Po Valley Energy Limited ABN 33 087 741 571 0 1 0 2 T R O P E R L A U N N A - I D E T M I L Y G R E N E Y E L L A V O P PO VALLEY ENERGY LIMITED ABN 33 087 741 571 Registered Office Level 28, 140 St. Georges Terrace Perth WA 6000 Tel: (08) 9278 2533 2010 Annual Report CORPORATE DIRECTORY Directors Graham Bradley, Chairman Michael Masterman, Deputy Chairman David McEvoy, Non Executive Director Byron Pirola, Non Executive Director Gregory Short, Non Executive Director Chief Executive Officer Giovanni Catalano Company Secretary Lisa Jones Registered Office Level 28, 140 St George’s Tce Perth, WA Australia 6000 Tel: +61 8 92782533 Rome Office Via Boncompagni, 47 00187 Rome, Italy Tel: +39 06 42014968 Share Registry Link Market Services Limited 178 St Georges Terrace Perth, WA Australia 6000 Tel: +61 2 82807111 Solicitors Steinepreis Paganin Level 4, 16 Milligan St Perth, WA Australia 6000 DLA Piper Via Gabrio Casati, 1 20123 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. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information 2010/2011 Reserves & Resources Statement 2 3 4 14 18 27 28 29 30 31 32 63 64 66 68 Highlights 26.8 million cubic metres (0.9 bcf) Total gas production €4.3m (AUD 5.6m) Reduction in Bank of Scotland borrowing base 85,000 cubic metres (3 million cubic feet) Daily gas production 2,000 sq kilometers (494,200 acres) 100% licences area in Italy 2 producing gas fields 2 development fields 2 development projects 5 gas discoveries for appraisal 11 gas exploration prospects 2 oil exploration opportunities €7.1m (AUD 9.2m) Operating revenue 29.35 €cent/scm Average ENI gas release price for 2010 Strengthened Company’s Board and Senior Management team 44,000 man/hours With no incidents €2.2m (AUD 2.8m) Positive EBITDA 11.8 bcf 2P Total Proven Reserves PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 1 CHAIRMAN’S LETTER TO SHAREHOLDERS On behalf of the Board of Directors, I am pleased to present the Annual Report for the Company for 2010. During the past year, the Company achieved a number of significant operational and financial milestones, together with a transition of executive leadership. Gas production from the Company’s two wells in the Sillaro field commenced in mid-2010 and the combined production from our Sillaro and Castello fields totalled 26.8 million cubic metres (0.9 bcf) during the 2010 calendar year. Production from Sillaro was maintained at a consistent level above 80,000 cubic metres per day during the last six months to December and continued at that rate in the first quarter of 2011. Sillaro’s good production was offset, however, by the need to significantly reduce production from our Castello field due to water influx and poor gas flows. Geological analysis has confirmed that it will be necessary to drill a deviated well (Vitalba-1dirA) to exploit the remaining Castello reserves, and plans are underway for this new well to be drilled in mid-2011. Despite the setback at Castello, the Company’s operating revenues for the year were €7.1 million (AUD 9.2m). Earnings before interest, tax, depreciation and amortisation (EBITDA) in 2010 were €2.2 million, the first year in which the Company has generated positive EBITDA. Furthermore the Company reduced its debt facility with Bank of Scotland by €4.3 million during the year to a balance of €6.0 million at year end. The Company continued to grow its portfolio of exploration licences in 2010 with the preliminary grant of our first offshore licence, located in the Adriatic Sea. Since year-end, we also received final award of two promising exploration licences at Cadelbosco di Sopra and Grattasasso in the Po Valley region. During the year the Company engaged external experts to review comprehensively its reserves and resources, and the results of those reviews have been progressively reported to shareholders and are summarised in this annual report. In mid-2010, we were pleased to secure the services of Giovanni Catalano, a 30-year professional in the oil and gas industry, as our Chief Operating Officer. In October, following the decision by our founding Chief Executive, Michael Masterman, to retire from his executive role with the Company, Giovanni was appointed as Chief Executive Officer. He has brought to the Company the valuable expertise and experience acquired during his long career in the industry, including, most recently, his role as Chief Executive for the AIM listed, Italian-based company, Mediterranean Oil & Gas Plc. We thank sincerely our founding Chief Executive, Michael Masterman for his pivotal contribution to the Company. As a major shareholder, Michael remains actively engaged with the Company as a Non Executive Director and Deputy Chairman. During 2010, we also welcomed Greg Short to the Board. Greg is another veteran of the oil and gas industry with a long career in gas exploration and development with Exxon in a number of countries around the world. Greg’s expertise further strengthens the Board’s technical knowledge, particularly in geological and geophysical analysis. Your Directors share the disappointment of all shareholders in the poor performance of the Company’s share price during 2010 and the setbacks underlying that performance. We believe, however, that our executive team is now well placed to realise full value from the Company’s assets and I look forward to reporting more fully on our plans and progress during 2011. On behalf of shareholders, I would like to thank our small but hardworking management team for their efforts during 2010. I also thank my Board colleagues for their continued dedication and commitment. Graham Bradley Chairman Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 2 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 CHIEF EXECUTIVE OFFICER’S REPORT As the recently appointed Chief Executive Officer, I am pleased to report that in 2010 Po Valley Energy achieved its first full year of gas production and positive EBITDA from our 100% owned Sillaro and Castello gas fields in northern Italy. The Sillaro reservoirs are performing well, in line with expectations, and this has partially offset the unexpected decline in production from the Castello field. Key operational priorities for 2011 include to maintain steady production at the Sillaro gas field, drill Vitalba-1dirA with the aim of bringing the Castello field back into production, farm- out and drill the Fantuzza-1 well, progress an application for production concession for the Sant’ Alberto gas field, apply for authority to drill the Zini prospect (Correggio) and secure the Bezzecca production concession. As part of Po Valley’s commitment to sound growth, key appointments were made in 2010 to strengthen the Company’s senior management team consisting of Franco Benelli, Chairman Technical, Pierluigi Vecchia, Program Manager and Mariyam Musrepova, Corporate & Legal Officer. Sara Edmonson became our Finance Manager, Diego Balistreri was appointed Production & Development Manager, Giorgio Bertuzzi has taken the place of Exploration & New Projects Manager and Cristian Masini joined the Company as Petroleum Engineer. These additions bring valuable experience and a solid skill set to our established team in Rome. Looking forward, I believe the Company is now in a position to build on its success in bringing new fields into production with a new phase of growth involving already identified projects like Bezzecca, Sant’Alberto, Fantuzza, Correggio, offshore Adriatic and other medium-long term projects within our well-diversified exploration portfolio. We remain very focused on realising value from our existing Italian assets. On a personal note, I thank the Po Valley team for their remarkable efforts during this milestone year and look forward to a new phase of consolidation and growth which will allow the Company to deliver future value to shareholders. Giovanni Catalano Chief Executive Officer Total gas production for 2010 was 26.8 million cubic metres (0.9 bcf) generating annual revenues amounting to €7.1 million (AUD 9.2m). Castello and Sillaro continue to be the only new gas production fields in the Po Valley region to commence production since the end of the ENI-AGIP’s energy monopoly and the liberalisation of the Italian gas market in 1998. I am also pleased to report that the Company’s strong commitment to safety helped us to record zero lost time injuries during 2010. Following Castello’s pressure and production decline, our analysis confirmed that the Castello field has remaining probable gas reserves of 100.7 million cubic metres (3.6 bcf). Accordingly, we plan to drill a new Vitalba-1dirA well from the Castello plant location in mid-2011. If drilling is successful, production would restart without delay. During the past year the Company commissioned a thorough, independent review of its reserves and resources by Dedicated Reservoir Engineering and Management (DREAM) and UK- based RPS Group Plc, resulting in some adjustments to previously estimated reserves. Importantly, the review confirmed the Company’s solid resource and reserve base upon which to develop future production. The review results will also support our development strategy for the Bezzecca and Fantuzza gas fields. An application for a production concession in respect of the Bezzecca field has now been submitted to the Italian authorities. In parallel, the Company has continued to grow and analyse its exploration portfolio during 2010 and to confirm its best prospects for future drilling to unlock the upside potential of the Company’s extensive exploration assets. Some important milestones were achieved over the past 12 months, including: a positive resolution of the AR168PY Adriatic offshore application, the award of Cadelbosco di Sopra and the adjacent Grattasasso exploration permits with their near term development potential involving the already identified Zini and Canolo prospects, the acquisition of 2D seismic on the Cembalina and Sant’Alberto structures, drilling preparation in respect of the Gradizza gas prospect and the purchase of 124 kilometres of new seismic data in Castello and Cadelbosco/Grattasasso. Additionally, the Company is continuing to seek farm-out opportunities for certain assets in order to optimise the risk profile of future capital investments. