2008 30 May 2008 200,000 - 30 May 2008 - 0.4919 0.4919 0.4919 0.4919 0.4919 - 1.75 1.75 1.75 1.75 1.75 - 31 May 2011 31 May 2011 31 May 2011 31 May 2011 - - - - 200,000 200,000 200,000 333,333 31 May 2011 - - 62,426 66,666 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. One third of the options granted in the current year are exercisable after 12 months from grant date with the remaining exercisable 24 and 36 months from the grant date. In addition to continuing employment service condition, the ability to exercise options is con- ditional on the Group achieving certain performance hurdles. For options granted in the current year, the earliest exercise date is 31 May 2009. Modification of Terms of Equity-settled Share-based Payment Transactions Exercise of Options Granted as Compensation No terms of equity-settled share-based payment transac- tions (including options and rights granted as compensation to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period. During the reporting period, the following shares were issued on the exercise of options previously granted as compensation: 2008 Number of shares Amount paid $/share Directors G Bradley D McEvoy B Pirola M Masterman Executives D Del Borrello 1,000,000 500,000 200,000 1,100,000 $1.00 $1.00 $1.00 $1.25 75,000 $1.25 No options granted as compensation were exercised during 2007. There are no amounts unpaid on the shares issued as a result of the exercise of the options in the 2008 financial year. 22| DIRECTORS REPORT 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 Financial year in in year which grant vests Non-Executive Directors G Bradley D McEvoy B Pirola Executive Directors M Masterman Specified Executives D Colkin D Del Borrello 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 333,333 333,333 333,333 66,666 66,666 66,666 75,000 75,000 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 May 2008 30 Nov 2006 30 Nov 2006 100% - - 100% - - 100% - - 100% - - 100% - - 100% - Analysis of Movements in Options - - - - - - - - - - - - - - - - - 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2008 31 Dec 2009 The movement during the reporting period, by value, of options over ordinary shares in the Company held by each key management person and each of the specified executives is detailed below. Granted in year $ (A) Value of options exercised in year $ (B) Lapsed in year $ (C) Non-Executive Directors G Bradley D McEvoy B Pirola Executive Directors M Masterman Specified Executives D Colkin D Del Borrello 295,140 295,140 295,140 491,900 98,380 - 390,000 195,000 78,000 - - - 514,000 272,000 - 10,500 - 51,000 (A) The value of options granted in the year is the fair value of the options calculated at grant date using a binomial option- pricing model. The total value of options granted is included in the table above. This amount is allocated to remuneration over the vesting period (i.e. in years 30 May 2008 to 31 May 2011). (B) The value of options exercised during the year is calculated as the market price of shares of the Company as at close of trading on the date the options were exercised after deducting the price paid to exercise the option. (C) The value of the options that lapsed during the year represents the benefit foregone and is calculated at the date the option lapsed using a binomial option-pricing model assuming the performance criteria had been achieved. 475,000 options lapsed in the year. |23 12. Directors’ Interests At the date of this report, the direct and indirect interests of the Directors in the shares and options of the Com- pany, as notified by the Directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, is as follows. Ordinary Options over Ordinary Shares Shares $1.75 expiring 31 May 2011 G Bradley M Masterman D McEvoy B Pirola 1,123,880 23,447,064 304,593 7,112,782 600,000 1,000,000 600,000 600,000 13. Share Options Details of share options over ordinary shares granted dur- ing the year and on issue at 31 December 2008 are set out in Note 26 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 corpo- rate behaviour and accountability, the Directors of PVE support and have adhered to the principles of sound corpo- rate 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 dis- closures are contained elsewhere in the annual report and are also available on the Company at www.povalley.com. 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 Com- pany. 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 serv- ices in addition to their statutory duties as auditors to the Company. Refer to note 5 of the financial report for details of auditor’s remuneration. 17. Proceedings on Behalf of the Company No person has applied for leave of Court, pursuant to sec- tion 237 of the Corporations Act 2001, to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. 18. Lead Auditor’s Independence Declaration The lead auditor’s independence declaration is set out on page 25 and forms part of the Directors’ report for the financial year ended 31 December 2008. This report has been made in accordance with a resolu- tion of Directors. Graham Bradley Chairman Sydney, NSW Australia 19 March 2009 24| “PO VALLEY ENERGY LIMITED To: the directors of Po Valley Energy Limited Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2008 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the review; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG B C Fullarton Partner Perth 19 March 2009 KPMG, an Australian partnership and a member firm of the KPMG network of indipendent member firms affiliated with KPMG International, a Swiss cooperative. |25 CONSOLIDATED 2008 9,577 2007 8,363 COMPANY 2008 - 2007 - (2,439,018) (1,261,254) (407,200) (323,570) (38,929) (19,023) - - (2,063,232) (1,580,841) (995,641) (567,646) (1,402,192) (277,238) - (169,428) - - - (150,508) (5,933,794) (3,299,421) (1,402,841) (1,041,724) 1,147,505 569,366 8,331,429 977,489 (1,879,636) (20,202) (1,593) - (732,131) 549,164 8,329,836 977,489 (6,665,925) (2,750,257) 6,926,995 (64,235) - - - - (6,665,925) (2,750,257) 6,926,995 (64,235) (7.25) (3.12) Income Statements NOTES 3 14 4 15 6 7 8 Other income Finance income Finance expenses Impairment losses Corporate overheads Employee benefit expense Net finance income / (expenses) Results from operating activities Resource property costs written off Depreciation and amortisation expense (Loss) / Profit before income tax expense for the year ended 31 December 2008 “PO VALLEY ENERGY LIMITED for the year ended 31 December 2008“PO VALLEY ENERGY LIMITED Net income and expense recognised directly in equity Total recognised income and expense for the year Foreign exchange translation differences Basic and Diluted loss per share (Loss) / Profit for the period Profit / (Loss) for the year Income tax expense The income statements are to be read in conjunction with the accompanying notes to the financial statements. Statements of Recognised Income And Expense NOTES 20 CONSOLIDATED 2008 2007 9,899,602 466,023 9,899,602 466,023 COMPANY 2008 2007 - - - - (6,665,925) (2,750,257) 6,926,995 (64,235) 3,233,677 (2,284,234) 6,926,995 (64,235) The statements of recognised income and expense are to be read in conjunction with the accompanying notes to the financial statements. 