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 3 PRODUCTION, DEVELOPMENT, EXPLORATION Overview ITALIAN GAS MARKET Italy is the 4th most populated European country and the 3rd largest European gas market after the UK and Germany. Despite its gas supply needs, in 2009 Italy produced only 8 billion cubic metres of gas (282 billion cubic feet) against a total consumption of 76 billion cubic metres (2.6 trillion cubic feet): these figures clearly show how Italy is deeply dependent on foreign energy sources, including Libya and Russia. In 2009 imports accounted for around 67 billion cubic metres of gas (2.3 trillion cubic feet). Demand for natural gas in Italy has grown rapidly over the last decades, increasing by 359% between 1973 and 2009, growing from just 17 billion cubic metres in 1973 to over 70 billion cubic metres in recent years. Italian gas prices are high by world standards, capital costs and transportation costs are very low resulting in highly attractive development economics. Po Valley gas production is contracted under formula based contracts with the pricing based on the ENI gas release formula, driven by diesel, fuel oil and crude oil prices. Prices under the formula averaged €0.29 per cubic metre through 2010, rising to approximately €0.31 in the first quarter 2011. The national transportation grid is more than 29,000 km long and the distribution network is well developed, covering 90% of the north of Italy where the Company operates. Sillaro is a good example of the extension and proximity to the pipeline grid: the production plant is only 200 metres away from to the national entry point, reducing time and costs to develop gas discoveries. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 4 PO VALLEY ENERGY • ANNUAL REPORT 2010 ENI GAS RELEASE (€ CENT/M3) TOTAL MAN-HOURS WORKED IN 2009-2010: 44,000 TOTAL LOST HOURS IN 2009-2010: 0 45 40 35 30 25 20 15 10 5 0 - - - - - - - - - 0 1 - n a J - - - - - - - - - - - - - - - - - - - - - - - 1 1 1 1 - - c n e a D J 0 1 - c e D 1 1 - r a M 0 1 - r a M 0 1 - b e F 1 1 - p e S 1 1 - b e F 0 1 - t c O 1 1 - t c O 0 1 - r p A 1 1 - r p A 1 1 - n u J 0 1 - n u J 0 1 - l u J 1 1 - l u J 1 1 - v o N 0 1 - v o N 1 1 - g u A 0 1 - g u A 1 1 - y a M 0 1 - y a M 0 1 - p e Z S SILLARO INSTALLATION VITALBA O&M 200 man hours SILLARO INSTALLATION VITALBA O&M 4,300 man hours 6,500 man hours 14,100 man hours 6,300 man hours 12,100 man hours VITALBA INSTALLATION SILLARO O&M Forecast provided by Alba Soluzioni 2009 2010 The Po Valley region, between the Alps and the Apennines, is the main gas production zone in Italy. Having operated in Italy for the past 10 years, the Company is experienced in Italy’s regulatory process and has successfully managed each stage of the exploration and production business. The Company and local management team’s experience in Italy represent a significant competitive advantage to successfully exploit the Italian gas market potential. its SUSTAINABILITY Po Valley Energy strives to maintain and continuously improve high standards of health, safety and environmental (HS&E) practice through its operations. Safety was a priority in 2010, during the buildup of our second gas production plant as well as during the Operation and Maintenance activities. In the last two years both of our production surface facilities have been constructed, installed and managed with a cumulative total of circa 44,000 man hours on site without a single lost time incident and strong safety controls: only two minor accidents were recorded, with no consequences. As the Company entered into permanent activities, one of the goals became the establishment of a simple but clear and defined set of procedures to be easily used by everybody if an emergency occurs. When the Company plans an operation its choice of Contractors is strongly influenced by the objective of minimizing any possible interference and/or disturbance to local communities. We believe in the importance of a clear, open and continuous relationship with the local communities: this has been the success key for the most of our operations. We established commencing with our activities in 2004, a solid communications network with all the local authorities involved in the areas of operations, achieving a positive and supportive response from the national, regional and local authorities. to HS&E objectives shared by The committment Company’s staff and contractors is a key priority for Po Valley. The Company encourages and promotes a proactive communication environment to develop, implement and monitor its HS&E systems. PROJECT PIPELINE & OPERATIONS MARCH 2011 EXPLORATION APPRAISAL/DEVELOPMENT PRODUCTION LICENCE APPLICATION (cid:129) La Risorta - Ariano - Corcrevà - D. Delle Anime (cid:129) GR27NS (cid:129) Tozzona LICENCE GRANTED (cid:129) Opera - Donnino (cid:129) P. Gallina - Cembalina - F. Perino - C. Rossa (cid:129) La Prospera - Gradizza - Pioppette - Capitello (cid:129) Terra del sole LICENCE APPLICATION (cid:129) AR168PY - Carola - Irma - Azzurra - Ginevra LICENCE GRANTED (cid:129) Crocetta - Fantuzza (cid:129) Cadelbosco/ Grattasasso - Canolo - Zini - Correggio - Bagnolo (Oil) - Ravizza (Oil) LICENCE APPLICATION LICENCE GRANTED (cid:129) S. Vincenzo - Sant’Alberto (cid:129) C. Castello - Vitalba (cid:129) C.S. Pietro - Bezzecca (cid:129) Sillaro - Sillaro Undiscovered Prospective Resources Discovered Contingent Resources Reserves Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 5 PRODUCTION Sillaro The Sillaro gas field, located 30 km east of Bologna, was originally explored by ENI (former Budrio field) in its upper Miocene sequence with six wells between 1955 and 1982. During 2005 the Company drilled the Sillaro-1dir well into the Pliocene sequence and in July 2009 a second production well (Sillaro-2dir) was designed and drilled to produce from multiple levels to increase overall flow rates and optimise total field recovery. Testing at Sillaro-2dir well confirmed a total of six gas-bearing levels. In September 2009, the Company received authorisation to install the surface plant to develop the discovered field. 2010 WORK: In May 2010, the field commenced production from levels A and E of Sillaro-2dir. Later, in June 2010, the Sillaro-1dir well was connected to produce from levels C1+C2. In June/July 2010, the Company engaged Dedicated Reservoir Engineering and Management (DREAM), a technical consultancy firm associated with the Polytechnic of KEY INFORMATION Production Concession Interest: 100% Wells: Location: Bologna, Emilia Romagna Production: Production start: Q2 2010 Remaining Reserves: 2 in place 2.9 mmcf/day 1P 7.5 bcf 2P 8.2 bcf Invested capital €16.1 m Turin, to conduct a static and dynamic reservoir study to re-assess the field recoverable reserves. The resulting assessment indicated Sillaro proven (1P) reserves of 230 million cubic metres (8.1 bcf) and proven plus probable (2P) reserves are estimated to be 248 million cubic metres (8.8 bcf). During 2010 Sillaro achieved a total production of 18.5 million cubic metres (0.65 bcf) and from the 1st of October 2010 its production is set at an average rate of 83,000 cubic metres/day (2.9 mmcf/day). The field is producing with and pressure flow stable performance, the in Company’s production plan. line with gas DEVELOPMENT PLAN: The Company will continue the production of natural gas, carefully monitoring performance and in accordance with the contracted gas rates for the 2010- 2011 Gas Thermal Year of 83,000 cubic metres/day (2.9 mmcf/day). Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 6 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 PRODUCTION Cascina Castello The Vitalba-1dir well, located east of Milan, was drilled by the Company in 2005 at a structural location updip from the former ENI Agnadello-1 gas well, which produced from 1980 to 1989 about 358 million cubic metres (12.6 bcf). The Vitalba-1dir was completed to commingle over two gas bearing levels. After receiving a 20-year production concession award in November 2008, the Company started surface plant construction. installation approval the Ministry of Economic Development was granted in December 2009 and Vitalba gas production commenced on 17th December 2009. Final from Interest: Location: Production start: 2010 WORK: The plant started gas production smoothly, ramping up to around 60,000 cubic metres per day (2.1 mmcf/day) through to the period of April 2010, after which the well experienced an unexpected decline in wellhead pressure and subsequent water incursion. During May and June 2010, three rounds of down-hole test and interventions were completed. The first test identified that water influx occurred in the deepest level and this level was consequently shut off, leaving only the shallower level open. The second test, completed late in June, indicated that the performance problem of the shallow level was due to the low permeability of the reservoir. An extensive in-house geological and geophysical re- evaluation of the field including incorporation of 13 km of 2D seismic data recently purchased from ENI, was carried out. Also a static and dynamic reservoir study by DREAM was performed in July 2010. DEVELOPMENT PLAN: The Company’s plan is to side- track the existing well with the aim to recover the KEY INFORMATION Production Concession 100% Wells: 1 in place to be sidetracked Milan, Lombardia Production: 2.3 mmcf/day post side strack Q4 2009 Remaining Reserves: 1P 0.1 bcf 2P 3.6 bcf Invested capital €9.5 m remaining attic gas, estimated to be 100 million cubic metres (3.5 bcf). Starting from the current Vitalba-1dir location, the bottom hole of the new side-track was identified using the recent geological, geophysical and engineering studies. The side- track will then be connected to the existing Vitalba gas treatment plant to allow production re-start. The estimated cost of the side-track is approximately €2.5 million (dry-hole basis) and €3.5 million completed over two gas bearing zones in single selective mode. Authorisation to drill was granted in March 2011. Production currently continues at Vitalba-1dir at around 3,500 cubic metres per day (0.12 mmcf/day). Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 7 DEVELOPMENT San Vincenzo Sant’Alberto The Sant’Alberto gas field, 40 Km north of Bologna, was drilled and discovered the Santa through Maddalena-1dir well in 2004. The drilling target was the western side (Block 5) of the former ENI San Pietro in Casale gas field with an historic production from 4 wells of 178 million cubic metres (6.2 bcf). Edison, the former operator, submitted a production concession application in July 2006. In March 2008, Po Valley gained 100% ownership of the licence from Edison and the Ministry confirmed that the Company was the sole operator/owner. following February partner and the Following 2010 WORK: the Ministry’s approval of the revised work program, the Company completed an initial reservoir study on Block 5. In February 2011, 31 line-kilometer of 2D seismic survey were acquired. Preliminary results from the processing of lines are promising, with direct hydrocarbon these new seismic KEY INFORMATION Application for Production Concession Interest: 100% Wells: 1 in place +1 development Location: Bologna, Emilia Romagna Expected production: 0.9/1.8 mmcf/day Production start: Q4 2012 Contingent Resources: 1C 3.9 bcf 2C 8.9 bcf Invested capital €1.3 m indicators accumulation being present. related to the gas DEVELOPMENT PLAN: The structural interpretation of the new 2011 seismic data, integrated with ENI’s pre-existing seismic, together with the recently completed field’s review by RPS, will allow the Company to define a viable development plan to be submitted the Ministry. The Company is committed to commencing commercial production from this field in the shortest timeframe. to Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 8 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 DEVELOPMENT Cascina S.Pietro Bezzecca The Bezzecca gas field (former ENI Pandino gas field) is located 35km east of Milan. The field was originally brought into production in the 1950’s by ENI; historic production from 8 wells was 148 million cubic metres (5.2 bcf) of gas. Bezzecca-1 well was drilled by the Company in March-May 2009 to a depth of 2,010 metres and it was tested across three gas bearing levels of lower Pliocene and upper Miocene in age. The tests did flow at stabilized rates and exhibited rapid full pressure recovery. The well was then completed in single selective mode over three gas bearing levels. KEY INFORMATION Application for Production Concession Interest: Location: 100% Wells: 1 in place + 1 development Milan, Lombardia Expected Production: 0.5-1.2 mmcf/day Production start: Q1 2013 Contingent Resources: 1C 0.7 bcf 2C 3.1 bcf Invested capital €4.5 m 2010 WORK: The results of Bezzecca-1 well have been the basis for an integrated re-evaluation of the field, including petrophysics, seismic re-mapping and reservoir simulation. The evaluation was completed in- house with the support of external consultancy with results that have identified a more complex geology than originally interpreted with variable petrophysical characteristics. to DEVELOPMENT PLAN: According to the evaluation results supported by the recent field’s review by RPS, the Company’s current plan is to connect Bezzecca 1 well the Vitalba production plant by way of an 8 km gas gathering line. A subsequent second development well (Bezzecca-2) to drain the area of the field structurally updip of Bezzecca-1 well, is planned as part of a two-stage development programme. The application for the production licence was lodged with the Ministry in January 2011 as an extension of the nearby Cascina Castello Production Concession. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 9 DEVELOPMENT Fantuzza KEY INFORMATION Exploration Licence Interest: 100% Wells: 1 appraisal/development + 1 development Location: Bologna, Emilia Romagna Expected production: 1.6/4.2 mmcf/day Production start: Q1 2013 Remaining Contingent Resources: 1C 1.5 bcf 2C 5.4 bcf Invested capital: €0.2 m Crocetta After the discovery of the Sillaro gas field, the Crocetta Exploration Licence is now under a three years extension. The drilling program for the Fantuzza-1 well (estimated total depth of 2,600 metres) is waiting for final authorisation. The programme is designed to test the gas the upper Miocene potential of reservoirs successfully drilled in the 1950’s by ENI with the Budrio wells. to study re-assess 2010 WORK: A static and dynamic reservoir the recoverable reserves from the Fantuzza structure was carried out by DREAM in June-July 2010. From the general geological settings of the area, from correlations of well logs and from seismic maps of the main gas levels, a static model was bearing generated. Based on this work, a dynamic model was then created and calibrated with the interpretation of production tests from the existing wells in the area. The calibration was also based on the short production history of the Budrio field that produced around 10 million cubic metres (0.35 bcf) of gas over few months. The resulting estimated original resources were: proven contingent recoverable resources (1C) of 53 million cubic metres (1.9 bcf) and proven plus probable contingent recoverable resources (2C) of 163 million cubic metres (5.8 bcf). DEVELOPMENT PLAN: The Fantuzza-1 drilling program has received environmental clearance and the final drilling approval from the Ministry is expected shortly. Anticipated production from 2 wells is estimated to be in the order of 120,000 cubic metres per day (4.2 mmcf/day) for a period of more than three years. Assuming exploration success, the wells, when successfully completed, will be connected to existing Sillaro production facility via approximately 2 km of gas gathering line. The Company is considering a farm-out campaign to fund the cost of Fantuzza-1 well (€4.5 million, dry hole basis). Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors Report Lead Auditor’s Independence Declaration Statement of Financial Position 10 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 DEVELOPMENT Cadelbosco di Sopra/ Grattasasso Correggio LICENCE STATUS: The contiguous exploration permits Cadelbosco di Sopra and Grattasasso, containing the former Correggio gas field, were both awarded to the Company in February 2011. carried out by DREAM. The first results have identified two promising Quaternary prospects, named Canolo (2C 1.2 bcf) and Zini (2C 3.0 bcf) as possible near term drilling candidates, while the evaluation work continuing for the Pliocene targets. UPDATE: A preliminary exploration assessment in 2009 of the former ENI Correggio gas field (gas produced: 7.1 billion cubic meters – 253 bcf), confirmed the presence of remaining gas potential in this area. The interpretation of a recently purchased package of 111 km of ENI 2D seismic lines, is being integrated with production history from 41 wells drilled by ENI in the past. A static and dynamic reservoir study to assess the remaining Quaternary and Pliocene recoverable reserves of the area of the former Correggio gas field is being KEY INFORMATION Exploration Licence The two licence areas also include the Ravizza and Bagnolo in Piano oil discoveries (previous estimates indicate potential recoverable volumes in order of the 5 mmbbls each). An evaluation to determine potential viability of both disco ve ries is underway. Interest: 100% Wells: 1+1 appraisal/development Location: Reggio Emilia, Emilia Romagna Expected Production: 1.8 mmcf/day Production start: Q3 2013 Contingent Resources (Quaternary): 1C 1.2 bcf 2C 4.2 bcf Invested capital €0.4 m Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 11 EXPLORATION New Projects The Company worked relentlessly during the past year to progress the development of the numerous projects within its portfolio. The most advanced project developed in 2010 has been La Prospera, located in the Ferrara province, north of Bologna. The Exploration Permit was awarded in September 2008 and a subsequent seismic interpretation of 68 km of ENI seismic identified whithin the Quaternary sequence the Gradizza prospect with predicted target depth of 1,000 metres and prospective best estimates