26| Balance Sheets as at 31 December 2008 “PO VALLEY ENERGY LIMITED Cash and cash equivalents Total Current Assets Non-Current Assets Financial assets Current Assets Investments Receivables Receivables Inventory Other assets Plant & equipment Resource property costs Total Non-Current Assets Total Assets Current Liabilities Payables Provisions Interest bearing loans Total Current Liabilities Non-Current Liabilities Provisions Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued capital Reserves Accumulated losses Total Equity CONSOLIDATED NOTES 2008 2007 COMPANY 2008 2007 9 11 10 12 13 14 15 16 18 19 5,159,911 5,970,964 4,432,641 5,918,433 1,230,504 621,584 - - 4,539,460 2,476,701 21,626 22,722 4,228,750 3,473,605 - - 15,158,625 12,542,854 4,454,267 5,941,155 - - 16,148,862 13,563,529 1,139,926 1,463,402 52,636,486 31,946,660 29,172 75,195 35,722 55,656 52,595,553 33,846,412 8,709 8,709 - - - - 53,839,846 35,401,192 68,794,057 45,518,898 68,998,471 47,944,046 73,248,324 51,460,053 4,186,746 3,432,851 281,688 255,657 293,028 230,072 - 9,311,316 - 9,311,316 - - 13,791,090 3,662,923 9,593,004 255,657 18 2,168,652 2,168,652 - - - - - - 15,959,742 3,662,923 9,593,004 255,657 53,038,729 44,281,123 63,655,320 51,204,396 57,285,164 52,079,529 57,285,164 52,079,529 10,587,524 687,922 - - (14,833,959) (8,486,328) 6,370,156 (875,133) 20 53,038,729 44,281,123 63,655,320 51,204,396 The balance sheets are to be read in conjunction with the accompanying notes to the financial statements. |27 Cash Flow Statements for the year ended 31 December 2008 “PO VALLEY ENERGY LIMITED Net cash outflow from operating activities Cash flows from operating activities Cash flows from investing activities Payments to suppliers and employees Payments for non-current assets Payments for well equipment Interest received Interest paid Payments on security deposits Payments for financial assets Proceeds from sale of financial assets Payment for investment in controlled entity Amounts advanced to controlled entities Loans to other entities CONSOLIDATED NOTES 2008 2007 COMPANY 2008 2007 (3,557,228) (2,226,216) (1,109,443) (520,673) 285,883 329,560 252,211 304,476 (393,278) (2,694) (357,683) - 25 (3,644,623) (1,899,350) (1,214,915) (216,197) (46,537) (37,898) (123,523) (1,754,941) (510,575) (639,093) (162,257) 1,025,641 - - - - - - - - - - (162,257) 1,025,641 - - - - - - (2,585,333) (2,641,325) (10,094,415) (3,785,978) (150,508) (150,508) Payments for resource property costs (9,414,650) (2,335,305) Net cash outflow from investing activities (9,232,001) (4,917,745) (12,345,061) (6,577,811) Cash flows from financing activities Proceeds from the issues of shares 4,687,500 7,878,750 4,687,500 7,878,750 Payments for share issue costs Proceeds from borrowings Payments for borrowing costs (9,249) (395,979) (9,249) (395,979) 8,488,006 (1,082,218) - - 8,488,006 (1,082,218) - - Net cash inflow from financing activities 12,084,039 7,482,771 12,084,039 7,482,771 Net increase / (decrease) in cash held (812,485) 665,676 (1,475,937) 688,763 Cash and cash equivalents at 1 January 5,970,964 5,082,323 5,918,433 5,008,195 Effects of exchange rate fluctuations on cash held 1,432 222,965 (9,855) 221,475 Cash and cash equivalents at 31 December 9 5,159,911 5,970,964 4,432,641 5,918,433 The cash flow statements are to be read in conjunction with the accompanying notes to the financial statements. 28| Notes to the Consolidated Financial Statements NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for the year ended 31 December 2008“PO VALLEY ENERGY LIMITED 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 2008 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 in the Po Valley region in Italy and appraisal and development of gas properties. (A) REPORTING ENTITY (B) STATEMENT OF COMPLIANCE The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASB’s) (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB) 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 19 March 2009. (C) BASIS OF MEASUREMENT These consolidated financial statements have been prepared on the basis of historical cost, except for financial assets, liabilities and share based payments recognised at fair value. (D) FUNCTIONAL AND PRESENTATION 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. Certain comparative amounts have been reclassified to conform with the current year’s presentation. The consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. (I) SUBSIDIARIES Subsidiaries are entities controlled by the Company. Control (F) PRINCIPLES OF CONSOLIDATION |29 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued 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 intra-group transactions, are expenses arising eliminated in preparing the consolidated financial statements. from (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 assets 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 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 30| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued 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 2008 3-5 years 2007 3-5 years 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. 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 (N). 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 |31 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued 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 as finance income or expense. 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 as finance income or expense. Other Other non-derivative financial instruments are measured at amortised costs using the effective interest method, less any impairment losses. (II) DERIVATIVE FINANCIAL INSTRUMENTS Derivatives are initially recognised at fair value; attributable costs are recognised in profit or loss when incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are accounted for in the profit and loss as finance income or expense. (III) 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) INVENTORIES Inventories are measured at the lower of cost and net realisable value; and includes expenditure incurred in acquiring the inventories and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (L) 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 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. (M)PROVISIONS Rehabilitation costs Long term environmental obligations are based on the Group’s environmental and rehabilitation plans, in compliance with current environmental and regulatory requirements. Full provision is made based on the net present value of the estimated cost of restoring the environmental disturbances that has occurred up to the balance sheet date and abandonment of the well site and production fields. Increases due to additional environmental disturbances, relating to the development of an asset, are capitalised and amortised over the remaining useful lives of the areas of interest. 32| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued Annual increases in the provision relating to the change in net present value of the provision are accounted for in the income statement as finance expense. The estimated costs of rehabilitation are reviewed annually and adjusted as appropriate for changes in legislation, technology or other circumstances including drilling activity. Cost estimates are not reduced by potential proceeds from the sale of assets. (N) FINANCE INCOME AND EXPENSES Finance income comprises interest income on funds invested and is recognised as it accrues in profit or loss, using the effective interest method. interest expense on Finance expenses comprise borrowings or other payables and unwinding of the discount of provisions. All borrowing costs are capitalised using the effective interest method. (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. (O) EMPLOYEE BENEFITS (P) FOREIGN CURRENCY (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 Government bonds at the balance sheet date which have maturity dates approximating to the terms of the Group’s obligations. (II) WAGES, SALARIES, ANNUAL LEAVE, SICK 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 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 to defined contribution The Group contributes superannuation plans. Contributions are recognised as an expense as they are due. (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) FOREIGN CURRENCY TRANSACTIONS 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 as finance income or expense. 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 |33 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued operation, or qualifying cash flow hedges, which are recognised directly in equity. (III) FOREIGN OPERATIONS 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. Foreign exchange gains and losses arising from monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised directly in equity in the foreign currency translation reserve. (Q) 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. (R) 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. (S) NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 31 December 2008, but have not been applied in preparing this financial report. Reference Title Summary AASB 8 and AASB 2007-3 AASB 101 (Revised) and AASB 2007-8 Operating Segments and consequential amendments to other Australian Accounting Standards Presentation of Financial Statements and consequential amendments to other Australian Accounting Standards 34| New standard replacing AASB 114 Segment Reporting, which adopts a management reporting approach to segment reporting. statement of Introduces a comprehensive income. Other revisions include impacts on the presentation of items in the statement of changes in equity, new presentation requirements for restatements or reclassifications of in the financial statements, changes in the presentation for dividends and changes to the titles of the financial statements. requirements items Application date of standard* 1 January 2009 Impact on Group financial report AASB 8 is a disclosure standard so will have no direct impact on the amounts included in the Group's financial statements. In addition, the amendments may have an impact on the Group’s segment disclosures. Application date for Group* 1 January 2009 1 January 2009 1 January 2009 are amendments These only expected to affect the presentation of the Group’s financial report and will not have a direct impact on the measurement and recognition of amounts disclosed in the financial report. The Group has not determined at this stage whether to present a single statement of comprehensive income or two separate statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued Reference Title Summary AASB 2008-1 Amendments to Australian Accounting Standard – Share-based Payments: Vesting Conditions and Cancellations AASB 3 (Revised) Business Combinations AASB 127 (Revised) Consolidated and Separate Financial Statements The amendments clarify the definition of 'vesting conditions', introducing the term 'non-vesting conditions' for conditions other vesting conditions as specifically defined and prescribe the accounting treatment of an award that is effectively cancelled because a non-vesting condition is not satisfied. than The revised standard introduces a number of changes to the accounting for business combinations, the most significant of which allows entities a choice for each business combination entered into – to measure a non- controlling interest (formerly a minority interest) in the acquiree either at its fair value or at its proportionate interest in the acquiree’s net assets. This choice will effectively result in recognising goodwill relating to 100% of the business (applying the fair value option) or recognising goodwill relating to the interest acquired. The percentage changes apply prospectively. Under the revised standard, a change in the ownership interest of a subsidiary (that does not result in loss of control) will be accounted for as an equity transaction. Application date of standard* 1 January 2009 Impact on Group financial report The Group has share-based payment arrangements that may be affected by these amendments. However, the Group has not yet determined the extent of the impact, if any. Application date for Group* 1 January 2009 1 July 2009 1 January 2010 The Group may enter into some business combinations during the next financial year and may therefore consider early adopting the revised standard. The Group has not yet assessed the impact of early adoption, which accounting policy to adopt. including 1 July 2009 If the Group changes its ownership interest in existing subsidiaries in the future, the change will be accounted for as an equity transaction. 1 January 2010 AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 Amending standard issued as a consequence of revisions to AASB 3 and AASB 127. 1 July 2009 Refer to AASB 3 (Revised) and AASB 127 (Revised) above. 