resources of 265 million cubic metres (9.0 bcf). lines has The drilling program was lodged to the Ministry during January 2010 and the project is presently waiting for Environmental Impact Assessment (EIA) clearance. Interpretation work on the licence is continuing in order to better define the exploration gas potential of the permit. Assessment of the Cembalina shallow gas prospect (predicted total depth of 1,200 metres) in the Podere Gallina exploration permit was advanced. The prospect carries prospective best estimate resources of 280 million cubic metres (9.8 bcf). In order to confirm Cembalina structural framework and assist in selecting the best location for an exploration well, an infill 2D seismic survey of 15 line-kilometers was completed at the beginning of March 2011 and will be incorporated into the ongoing evaluation. On the same licence, additional geological and geophysical interpretation work is planned for the Casa Rossa structure. AR168PY: The AR168PY offshore exploration licence application covers an area of 526 km2 in the northern Adriatic Sea (water depth: 30/50 m) and includes four gas discoveries: Irma/Carola, Adele, Azzurra and Ginevra. During 2009, a preliminary evaluation was completed highlighting the potential of the discoveries, in particular the Irma-Carola structure. The Company expects full grant in late 2011. The working plan is to purchase Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors Report Lead Auditor’s Independence Declaration Statement of Financial Position 12 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 the Company On the La Risorta exploration granted), (preliminary permit located in the north east of Ferrara province, is progressing studies for promising gas prospects (Dosso delle Anime, Ariano and Corcrevà) with target depths ranging from 1,200 and 2,100 Preliminary evaluation of total prospective resources amount to 43.7 bcf (unrisked). Purchase of existing seismic is planned in order to finalize the prospects gas potential and select drilling locations. metres. A new application, called Tozzona, was June 2010. The application borders the existing ENI filed in already existing 3D seismic data from ENI and carry out a reservoir study for the final assessment of resources that should lead to a timely appraisal of the gas discoveries. gas production licence Santerno, which produced 905 million cubic metres (32 bcf) to date. The main gas targets are represented by Mio-Pliocene reservoirs within structural traps. The Hydrocarbon Committee ruled in PVE’s favour against a competing bidder in February 2011 therefore, the Company expects to receive a preliminary award in the near future. The Reserves & Resources statement summary table can be found on page 68. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 13 CORPORATE GOVERNANCE STATEMENT PO VALLEY ENERGY (“the Company” or “PVE”) and its Board of Directors are committed to achieving the highest standards of corporate governance and acknowledge that this is essential in creating and building sustainable value for shareholders. The Directors aim to meet the standards of corporate governance for listed companies as set out in the Corporate Governance Principles and Recommendations of the ASX Corporate Governance Council (ASX for the Recommendations), appropriately adapted Company’s size and stage of development. A description of the Company’s main corporate governance practices is set out below. BOARD & MANAGEMENT The Board and management believe their primary responsibility is to maintain and grow the value of the Company for its shareholders, while respecting the legitimate interests and expectations of employees, customers, creditors, the communities in which PVE operates and other stakeholders. The Board accepts that it has the responsibility for establishing a culture of high ethical, environmental, health and safety standards and internal control procedures within the Company. The Board has a formal charter and has established the functions reserved to the Board and those delegated to senior management. The key responsibilities of the Board are to review, advance and approve PVE’s objectives and strategies, business plan and annual budget, exploration and development programs and capital management. The Board monitors PVE’s businesses, financial performance and corporate governance, oversees the financial position of PVE and reports to shareholders, ensuring effective management processes and control systems are in place. The Board is responsible for appointing and appraising the CEO and oversees the senior management team in terms of performance evaluation, succession planning and remuneration. it for to undertake Structure of the Board The Board comprises five Non Executive Directors. The Board has been structured to provide a team of Directors with a range of skills, expertise and experience its duties and appropriate responsibilities for the proper and effective management of the Company’s business and affairs. In particular the composition of skills, expertise and experience of the Directors span the areas of oil and gas exploration and development, resources and mining, finance, management consulting, public company affairs and corporate governance. Please refer to the Directors Report on page 19 for details of the skills and experience of each Director and their term of office. Independence The Company currently has three independent Non Executive Directors being Graham Bradley (Chairman), David McEvoy and Gregory Short and two Non Executive Directors who are not considered independent, Byron Pirola and Michael Masterman. Dr. Pirola is not considered to be independent as he currently controls slightly more than 5% of the Company’s shares. Mr. Masterman is not considered to be independent as he was, until October 2010, employed as the Company’s Chief Executive Officer and is also a substantial shareholder. The Board assesses the independence of its Directors annually and in doing so has careful regard for, amongst other things, the ASX Recommendations on independence of Directors. Under the Company’s Constitution, one-third of the Board is subject to re-election at each annual general meeting. In determining whether an interest or relationship is Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 14 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 considered to interfere with a Director’s independence, the Board has regard to the materiality of the interest or relationship. PVE considers the relationship to be material when: • Where the Director is a professional adviser or consultant to PVE or its affiliates (or officer of or associated with such person) the payments from PVE to such adviser or consultant exceed 10% of PVE’s annual expenditure to all advisers and consultants or where such payments exceed 10% of the recipient’s annual revenue for advisory or consulting services; • Where the Director is a supplier or customer to PVE or its affiliates (or officer of or associated with such person) the Company considers the relationship to be material where the payments from PVE to that supplier or customer exceed 10% of the annual consolidated gross revenue of either PVE or the customer or supplier. Independent Advice Directors have the right, in connection with their duties and responsibilities as Directors, to seek independent professional advice at the Company’s reasonable expense. Prior approval of the Chairman is required which will not be unreasonably withheld. EVALUATION OF PERFORMANCE OF SENIOR EXECUTIVES to The Remuneration & Nominations Committee is responsible for reviewing the ongoing performance of the CEO and ensuring there is an appropriate process to review the performance of Senior Executives and for the performance objectives of Senior approving their performance-based Executives applicable remuneration. Each year, the Remuneration & Nominations Committee approves Company and individual performance targets for the CEO and Senior the coming year and evaluates Executives performance and approves any performance based remuneration for the CEO, Senior Executives and management in respect of the preceding 12 month period. Performance targets are a combination of company and individual objectives. The Remuneration & Nominations Committee evaluated the performance of the CEO and Senior Executives in accordance with this process in December 2010. for REMUNERATION & NOMINATIONS COMMITTEE The Company has a Remuneration & Nominations Committee which provides recommendations to the Board on matters including: • Appointment and evaluation of the CEO and process for evaluation of senior executives. • Composition of the Board and competencies of Board members to add value to the Company. • Succession planning for Board members and senior management. • Processes for the evaluation of the performance of the Directors. The current members of this committee are Graham Bradley (Chairman), Byron Pirola and Michael Masterman, appointed 1 January 2011. Details of attendance of committee meetings during 2010 can be found on page 20 of the Directors Report. The Remuneration & Nominations Committee reviews Board performance annually, as set out in the Company’s Board Charter. As part of the annual Board review, all Directors must a Board Evaluation Questionnaire, the results of which are then analysed and considered by the Board. The last such review was conducted in January 2011. complete The Board regularly reviews its composition to determine whether it has the right mix of skills and experience. This process led in 2010 to the appointment of Mr. Gregory Short, an experienced oil and gas executive, to expand the Board’s technical and geophysical expertise. The Remuneration & Nomination Committee has a formal charter published on the Company’s website. AUDIT AND RISK COMMITTEE The Company has established an Audit & Risk Committee to provide advice and assistance to the Board in discharging its corporate governance and oversight responsibilities in relation to the Company’s financial and market reporting, internal accounting and financial control systems, internal audit, external audit, risk management system and such other matters as the Board may request from time to time. The Committee has adopted a formal charter which is published on the Company’s website. In discharging its obligations, the Committee has direct the auditors or any other access independent experts and advisers it considers appropriate to carry out its duties. to employees, The current members of the committee are Byron Pirola (Chairman), David McEvoy and Gregory Short. The Committee has been structured so that it: • Comprises only Non Executive Directors; • Has a majority of independent Directors; • Has a chairman who is not the chairman of the Board; and • Comprises members with the appropriate financial and business expertise to act effectively as a member of the Audit Committee. • The Company’s remuneration policies and practices and the remuneration of the CEO, senior executives, and Non Executive Directors. The qualifications of the members of the Audit Committee, the number of meetings and attendance at those meetings is set out in the Directors Report on page 20. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 15 RISK MANAGEMENT reviewed and updated as necessary to ensure it reflects the highest standards of behavior and professionalism. 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 has been required to design and implement a risk management and internal control system to manage material business risk and reported to the Board during the year on whether those risks are being managed effectively. The CEO has provided written statements to the Board for each reporting period confirming that the Company’s system of risk management and internal compliance and control complies with the recommendations set out in the ASX Corporate Governance Recommendations. STANDARDS AND CODES OF CONDUCT All executives and employees are required to abide by all applicable 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, regulators and the community. The Company has adopted a code of conduct, which will be CONTINUOUS DISCLOSURE The Company is committed to complying with its continuous disclosure obligations as set out in the ASX Listing Rules and the ASX Recommendations. The Company has adopted a Continuous Disclosure Policy designed to ensure that investors can readily have sufficient information to ascribe to a fair value to the the Company’s 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 proprietary information. securities, understand SECURITIES TRADING The Company has adopted a Securities Trading Policy which provides guidance to Directors and employees on the law relating to insider trading, and provides them with practical guidance for avoiding unlawful transactions in Company securities. This policy was revised and amended in late 2010 in order to comply with recent amendments to the ASX Listing Rules applicable to securities trading policies. Specifically, Directors and employees are not permitted to engage in short term trading of the Company’s securities and are generally prohibited from trading in securities during “black-out” periods being the periods from the end Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 16 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 of the full or half year reporting period (31 December and 30 June) until the next trading day after announcement of the full or half year results as applicable. In any event, any trading in securities by Directors or employees is subject to the prior approval of the Chairman (in the case of Directors), the Chairman of the Audit Committee (in the case of the Chairman) or the CEO or Company Secretary (in the case of other employees). RELATED PARTY MATTERS Directors and senior management are required to advise the Chairman of any related party contract or potential contract. The Chairman will inform the Board and the reporting party will be required to remove himself/herself from all discussions and decisions involving the matter. The Board may, when appropriate, take further steps to avoid conflicts of interest in related party matters. SHAREHOLDER COMMUNICATIONS The Company aims to ensure that shareholders, on behalf of whom they act, and the financial market have timely access to material information concerning the Company. The Company’s shareholder communications policy sets out the communication guidelines established by the Company. The Company uses its website to complement the official release of material information and periodic reports to the market including ensuring that all press releases, ASX announcements and notices of and presentations made at general meetings for at least the past three years are available on the Company’s website. is committed to ensuring that all The Company shareholders have the opportunity to participate in the Company’s annual general meetings. In order to facilitate this, from 2010 the Company has provided shareholders for the opportunity consideration by the Board at the annual general meeting. to submit written questions CORPORATE GOVERNANCE POLICIES AND CHARTERS Information on PVE’s corporate governance practices and policies is available on the Company’s web site, www.povalley.com. In particular, copies of the following documents are available in the corporate governance section of the Company’s website: • Board & Governance Charter; • Code of Conduct; • Continuous disclosure Policy; • Securities Trading Policy; • Risk Management Policy; • Audit & Risk Committee Charter; • Remuneration & Nominations Committee Charter; • Risk Management Policy; • Shareholder Communication Policy. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 17 DIRECTORS’ REPORT The Directors present their report together with the financial report of Po Valley Energy Limited (“the Company” or “PVE”) and of the Group, being the Company and its controlled entities, for the year ended 31 December 2010. 1. Directors DIRECTORS M Masterman B Pirola G Bradley D McEvoy G Short THE DIRECTORS OF THE COMPANY at any time during or since the end of the financial year are: DATE OF APPOINTMENT 22 June 1999 (Managing Director) 11 October 2010 (Non Executive Director) 10 May 2002 30 September 2004 30 September 2004 5 July 2010 Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 18 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 Information on Directors The Board is composed of a majority of Non Executive Directors, including the Chairman. The Chairman of the Board is elected by the Board and is an independent Director. Byron Pirola Non Executive Director BSc, PhD Age 50 Gregory Short Non Executive Director BSc Age 60 Byron is a co-founder of PVE and is based in Sydney. He is currently a Director of Port Jackson Partners Limited, a Sydney based strategy management consulting firm. Prior to joining Port Jackson Partners in 1992, Byron spent six years with McKinsey & Company working out of the Sydney, New York and London Offices and across the Asian Region. He has extensive experience in advising CEOs and boards of both large public and small developing companies across a wide range of industries and geographies. Byron is Chairman of the Audit and Risk Committee and member of the Remuneration and Nominations Committee. Greg Short was appointed Non Executive Director in July 2010. Greg is a geologist who worked with Exxon in exploration, development and production geosciences and management for 33 years in Australia, Malaysia, USA, Europe and Angola. During his time in Europe, Greg was actively involved in Exxon's activities in the Netherlands and Germany. Greg was Geoscience Director of Exxon's successful development of its Angola offshore operations. Greg retired from Exxon in 2006 and is a Non Executive director of ASX listed MEO Australia and Pryme Oil and Gas Limited. Graham Bradley Chairman BA, LLB (Hons), LLM, FAICD Age 62 Graham joined PVE as a director and Chairman in September 2004 and is based in Sydney. He is an experienced Chief Executive Officer and listed public company director. Graham previously served as Chief Executive Officer of one of Australia’s major listed funds management and financial services groups, Perpetual Limited. He was formerly Managing Partner 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 currently Chairman of Stockland Corporation Limited, HSBC Bank Australia Limited and Anglo American Australia Limited. Graham is Chairman of the Remuneration and Nomination Committee and was a member of the Audit and Risk Committee until December 2010. Michael Masterman Non Executive Director BEcHon Age 48 Michael is a co-founder of PVE. Michael took up the position of Executive Chairman and CEO of PVE and Northsun Italia S.p.A. in 2002 and resigned in October 2010 to take on an Executive role with Fortescue Metals Group Limited. Prior to joining PVE he was CFO and Executive Director of Anaconda Nickel (now Minara Resources). Michael oversaw the