1 January 2010 Amendments to International Financial Reporting Standards Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate IFRIC 16 Hedges of a Net Investment in a Foreign Operation 1 January 2009 1 January 2009 Recognising all dividends received from subsidiaries, jointly controlled entities and associates as income will likely give rise to greater income being recognised by the parent entity after adoption of these amendments. In addition, if the Group enters into any group reorganisation establishing new parent entities, an assessment will need to be made to determine if the reorganisation meets the conditions imposed to be effectively accounted for on a ‘carry-over basis’ rather than at fair value. 1 January 2009 The Interpretation is unlikely to have any impact on the Group since it does not significantly restrict the hedged risk or where the hedging instrument can be held. 1 January 2009 The main amendments of relevance to Australian entities are those made to IAS 27 deleting the ‘cost method’ and requiring all dividends from a subsidiary, jointly controlled entity or associate to be recognised in profit or loss in an entity's separate financial statements (i.e., parent company accounts). The distinction between pre- and post-acquisition profits is no the longer payment of such dividends requires the entity to consider whether there is an indicator of impairment. required. However, AASB 127 has also been amended to effectively allow the cost of an investment in a subsidiary, in limited reorganisations, to be based on the previous carrying amount of the subsidiary (that is, share of equity) rather than its fair value. This interpretation proposes that the hedged risk in a hedge of a net investment in a foreign operation is the foreign currency risk arising between the functional currency of the net investment and the functional currency of any parent entity. This also applies to foreign operations in the form of joint ventures, associates or branches. |35 NOTE 2: FINANCIAL RISK MANAGEMENT Exposure to credit, market and liquidity risks arise in the normal course of the Group’s business. functional currencies of consolidated entities. The currency giving rise to this risk is primarily Euro. This note presents information about the Company’s and Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout this financial report. Risk recognition and management are viewed as integral to the Company's objectives of creating and maintaining shareholder value, and the successful execution of the Company's strategies in gas exploration and development. The Board as a whole is responsible for oversight of the processes by which risk is considered for both ongoing operations and prospective actions. In specific areas, it is assisted by the Audit and Risk Committee. Management is responsible for establishing procedures which provide identified, assurance that major business risks are consistently assessed and appropriately addressed. (I) CREDIT RISK The Group invests in short term deposits and trades with recognised, creditworthy is a concentration of credit risk in relation to receivables due to indirect tax (see note 11). third parties. There 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 The Group is primarily exposed to interest rate risk arising from its cash and cash equivalents and borrowings. Currency risk The Group is exposed to foreign currency risk on purchases that are denominated in a currency other than the respective 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. (III) CAPITAL MANAGEMENT The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board’s seek to encourage all employees of the Group to hold ordinary shares. Both management and employees participate in the Group’s employee share scheme and prefers to pay earned bonuses to staff in shares in lieu of cash. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. It seeks to maintain an upper level of borrowing of no greater than €10 million ($18.6 million) which it considers prudent for the stage of development of the company and the current economic cycle. The Group does not have a defined share buy-back plan and there were no changes in the Group’s approach to capital management during the year. (IV) 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 through the exercise by Directors and management of director and employee options. It also drew down €5 million of a bank finance facility with the Bank of Scotland. It has further raised funding post balance date, with a private placement of ordinary shares institutional and to investors. The Company had received sophisticated $9,000,000 of the placement proceeds, with the balance subject to shareholder approval at the Company’s Annual general meeting. 36| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 3: EMPLOYEE BENEFIT EXPENSES Wages and salaries Equity settled share-based payment transactions Shares issued in lieu of salaries Shares issued in lieu of bonus Options vested during the period CONSOLIDATED 2007 2008 1,073,429 1,593,340 COMPANY 2008 88,906 2007 135,745 88,210 439,174 318,294 - 154,847 32,978 - - 318,294 - 154,847 32,978 2,439,018 1,261,254 407,200 323,570 NOTE 4: CORPORATE OVERHEADS Corporate overheads comprises Company administration and compliance Professional fees Office costs Travel and entertainment Other expenses NOTE 5: CORPORATE OVERHEADS Remuneration for audit or review of the financial reports of the parent entity and the Group: Auditors of the Company – KPMG Australia The auditors received no other benefits 236,607 1,174,668 371,911 229,913 50,133 213,941 797,401 240,247 199,057 130,195 180,404 654,451 29,301 121,543 9,942 183,084 293,172 25,507 65,090 793 2,063,232 1,580,841 995,641 567,646 58,750 57,005 58,750 57,005 NOTE 6: FINANCE INCOME AND EXPENSE Interest income Foreign exchange gains Profit on sale of financial instruments 284,121 - 863,384 338,992 230,374 - 250,449 7,217,596 863,384 322,271 655,218 - Finance income 1,147,505 569,366 8,331,429 977,489 Interest expense Unwind of discount on site restoration provision Foreign exchange losses Fair value movement on financial assets Finance expense 37,191 121,723 1,682,075 38,647 2,694 - - 17,508 1,879,636 20,202 1,593 - - - 1,593 - - - - - Net finance income / (expense) (732,131) 549,164 8,329,836 977,489 |37 NOTE 7: FINANCE INCOME AND 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 Prima facie income tax calculated at 30% Foreign tax losses not brought to account Tax losses and temporary differences not brought to account as income tax benefit CONSOLIDATED 2007 2008 COMPANY 2008 2007 (6,665,925) (1,999,778) 1,407,981 (2,750,257) (825,077) 673,110 6,926,995 2,078,099 - (64,235) (19,271) - 591,797 151,967 (2,078,099) 19,271 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 This benefit for tax losses will only be obtained if: 1,609,968 1,018,171 1,636,577 1,014,781 (i) the relevant company derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; (ii) the relevant company continues to comply with the conditions for deductibility imposed by tax legislation; and (iii) No changes in tax legislation adversely affect the relevant company in realising the benefit from the deductions for the losses. NOTE 8: LOSS PER SHARE Basic loss per share (cents) CONSOLIDATED 2007 2008 (7.25) (3.12) The calculation of basic loss per share was based on the loss attributable to shareholders of $6,665,925 (2007: $2,750,257) and a weighted average number of ordinary shares outstanding during the year of 91,856,597 (2007: 88,019,609). 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 262,463 issued on 5 May 2008 200,000 issued on 10 June 2008 500,000 issued on 24 June 2008 500,000 issued on 30 June 2008 1,015,000 issued on 11 September 2008 514,148 issued on 23 October 2008 310,852 issued on 28 October 2008 1,050,000 issued on 31 October 2008 51,320 issued on 22 May 2007 4,325,000 issued on 22 June 2007 450,000 issued on 31 July 2007 89,403 issued on 8 August 2007 365 240 205 191 185 111 70 65 62 221 191 153 145 2008 Weighted average no. 2007 Weighted average no. 85,500,000 90,415,633 172,578 112,329 261,644 253,425 308,671 98,604 55,357 178,356 31,019 2,263,219 188,630 36,741 91,856,597 88,019,609 38| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 9: CASH AND CASH EQUIVALENTS Cash at bank and on hand 5,159,911 5,970,964 4,432,641 5,918,433 CONSOLIDATED 2007 2008 COMPANY 2008 2007 The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 22. NOTE 10: INVENTORY Well equipment – at cost 4,228,750 3,473,605 - - NOTE 11: TRADE AND OTHER RECEIVABLES Sundry debtors Vendor advances for well equipment Indirect taxes receivable (a) 273,079 499,910 3,766,471 112,388 - 2,364,313 16,031 - 5,595 17,794 - 4,928 4,539,460 2,476,701 21,626 22,722 The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 22. (a) Included in receivables are Italian indirect taxes recoverable as follows: Current Non-current 3,760,875 1,139,926 2,359,385 1,463,402 - - - - 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. |39 NOTE 12: INVESTMENTS Shares in controlled entities, at cost - - 16,148,862 13,563,529 CONSOLIDATED 2007 2008 COMPANY 2008 2007 The investments held in controlled entities are included in the financial statements at cost at 31 December 2008 and are as follows: Name: Country of Incorporation Class of Shares 2008 Investment $ 2007 Investment $ Northsun Italia S.p.A (“NSI”) Po Valley Operations Pty Limited (“PVO”) PVE USA Inc. Italy Australia United States of America Ordinary Ordinary Ordinary 15,431,562 715,890 1,410 12,847,639 715,890 - Holding % 100 100 100 16,148,862 13,563,529 NOTE 13: NON - CURRENT ASSETS - RECEIVABLES Indirect taxes receivable (refer Note 11(a)) Loans – Controlled Entities (i) 1,139,926 - 1,463,402 - - 52,636,486 - 31,946,660 1,139,926 1,463,402 52,636,486 31,946,660 (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 Reconciliations 245,128 (169,933) 164,392 (108,736) 75,195 55,656 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 55,656 46,567 (38,929) 11,901 36,378 31,175 (19,023) 7,126 Carrying amount at end of year 75,195 55,656 40| - - - - - - - - - - - - - - - - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 15: RESOURCE PROPERTY COSTS CONSOLIDATED 2007 2008 COMPANY 2008 2007 Resource Property costs Exploration Phase Development Phase Reconciliation of carrying amount of resource properties Exploration Phase Carrying amount at beginning of year Foreign exchange difference Exploration expenditure Transfer to Development phase Exploration expenditure written off 13,456,685 39,138,868 9,196,021 24,650,391 52,595,553 33,846,412 9,196,021 1,746,391 3,916,465 - (1,402,192) 29,254,350 257,452 2,544,730 (22,583,273) (277,238) Carrying amount at end of year 13,456,685 9,196,021 Development Phase Carrying amount at beginning of year Foreign exchange difference Development expenditure transferred from exploration phase Development expenditure 24,650,391 5,217,242 - 9,271,235 - 54,894 22,583,273 2,012,224 Carrying amount at end of year 39,138,868 24,650,391 - - - - - - - - - - - - - - - - - - - - - - - - NOTE 16: TRADE AND OTHER PAYABLES Trade payables and accruals Other payables Total 4,171,576 15,170 3,418,510 14,341 281,688 - 255,657 - 4,186,746 3,432,851 281,688 255,657 The Group’s exposure to currency and liquidity risks related to trade and other payables are disclosed in note 22. |41 NOTE 17: TRADE AND OTHER PAYABLES 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 26. 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. The number and weighted average exercise prices of share options is as follows: Number of options Weighted average Number of options Weighted average 2008 2007 Balance at beginning of year Granted (a) Exercised Balance at end of year (b) Exercisable at end of year 3,150,000 3,000,000 (3,000,000) 3,150,000 75,000 exercise price $ $1.28 $1.75 $1.25 $1.76 $1.25 3,150,000 - - 3,150,000 3,000,000 exercise price $ $1.28 - - $1.28 $1.25 The options outstanding at 31 December 2008 have an exercise price in the range of $1.75 to $1.95 and a weighted average contractual life of 3 years. The weighted average share price at the date of exercise for share options exercised during the year ended 31 December 2008 was $1.60 (2007: no options were exercised). Options granted during the reporting period pursuant to EIOS Number granted Grant date Vesting period Expiry date Exercise price 42| 2008 3,000,000 31 May 2008 3 years 31 May 2011 $1.75 2007 - - - - - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 17: TRADE AND OTHER PAYABLES continued The fair value of services received in return for share options granted is based on the fair value of share options granted, measured using a binomial lattice model, with the following inputs: FAIR VALUE OF SHARE OPTIONS AND ASSUMPTIONS Fair value at grant date Share price Exercise price Expected volatility Option life Risk-free interest rate 2008 $0.4919 $1.73 $1.75 40% 3 Years 6.75% Options held at the end of the reporting period pursuant to EIOS. Number of options 150,000 3,000,000 Grant date 30 Nov 2006 31 May 2008 2008 Vesting date Expiry date 2007 Exercise price 50% 50% 33% 33% 34% 1 Dec 2008 1 Dec 2009 31 May 2009 31 May 2010 31 May 2011 1 Dec 2010 31 May 2011 $1.95 $1.75 NOTE 18: PROVISIONS Current: Provision for legal claim Employee leave entitlements Non Current: Restoration provision CONSOLIDATED 2007 2008 COMPANY 2008 2007 204,230 88,798 168,180 61,892 293,028 230,072 2,168,652 - - - - - - - - - NOTE 19: INTEREST BEARING LOANS This note provides information about the contractual terms of the Company’s and Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Company’s and Group’s exposure to interest