financing of the US$1 billion Murrin Murrin Nickel and Cobalt project in Western Australia, involving the negotiation of a US$220m joint venture agreement with Glencore International and the raising of US$420m in project finance from a US capital markets issue – the first of its kind for a green fields mining project. Prior to joining Anaconda Nickel, he spent 8 years at McKinsey & Company serving major international resources companies principally in the area of strategy and development. He is also Executive Chairman of Caspian Holdings Plc, an AIM listed company with oil interests in the US. Mr. Masterman became a member of the Remuneration & Nomination Committee from 1 January 2011. David McEvoy Non Executive Director BSc, Grad Diploma (Appl. Geophysics) Age 64 David joined PVE as a Director in September 2004 and is based in Sydney. He has over 37 years experience in the oil and gas industry since joining Esso Australia Limited in 1969. Key positions held within Exxon affiliates included Esso Australia Limited’s Exploration General Manager, Exploration and Development Vice President for Esso Resources Canada and Regional Vice President of Exxon Exploration Company responsible for Exxon’s exploration activities in the Far East, USA, Canada and South America. He was recently the Business Development Vice President and member of the Management Committee of Exxon (subsequently ExxonMobil) Exploration Company, responsible for new exploration and development opportunities worldwide. He is currently a Non Executive Director of Woodside Petroleum Limited, Australian Worldwide Exploration and Innamincka Petroleum Limited. David is a member of the Audit and Risk Committee. 2. Company Secretary Lisa Jones Company Secretary LLB Lisa was appointed to the position of Company Secretary in October 2009. She is a corporate lawyer with over 16 years experience in commercial law and corporate affairs, working with large public companies and emerging companies in Australia and in Europe. She was a senior associate in the corporate & commercial practice of Allen Allen & Hemsley and spent several years working in Italy, including as international legal counsel at Pirelli Cavi and as an associate in the Rome office of a national Italian firm. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 19 3. Directors Meetings The number of formal meetings of the Board of Directors held during the financial year and the number of meetings attended by each Director is provided in the adjacent table: 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 • Production and sale of gas from the Group’s production wells. 5. Earnings per Share The basic and diluted loss per share for the Company was 2.11€ cents (2009: 6.99 € cents). 6. Operating and Financial Review During the year, the Company continued production from the Castello gas field and commenced production from the Sillaro gas field in May 2010. The Company’s 2010 full year production was 26.8 million cubic metres of gas (946 million cubic feet). Castello, which started on 17 December 2009, produced 8.3 million cubic metres during the full year. The newly installed plant ramped up smoothly to around 60,000 cubic metres per day through the period to April 2010. At this point the Company became concerned with the rate of pressure decline and the field was stopped for testing. Following evaluation work the ensuing three month period, the Company concluded that future production from the Vitalba -1dir well would be limited and that a new deviated well Vitalba -1dirA would be required to access the original reserves updip of the older Agnadello 1 well 400m to the South of Vitalba-1dir. The planned Vitalba-1dirA well will be deviated from the current Castello plant location and connected to the existing Castello production plant. Subject to drilling success, production is planned to recommence in the second half of 2011. The development plan has been modified to incorporate the new well and submitted to the responsible Italian regulatory authorities. The final authorisation was issued in the 1st Quarter of 2011. In the interim, Vitalba-1 dir has been operating at limited rates and is currently producing at approximately 3,000 cubic metres per day. 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 G Short* 11 11 2 2 3 3 11 11 n/a n/a n/a n/a 11 11 2 2 n/a n/a 11 11 2 2 3 3 5 5 n/a n/a n/a n/a * Appointed 5 July 2010 - was elegible to attend 5 meetings 1 October 2010. In 2010, Sillaro produced 18.5 million cubic meters following May start up and is currently running at approximately 83,000 cubic metres per day (2.9 million cubic feet per day) in accordance with the contracted gas rates for the 2010 – 2011 Gas Thermal Year. Progress was also made on the development front with plans and applications for Bezzecca and Sant’Alberto gas fields. New seismic will be shot on the Sant’Alberto field in the first quarter of 2011. As reported in detail in the 2010 March quarterly, the 3.1 bcf of 2P gas reserves of the Bezzecca field were significantly decreased compared to the pre-drilling reserve estimates of 44 bcf. Detailed field reservoir modelling and production forecast simulations on the Bezzecca gas field were carried out by independent experts during 2010 (based on the appraisal well drilled and tested in April 2009). The Company has finalised a phased development plan for the field which was submitted to the relevant authorities in January 2011. Geological, exploration and appraisal work advanced on a number of the company’s prospects. Based on this work our forward drilling program for the next 24 months is expected to cover the appraisal of the Fantuzza gas field, the appraisal of Quaternary gas prospects in Correggio and the drilling of the exploration gas prospects of Gradizza and Cembalina, subject to ongoing technical assessment, regulatory approvals and available finance. In 2010, with the production from the Castello and Sillaro gas fields, the Company generated €7,157,331 in revenues. Operating efficiencies were also achieved and evidenced by the improvement in operating margin during the last six months of the year. Earnings before interest, tax, depreciations and amortisation amounted to €2,218,895 for the full year 2010. The consolidated loss after income tax amounted to €2,323,598 (2009: €7,202,805). Included in the results is an amount totalling €1,075,168 (2009: €5,108,595) relating to production, exploration and evaluation expenditure impaired. Sillaro commenced production initially from Sillaro-2dir (Pliocene PL2-A and PL2-E levels ) on 18 May 2010, followed by Sillaro-1 (PL2 C1/C2 levels) on 14 June 2010. The Sillaro gas field demonstrated stable plant and pressure performance during the balance of 2010. The rate of production from the Sillaro field was gradually increased during the commissioning period and subsequently stabilised at the start of the Gas Thermal Year, During the period, repayments of borrowings totalled €4,279,269 effectively reducing the Company’s drawings on the Bank of Scotland facility from €10,279,269 to €6,000,000 at 31 December 2010. Share issues during the period were limited to employee bonuses. A total of 368,980 shares were issued at a price of €0.16 (A$0.21) (156,338 shares issued) and €0.22 (A$0.33) (212,642 shares issued). The share price was calculated Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 20 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 All senior executives except the company secretary are based in Rome and when setting their remuneration the Board must have regard to remuneration levels and benefit arrangements that prevail in the European oil and gas industry which remains highly competitive. After reviewing external market benchmarks and considering the company’s financial position, the board has determined an appropriate remuneration package for the new Chief Executive Officer, Giovanni Catalano comprising base pay, benefits and bonus incentives based on agreed performance objectives and payable, if earned, in cash or shares at the Company’s direction. Since listing in 2004, the Company has largely based its long- term incentive plans on issues of shares and options vesting over 3 year periods rather than cash payments to minimise calls on the company’s cash reserves. In 2010, employees were given the choice to receive their short-term bonus in shares or cash. Depending on the Company’s cash reserves, on an annual basis the Board will review the method of payment (i.e. cash compared to share-based payments) for employee short-term bonuses. Consequences of performance on shareholder wealth In considering the consolidated entity’s performance and benefits for shareholders wealth the Board has regard to the indices presented in the table below in respect of the current financial year and the previous financial period. In establishing performance measures and benchmarks to ensure incentive plans are appropriately structured to align corporate behaviour with the long term creation of shareholder wealth, the Board has had regard for the stage of development of the Company’s business and given consideration to each of the indices outlined above and other operational and business development achievements of future benefit to the Company but not reflected in those financial measures. Senior executives The remuneration of PVE senior executives is based on a combination of fixed salary, a short term incentive bonus which is based on performance and, in some cases, a long term incentive payable in cash or shares. Other benefits include employment insurances and superannuation contributions. In relation to the payment of annual bonuses, the Board assesses the performance and contribution of executives against a series of objectives defined at the beginning of the year. These objectives are a combination of strategic and operational Company targets which are considered critical to shareholder value creation and objectives which are specific to the individual executive. The Board exercises its discretion when as the weighted average price for the first 15 days of the month in which the shares were issued. 