rate, foreign currency and liquidity risk, see note 22. Current liabilities Secured bank loan 9,311,316 - 9,311,316 - The Group’s exposure to currency, interest rate and liquidity risks related to loans are disclosed in note 22. |43 NOTE 19: INTEREST BEARING LOANS continued Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: Consolidated and Company 31 DECEMBER 2008 31 DECEMBER 2007 Currency Nominal Interest rate Year of Maturity Face Value $ Carrying Amount $ Face Value $ Carrying Amount $ Current liabilities Secured bank loan Euro Euribor + 4.5% 2009 9,311,316 9,311,316 - - The amount presented is disclosed net of borrowing costs. Bank of Scotland have provided a € 25,000,000 finance facility comprised of a pre-FDP facility of € 5,000,000 and a Senior facility of € 20,000,000. The initial borrowing base of € 5,000,000 was used to finance the construction programme of the Castello and Sillaro fields. This initial maturity has been extended to 30 June 2009; with interest payable at Euribor plus 4.50%. Access to the Senior facility is committed and available once the Company receives its formal production concessions and final approval to enter site and commence civil works for the Castello and Sillaro fields. At the date of approval of this financial report, the final production concessions have been granted and the Company is expecting final approval to enter site and commence civil works. The Senior facility matures on 15 February 2013. This second tranche of senior debt will replace the initial tranche of € 5,000,000. The facility is secured over the assets of Northsun Italia SpA and Po Valley Operations Pty Ltd including the Castello, Sillaro and Sant’ Alberto gas fields and licence areas. NOTE 20: CAPITAL AND RESERVES Reconciliation of movement in capital and reserves. Attributable to equity holders of the parent. CONSOLIDATED 2008 Issued Capital $ Translation(i) Reserve $ Accumulated losses $ Total $ Balance at 1 January 2008 52,079,529 687,922 (8,486,328) 44,281,123 Total recognised income and expense Equity-settled transactions Shares issued Share issue costs - 527,384 4,687,500 (9,249) 9,899,602 - - - (6,665,925) 318,294 - - 3,233,677 845,678 4,687,500 (9,249) Balance at 31 December 2008 57,285,164 10,587,524 (14,833,959) 53,038,729 (i) The figure of $9,899,602 in the Translation Reserve primarily relates to the movement in the value of the Euro intercompany loan balances due to difference in the value of the Euro relative to the AUD at balance date. This is in accordance with the Company accounting policies in Note 1 (P). 44| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 20: CAPITAL AND RESERVES continued Reconciliation of movement in capital and reserves. Attributable to equity holders of the parent. CONSOLIDATED 2007 Balance at 1 January 2007 Total recognised income and expense Equity-settled transactions Shares issued Share issue costs Issued Capital $ 44,354,162 - 154,847 7,878,750 (308,230) Balance at 31 December 2007 52,079,529 Reconciliation of movement in capital and reserves. Translation Reserve $ Accumulated losses $ Total $ 221,899 466,023 - - - 687,922 (5,769,049) 38,807,012 (2,750,257) 32,978 - - (2,284,234) 187,825 7,878,750 (308,230) (8,486,328) 44,281,123 2008 2007 Issued Capital $ Accumulated losses $ Total $ Issued Capital $ Accumulated losses $ Total $ Balance at 1 January 52,079,529 (875,133) 51,204,396 44,354,162 (843,876) 43,510,286 Total recognised income and expense Equity-settled transactions Shares issued Share issue costs - 527,384 4,687,500 (9,249) 6,926,995 318,294 - - 6,926,995 845,678 4,687,500 (9,249) - 154,847 7,878,750 (308,230) (64,235) 32,978 - - (64,235) 187,825 7,878,750 (308,230) Balance at 31 December 57,285,164 6,370,156 63,665,320 52,079,529 (875,133) 51,204,396 Share Capital – Company Opening balance - 1 January Shares issued during the year Share issue at $1.85 each on 5.5.08 Options exercised at $1.25 each on 10.6.08 Options exercised at $1.25 each on 24.6.08 Options exercised at $1.25 each on 30.6.08 Options exercised at $1.25 each on 11.9.08 Options exercised at $1.25 each on 23.10.08 Options exercised at $1.00 each on 23.10.08 Options exercised at $1.25 each on 28.10.08 Options exercised at $1.00 each on 28.10.08 Options exercised at $1.00 each on 31.10.08 Options exercised at $1.25 each on 31.10.08 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 2008 Number 2007 Number 90,415,633 85,500,000 262,463 200,000 500,000 500,000 1,015,000 14,148 500,000 60,852 250,000 950,000 100,000 - - - - - - - - - - - - - - - 51,230 4,325,000 450,000 89,403 Closing balance – 31 December 94,768,096 90,415,633 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. No dividends were paid or declared during the current year. |45 NOTE 21: FINANCIAL REPORTING BY SEGMENTS The Group operates primarily as a gas exploration and development company in one geographical location, being Italy. NOTE 22: FINANCIAL INSTRUMENTS (A) INTEREST RATE RISK EXPOSURES PROFILE At the reporting date the interest rate profile of the Company’s and the Group’s interest-bearing financial instruments was: Fixed rate instruments Financial assets Variable rate instruments Financial assets Financial liabilities CONSOLIDATED 2007 2008 COMPANY 2008 2007 - 5,278,670 - 5,254,724 6,406,446 (9,311,316) 1,313,477 - 4,448,673 (9,311,316) 663,709 - (2,904,870) 1,313,477 (4,862,643) 663,709 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. Therefore a change in interest rates at the reporting date would not affect the profit or loss. Cash flow Sensitivity analysis for variable rate instruments A strengthing 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 2007. Effect in AUD’s 31 December 2008 Variable rate instruments 31 December 2007 Variable rate instruments PROFIT OR LOSS Group Company (38,051) (57,628) 4,000 4,000 A decrease of 100 basis points would have an equal and opposite effect on profit or loss. 46| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 22: 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 Group has a concentration of credit risk exposure to the Italian Government for VAT receivable (see note 11.) The carrying amount of the Group’s and Company’s financial assets represents the maximum credit exposure and is shown in the table below: Cash and cash equivalents Financial assets Receivables – Current Receivables – Non-current Other assets Cash and cash equivalents Receivables – Current Receivables – Non-current Other assets CONSOLIDATED Carrying Amount Note 2008 2007 9 11 13 5,159,911 1,230,504 4,539,460 1,139,926 29,172 5,970,964 621,584 2,476,701 1,463,402 35,722 12,098,973 10,568,373 COMPANY Carrying Amount Note 2008 2007 9 11 13 4,432,641 21,626 52,637,896 8,709 5,918,433 22,722 31,946,660 8,709 57,100,872 37,896,524 |47 NOTE 22: FINANCIAL INSTRUMENTS continued (C) LIQUIDITY RISK The following are the contractual maturities of financial liabilities, including estimated interest payments: GROUP 31 December 2008 In AUD Trade and other payables Secured bank loan GROUP 31 December 2007 Carrying amount 4,186,746 9,311,316 Contractual cash flows (4,186,746) (10,597,933) 6 months or less (4,186,746) (10,597,933) 13,448,062 (14,784,679) (14,784,679) Trade and other payables 3,432,851 (3,432,851) Carrying amount Contractual cash flows 6 months or less - COMPANY 31 December 2008 Trade and other payables Secured bank loan COMPANY 31 December 2007 Carrying Carrying amount 281,688 9,311,316 Contractual cash flows (281,688) (10,597,933) 6 months or less (281,688) (10,597,933) 9,593,004 (10,879,621) (10,879,621) Contractual amount 6 months cash flows or less Trade and other payables 255,657 (255,657) (255,657) (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. 48| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 22: FINANCIAL INSTRUMENTS continued (E) FOREIGN CURRENCY RISK The Group is exposed to foreign currency risk on 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: Cash Current – Receivables Financial assets Non-current – Receivables Other assets Current – Payables Interest bearing loans CONSOLIDATED 2007 2008 COMPANY 2008 2007 1,395,452 5,687,223 1,230,504 - 16,851 (3,960,795) (10,211,500) 2,127,027 2,514,522 621,584 1,463,402 27,014 (3,266,425) - 668,183 - - 52,166,452 - (66,223) (10,211,500) 2,074,496 - - 31,946,660 - (88,933) - Net Exposure (5,842,265) 3,487,124 42,556,912 33,932,223 The following significant exchange rates applied during the year: Euro (€) Average rate 2008 0.5736 2007 0.6112 Reporting date spot rate 2007 2008 0.4896 0.5946 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. Effect in AUD 31 December 2008 Euro (€) 31 December 2007 Euro (€) CONSOLIDATED Profit or loss COMPANY Profit or loss 531,509 (3,871,684) (317,544) (3,089,932) 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. |49 NOTE 23: COMMITMENTS AND CONTINGENCIES CONTRACTUAL COMMITMENTS The Group has provided a bank guarantee to Perazzoli Drilling of Euro 500,000 as security for the commitment to drill two wells. The drilling of Bezzecca 1, which commenced in March, is with Perazzoli Drilling. The Company plans to drill either the production well of Sillaro 2 or Fantuzza appraisal well to fulfil this commitment. The minimum expected commitment is Euro 500,000. 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 the fields to the SNAM grid. NOTE 24: JOINT VENTURES As at the 31 December 2008 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 Ossola NSI 32.5% PVO 17.5% Edison 50.0% Assets and liabilities of the Joint Venture at 31 December 2008 were as follows: Resource Property Costs 668,338 50| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 25: RECONCILIATION OF CASH FLOWS FROM OPERATING ACTIVITIES (Loss) / Profit for the period (6,665,925) (2,750,257) 6,926,995 (64,235) CONSOLIDATED 2007 2008 COMPANY 2008 2007 Adjustment for non-cash items: Net foreign exchange (gains)/loss Share-based payments Depreciation – office furniture & equipment Exploration expenditure written off Impairment losses Fair value movement on financial assets Profit on unwind of put options Unwind of discount on site restoration provision Interest on loan 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 1,682,075 845,677 38,929 1,402,192 - 38,647 (863,384) 121,723 (356,086) (221,475) 187,825 19,023 277,238 169,428 17,508 - - - (7,217,596) 318,294 - - - - (863,384) - (356,086) (646,276) 187,825 - - 150,508 - - - - (160,691) (6,550) 195,814 62,956 (66,004) (35,722) 372,232 130,854 1,096 - (24,234) - 25,555 (8,709) 37,896 101,239 Net cash outflow from operating activities (3,664,623) (1,899,350) (1,214,915) (216,197) NOTE 26: KEY MANAGEMENT PERSONNEL DISCLOSURE Short-term employee benefits Other long term benefits Post-employment benefits Share-based payments CONSOLIDATED 2007 2008 COMPANY 2008 2007 1,054,871 - - 730,953 756,335 - - 157,964 276,416 - - 318,292 - - - 32,978 1,785,824 914,299 594,708 32,978 Individual directors and executives compensation disclosures Information regarding individual directors and executives’ compensation and some equity instruments disclosures as permitted by Corporations Regulation 2M.3.03 is provided in the remuneration report section of the directors’ report. Apart from details disclosed in this note, no director has entered into a material contract with the Group or the Company since the year end of the previous financial year end and there were no material contracts involving directors’ interests existing at year-end. |51 NOTE 26: KEY MANAGEMENT PERSONNEL DISCLOSURE continued Options over equity instruments The movement during the reporting period in the number of options over ordinary shares in the Company held directly or indirectly by each key management person, including their personally-related parties, is as follows: Held at 31 Dec 2007 Granted Exercised Expired Held at 31 Dec 2008 Directors G Bradley M Masterman D McEvoy B Pirola Executives D Colkin D Del Borrello 1,000,000 1,500,000 500,000 200,000 600,000 1,000,000 600,000 600,000 (1,000,000) (1,100,000) (500,000) (200,000) - (400,000) - - 600,000 1,000,000 600,000 600,000 3,200,000 2,800,000 (2,800,000) (400,000) 2,800,000 - 300,000 200,000 - - (75,000) - (75,000) 200,000 150,000 300,000 200,000 (75,000) (75,000) 350,000 Held at 31 Dec 2006 Granted Exercised Expired Held at 31 Dec 2007 Specified directors G Bradley M Masterman D McEvoy B Pirola D Greil (resigned 22 May 2007) Specified executives 1,000,000 1,500,000 500,000 200,000 900,000 4,100,000 - - - - - - D Del Borrello 150,000 150,000 - - - - - - - - - - - - - - 1,000,000 1,500,000 500,000 200,000 900,000 4,100,000 300,000 52| NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 NOTE 26: KEY MANAGEMENT PERSONNEL DISCLOSURE continued The details of the options held at 31 December 2008 are as follows: $1.75 Exercise price, expiring 31 May 2011 $1.95 Exercise price, expiring 31 Dec 2010 Total 2008 Total 2007 Specified directors G Bradley M Masterman D McEvoy B Pirola D Greil (resigned 22 May 2007) Specified executives D Colkin D Del Borrello 600,000 1,000,000 600,000 600,000 - 200,000 - - - - - - 600,000 1,000,000 600,000 600,000 - 1,000,000 1,500,000 500,000 200,000 900,000 - 150,000 200,000 150,000 - 300,000 3,000,000 150,000 3,150,000 4,400,000 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: Specified directors G Bradley M Masterman(i) D McEvoy B Pirola(i) Specified executives D Colkin D Del Borrello(i) Held at 31 Dec 2007 Purchased Shared based payments Options Exercise Sold Held at 31 Dec 2008 378,981 21,573,844 129,593 5,000 715,927 - 12,010,821 261,961 - 157,293 1,000,000 1,100,000 (250,000) 1,133,981 (100,000) 23,447,064 - - 500,000 (325,000) 304,593 200,000 (5,360,000) 7,112,782 34,093,239 982,888 157,293 2,800,000 (6,035,000) 31,998,420 - - - - - - 94,597 50,000 65,767 75,000 (170,568) 114,796 94,597 50,000 65,767 75,000 (170,568) 114,796 (i) Included above are shares held by related parties |53 NOTE 26: KEY MANAGEMENT PERSONNEL DISCLOSURE continued Held at 31 Dec 2007 Granted Exercised Expired Held at 31 Dec 2008 Specified directors G Bradley M Masterman(i) D McEvoy B Pirola(i) D Greil (resigned 22 May 2007) 323,981 21,464,242 129,593 12,010,821 695,989 55,000 50,000 - - 19,901 - 59,062 - - - 34,806,626 124,901 59,062 Specified executives D Del Borrello(i) 64,796 - 29,801 (i) Included above are shares held by related parties - - - - - - - 378,981 21,573,844 129,593 12,010,821 715,890 34,809,129 94,597 NOTE 27: SUBSEQUENT EVENT The Company announced on 23 February 2009 a private placement of 8,333,333 ordinary shares at $1.20 per share to institutional and sophisticated investors, seeking to raise $10,000,000. As at the date of this report, the Company had received $9,000,000 of the placement proceeds with the balance subject to shareholder approval at the Company’s Annual general meeting. It also contracted to sell all gas production until 2012 from the Castello and Sillaro fields to Italtrading SpA and Elettrogas SpA, both Italian gas trading and distribution businesses on a 50/50 shared basis. 54| Directors’ Declaration under Section 307C of the Corporations Act 2001 “PO VALLEY ENERGY LIMITED 1. i) In the opinion of the directors of Po Valley Energy Ltd (“the Company”): the financial statements and notes, as set out on pages 26 to 54, and the remuneration disclosures that are contained in the Remuneration report in the Directors’ report, are in accordance with the Corporations Act 2001, including: a. giving a true and fair view of the Company and the Group’s financial position as at 31 December 2008 and of their performance, for the financial year ended on that date. b. complying with Australian Accounting Standards and the Corporations Regulations 2001; ii) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1; iii) 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 2008 pursuant to Section 295A of the Corporations Act 2001. Dated at Sydney this 19th day of March 2009. Signed in accordance with a resolution of the directors: Graham Bradley Chairman Byron Pirola Non-Executive Director |55 Independent Audit Report for the year ended 31 December 2008 “PO VALLEY ENERGY LIMITED Report on the financial report Independent auditor’s report to the members of Po Valley Energy Limited We have audited the accompanying financial report of Po Valley Energy Limited (the Company), which comprises the balance sheets as at 31 December 2008, 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 13 to 48 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. 56| KPMG, an Australian partnership and a member firm of the KPMG network of indipendent member firms affiliated with KPMG International, a Swiss cooperative. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2008 Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. 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 2008 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 of the Group also complies with International Financial Reporting Standards. Report on the remuneration report We have audited the Remuneration Report included in Section 11 of the directors’ report for the year ended 31 December 2008. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with auditing standards. Auditor’s opinion In our opinion, the remuneration report of Po Valley Energy Limited for the year ended 31 December 2008, complies with Section 300A of the Corporations Act 2001. KPMG B C Fullarton Partner Perth 19 March 2009 KPMG, an Australian partnership and a member firm of the KPMG network of indipendent member firms affiliated with KPMG International, a Swiss cooperative. |57 “PO VALLEY ENERGY LIMITED Michael Masterman Hunter Hall Investment Management Pty Ltd Harbinger Capital Management Beronia Investments Pty Ltd1 Joan Masterman SG Hiscock &Company John Hancock Fund SUBSTANTIAL SHAREHOLDERS Name Shareholder Information 2008/2009 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 17 March, 2009. Number of ordinary shares held 23,447,064 18,956,767 16,156,244 7,112,782 4,788,444 4,759,191 3,500,000 Percentage of capital held % 22.93% 18.54% 15.80% 6.97% 4.68% 4.65% 3.42% 1 Interests associated with Non-Executive Director, Byron Pirola DISTRIBUTION OF SHARE AND OPTION HOLDINGS Ordinary Shares Options 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 83 201 105 157 47 593 23 Number of shares 49,923 602,353 864,012 4,673,368 96,078,440 Number of holders 0 0 0 0 6 102,268,096 6 Number of options 0 0 0 0 3,150,000 3,150,000 5,215 VOTING RIGHTS OF SHARES AND OPTIONS Refer to Note 17 and Note 20. ON-MARKET BUY-BACK There is no current on-market buy-back. 58| DISTRIBUTION OF SHARE AND OPTION HOLDINGS Name Number of ordinary shares held Percentage of capital held % Symmall Pty Ltd Beronia Investments Pty Ltd Cogent Nominees Pty Limited Citicorp Nominees Pty Limited Joan Masterman Equity Trustees Limited1 Michael Masterman 2 3 4 5 6 HSBC Custody Nominees 7 8 National Nominees Limited 9 10 Beronia FS Pty Ltd 11 Beronia FS Pty Ltd 12 Roy Rigotti 13 HSBC Custody Nominees Limited 14 Ken Ambrecht 15 ANZ Nominees Limited 16 Beronia Investments Pty Ltd 17 Cogent Nominees Pty Ltd 18 Bond Street Custodians Limited 19 Equity Trustees Limited 20 Holly Gibson 21,531,137 18,962,396 15,093,858 4,788,444 4,054,741 3,830,676 2,871,721 2,673,397 1,915,927 1,680,000 1,600,240 1,588,000 1,488,386 1,224,649 1,160,915 1,076,202 958,371 855,874 704,450 640,000 88,699,384 21.05% 18.54% 14.76% 4.68% 3.96% 3.75% 2.81% 2.61% 1.87% 1.64% 1.56% 1.55% 1.46% 1.20% 1.14% 1.05% 0.94% 0.84% 0.69% 0.63% 86.73% OPTION HOLDERS – UNQUOTED Number of ordinary options held Percentage of capital held % 1 Michael Masterman 2 Graham Bradley 3 David McEvoy 4 Byron Pirola 5 Douglas Colkin 6 Dom Del Borrello The total number of option holders is 6. RESTRICTED SECURITIES 1,000,000 600,000 600,000 600,000 200,000 150,000 3,150,000 Class Number of restricted Securities Non Executive Directors – unlisted Options Non Executive Directors – unlisted Options Executive – unlisted Options Executive – unlisted Options Executive – unlisted Options 600,000 600,000 399,999 75,000 400,000 31.75% 19.05% 19.05% 19.05% 6.35% 4.76% 100.00% Date of Release 1 June 2009 1 June 2010 1 June 2009 1 December 2009 1 June 2010 |59 “Notes PO VALLEY ENERGY LIMITED ABN 33 087 741 571 Level 28, 140 St George’s Tce Perth WA Australia 6000 Tel: +61 8 92782533