7. Dividends No dividends have been paid or declared by the Company during the year ended 31 December 2010. 8. Events Subsequent to Reporting Date There were no events between the end of the financial year and the date of this report that, in the opinion of the Directors, affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group. 9. Likely Developments The Company plans to invest €700,000 – 800,000 in geological and geophysical studies in 2011 including a reserve audit by RPS, the purchase and acquisition of seismic data for Sant’Alberto, Cembalina and Gradizza. The Vitalba-1dirA well is planned to be drilled in 2011 and, subject to identification of a suitable partner, the Company also plans to drill the Fantuzza- 1 well in 2011. 10. Environmental Regulation The Company’s operations are subject to environmental regulations under both National and local municipality legislation in relation to its mining exploration and development activities in Italy. Company management monitor compliance with the relevant environmental legislation. The Directors are not aware of any breaches of legislation during the period covered by this report. 11. Remuneration Report - 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 Directors and Executives of the Company. Remuneration Policy The Nominations & Remuneration Committee (Committee) is responsible for reviewing and recommending compensation arrangements for the Directors, the Chief Executive Officer and the executive senior team. The Committee assesses the appropriateness of the size and structure of remuneration of those officers on a periodic basis, with reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. The Company aims to ensure that the level and composition of remuneration of its Directors and executives is sufficient and reasonable in the context of the internationally competitive industry in which the Company operates. Indices Profit / Loss attributable to owners of the company (€'000s) * Earning / (loss) per share (€ cents per share) * Dividends paid Share Price at year end - AU$ 2010 2009 2008 2007 2006 (2,324) (7,203) (4,172) (1,572) (1,614) (2.11) (6.99) (4.54) (1.78) (1.95) NIL 0.21 NIL 1.68 NIL 1.10 NIL 1.50 NIL 1.66 * 2008, 2007, 2006 are restated to Euro Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 21 determining awards and exercises discretion having regard to the overall performance and achievements of the Company and of the relevant executive during the year. In past years, long-term performance benefits were in the form of employee share options granted to senior executives. Vesting of the options was subject to service vesting and price hurdles must be met before the options can be exercised. The Company has not awarded any options since April 2008 and has no plans to issue options in the immediate future. Non Executive Directors The remuneration of PVE Non Executive Directors comprises cash fees and superannuation contributions. There is no current scheme to provide performance based bonuses or retirement benefits to Non Executive Directors. Given the size of PVE, and the focussed nature of its 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 shareholders, to enhance overall shareholder wealth creation. The Board of Directors and shareholders last approved the maximum agreed remuneration pool for Non Executive Directors at a meeting of the Company in late 2004 at $200,000 per annum (€152,860 as at 31 December 2010). This pool which has not varied since listing in 2004. The total salary and fees paid in 2010 to Non Executive Directors was €104,900 (2009 € 70,000). Service contracts The major provisions of the service contracts held with the specified directors and executives, in addition to any performance related bonuses and/or options are as follows Directors: Graham Bradley, Chairman • Commencement Date: 19 May 2010 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December 2010: €36,000 • No termination benefits David McEvoy, Non Executive Director • Commencement Date: 19 May 2010 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December 2010: €24,000 • No termination benefits Byron Pirola, Non Executive Director • Commencement Date: 30 May 2008 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December 2010: €24,000 • No termination benefits Gregory Short, Non Executive Director • Commencement Date: 5 July 2010 • Term of Appointment: 3 years until AGM in May when Mr. Short intends to stand for re-election. • Fixed remuneration for the year ended 31 December 2010: €24,000 • No termination benefits Michael Masterman, Non Executive Director (previously Chief Executive Officer) • Commencement Date: 11 October 2010 • Term of Agreement: until AGM in May when Mr. Masterman intends to stand for re-election. • Fixed remuneration as a non-executive director: €24,000 • No termination benefits Executives: Michael Masterman, Chief Executive Officer (resigned 10 October 2010). • Commencement Date: 14 December 2008 • Term of Agreement: Indefinite terms subject to termination by either party. • Fixed remuneration for the year ended 31 December 2010: €200,000 (inclusive of non-monetary benefits). Remuneration was paid on a pro rata basis in light of Mr. Masterman’s resignation effective October 2010. • Annual performance based fee of up to 100% of his contracted service fee subject to the achievement of performance criteria agreed with the Board. • Payment of termination benefit on termination by the employer (other than for gross misconduct) equal to one year total fixed remuneration. Giovanni Catalano, Chief Executive Officer (previously Deputy Chief Executive Officer and Chief Operating Officer) • Commencement Date: 1 July 2010 as Chief Operating Officer (COO); as of 11 October 2010 as Chief Executive Officer (CEO). • Term of Agreement: The services of Mr. Catalano were originally provided through a service contract with a management company for 2 years with a further 1 year extension at the option of either the Company or the service company. A new agreement for services as the CEO provide for an indefinite term subject to termination by either party on three month’s notice. • Fixed service contract fee of €180,000 per annum plus accommodation costs and other non-monetary benefits. • Sign on bonus for a total of €100,000 payable in four quarterly installments, 50% of which is to be paid through the issue of shares and 50% in cash. The first two installments were settled in 2010 through the issue of shares. Mr. Catalano retains the sign-on entitlements under his new CEO agreement. • Annual performance based fee of up to 70% of his contracted service fee subject to the achievement of performance criteria agreed with the Board. • Payment of termination benefit on termination by the Company (other than for gross misconduct) equal to three months’ service fee. Doug Colkin, Chief Operating Officer (resigned 31 July 2010) • Commencement Date: 1 April 2008 • Term of Agreement: The services of Mr. Colkin were provided through a service contract with a management company which terminated on 31 July 2010. • Fixed service contract fee of €14,583 per calendar month plus accommodation costs. • No termination benefit Lisa Jones, Company Secretary • Commencement Date: 21 October 2009 • Term of Agreement: Indefinite but terminable by either party on one month’s notice. • Contracted on a fixed monthly retainer (A$2,250 to the end of 31 December 2010) to provide company secretarial and corporate governance services. • No termination benefit Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 22 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 Directors and executive officers’ remuneration - 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 & fees € Accommo -dation € Car € Other € Total base € STI cash € Superannuation benefits € Short term incentive bonus Shares € 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 G Short Non Executive Appointed 21 July 2010 2010 2009 2010 2009 2010 2009 2010 2009 36,000 30,000 24,000 20,000 24,000 20,000 12,500 - - - - - - - - - - - - - - - - - - - - - - - - - 36,000 30,000 24,000 20,000 24,000 20,000 12,500 - - - - - - - - - M Masterman Non Executive 2010 132,000 26,717 518 5,106 * 164,341 140,000 2009 144,000 31,312 10,203 14,485 200,000 - 2010 2009 228,500 26,717 518 5,106 260,841 140,000 214,000 31,312 10,203 14,485 270,000 Up to 11 October 2010 as Chief Executive Officer Total for Directors SPECIFIED EXECUTIVES G Catalano Chief Executive Officer Appointed 1 July 2010 From 11 October 2010 as CEO** D Colkin Chief Operating Officer Resigned 31 July 2010 Lisa Jones Company Secretary D Del Borrello Resigned 21 Oct 2009 Total for Specified Executives TOTAL DIRECTORS AND EXECUTIVES 2010 96,750 15,781 2009 - - 2010 94,789 13,236 2009 174,996 26,736 19,204 3,155 - 119,875 210,743 298,026 439,243 - - - - 29,017 26,736 55,734 2010 2009 2010 2009 2010 2009 2010 2009 - - - - - - - - - - - - - - - 112,531 - 771 108,796 43,750 1,593 203,325 - - - 19,204 3,155 - 4,000 123,875 - - - 771 240,531 43,750 5,593 330,355 - 518 5,877 501,372 183,750 512,026 58,048 10,203 20,078 600,355 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 13,801 51,288 13,801 51,288 13,801 51,288 - - 49,801 81,288 37,801 71,288 37,801 71,288 12,500 - 23,001 327,342 59,600 85,481 345,081 - 64,404 465,245 59,600 239,345 568,945 43,327 - - - - 155,858 - 4,601 157,147 37,251 17,096 257,672 - - - - - - 19.204 3,155 - - - - - - - - - 50% 42% 28% - 28% 21% - - - 62,581 18,298 204,754 40% 43,327 4,601 332,209 99,832 35,394 465,581 43,327 69,005 797,454 159,432 274,739 1,034,526 28% 63% 37% 72% 37% 72% - - 6% 25% - - 3% 7% - - - 9% * Paid in respect of 2009 calendar year performance. No bonus was paid for the 2010 calendar year ** Mr Catalano received a share-based performance bonus for the equivalent of Euro 10,000 relative to the 2010 calendar year 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 the Remuneration Committee. The established by 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 2009) 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 including share price hurdles. The following factors and assumptions below were used in determining the fair value of options on grant date. The fair value, exercise price and price on grant date have been translated into Euro and rate on the day of transition from Australian dollars to Euro functional currency. Grant Date 30 April 2009 31 May 2008 Option life Fair value per option Exercise price Price of shares on grant date Expected volatility Risk free interest rate 2.08 years €0.18 (A$0.32) €1.00(A$1.75) €0.91 (A$1.60) 3.00 years €0.28 (A$0.49) €1.00(A$1.75) €0.98 (A$1.73) 40% 40% 5.45% 6.75% Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 23 SHORT TERM INCENTIVE BONUS Directors and specified executives M Masterman* D Colkin G Catalano D Del Borrello Cash bonus 140,000 43,750 - - 2010 Bonus paid by issue of shares € - - 43,327 - % vested in year Cash bonus € 70% 100% 100% 100% - - - - * Paid in respect of 2009 calendar year performance. No bonus was paid for the 2010 calendar year 2009 Bonus paid by issue of shares € 59,600 37,251 - 62,581 % vested in year 100% 100% - 100% Analysis of bonuses included in remuneration Details of the vesting profile of the short-term incentive bonus awarded as remuneration are detailed above. Bonuses paid by issue of shares and included in share based payments to each Director and specified executive. 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 2009 and 2010 financial years. Equity instruments All options refer to options over ordinary shares of Po Valley Energy Limited, which are exercisable on a one-for-one basis. or key management personnel during the reporting period. (2009: 150,000) The table below shows options vested in the period. Modification of terms of equity-settled share- based payment transactions No terms of equity-settled share-based payment transactions (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. Exercise and lapse of options granted as compensation No options granted as compensation were exercised during 2010. Options over equity instruments granted as compensation No options were granted as compensation to Directors 75,000 options granted as compensation in prior periods lapsed on expiration date of 1 December 2010. No. of options vested during 2010 No. of options vested during 2009 DIRECTORS G Bradley D McEvoy B Pirola M Masterman EXECUTIVES D Colkin (Resigned 31 July 2010) D Del Borrello (Resigned 21 Oct 2009) OPTIONS GRANTED IN 2009: EXECUTIVES D Del Borrello(a) Resigned 21 Oct 2009 200,000 200,000 200,000 333,333 66,666 - No of options granted during 2009 Grant date 200,000 200,000 200,000 333,333 66,666 100,000 Fair value per Exercise option at grant per option date € price € Expiry date 150,000 30 Apr 2009 0.18 1.00 31 May 2011 (a) The options were provided at no cost. 100,000 Options vested during the year, 50,000 options granted in the year were forfeited as they had not vested on termination of employment. The vested options will only become exercisable once the Company’s closing share price has been equal to or greater than A$2.25 for 30 consecutive trading days. The fair value of the options vested granted as compensation in 2009 was determined as €18,298. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 24 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 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 % forfeited in year Financial year in which grant vests DIRECTORS: G Bradley 200,000 30 May 2008 200,000 30 May 2008 200,000 30 May 2008 200,000 30 May 2008 D McEvoy 200,000 30 May 2008 200,000 30 May 2008 200,000 30 May 2008 B Pirola 200,000 30 May 2008 200,000 30 May 2008 333,333 30 May 2008 M Masterman 333,333 30 May 2008 333,334 30 May 2008 SPECIFIED EXECUTIVES D Colkin 66,666 30 May 2008 Resigned 31 July 2010 66,666 30 May 2008 66,667 30 May 2008 D Del Borrello 75,000 30 Nov 2006 Resigned 21 October 2009 75,000 30 Nov 2006 100,000 30 April 2009 50,000 30 April 2009 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - - - - - - - - - - - - - - - - - - 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 2010 31 Dec 2009 - Analysis of movements in options 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: (A) The value of the options that lapsed during the year represents the benefit foregone and is calculated at the date the option lapsed using Black-Scholes formula assuming the performance criteria had been achieved. 75,000 options lapsed in the year. Granted in year € Value of options exercised in year € Lapsed in year €(A) DIRECTORS G Bradley D McEvoy B Pirola G Short M Masterman SPECIFIED EXECUTIVES G Catalano L Jones D Colkin (Resigned 31 July 2010) D Del Borrello (Resigned 21 Oct 2009) - - - - - - - - - - - - - - - - - - - - - - - - - - 294 Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 25 12. Directors’ interests At the date of this report, the direct and indirect interests of the Directors in the shares and options of the Company, as notified by the Directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is provided in the adjacent table: G Bradley M Masterman D McEvoy B Pirola G Short Ordinary Shares 1,123,880 26,222,569 314,210 7,112,782 - Options over Ordinary Shares $1.75 expiring 31 May 2011 600,000 1,000,000 600,000 600,000 - 13. Share Options Options granted to directors and executives of the Company The Company has not granted any options over unissued ordinary shares in the Company to any directors or specified executive during or since the end of the financial year. Unissued shares under option At the date of this report unissued ordinary shares of the in connection with any legal proceeding involving the Company or entities within the Group which is brought against the Director as a result of his capacity as an officer. During the financial year the Company paid premiums to insure the Directors against certain liabilities arising out of the conduct while acting on behalf of the Company. Under the terms and conditions of the insurance contract, the nature of liabilities insured against and the premium paid cannot be disclosed. Expiry Date Exercise price 31 May 2011 €1.00 (A$1.75) Number of shares 3,100,000 Company under option are: All options expire on the earlier of their expiry or termination of employee’s employment (at the Boards’s discretion). These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. Shares issued on exercise of options The Company has not issued any shares as a result of the exercise of options during or since the end of the financial year end. 14. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of PVE support and have adhered to the principles of sound corporate governance. The Board recognises the recommendations of the ASX Corporate Governance Council and considers that PVE is in compliance with those guidelines which are of importance to the commercial operation of a junior listed gas exploration and production company. The Company’s Corporate Governance Statement and disclosures are contained elsewhere in the annual report and are also available on the Company’s website at www.povalley.com 15. Indemnification and insurance of officers 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 16. Non audit services During the year KPMG has not performed any other services in addition to their statutory duties as auditors to the Company. Refer to note 6 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 section 237 of the Corporations Act 2001, to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. 18. Lead Auditor’s independence declaration The lead auditor’s independence declaration is set out on page 27 and forms part of the Directors’ report for the financial year ended 31 December 2010. This report has been made in accordance with a resolution of Directors. Graham Bradley Chairman Sydney, NSW Australia 14 March 2011 Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 26 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 LEAD AUDITOR’S INDEPENDENCE DECLARATION under Section 307C of the Corporations Act 2001 Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 27 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010 CONSOLIDATED CURRENT ASSETS: Cash and cash equivalents 10 (a) NOTES Trade and other receivables Inventory Total Current Assets NON-CURRENT ASSETS: Receivables Other assets Property, plant & equipment Resource property costs Total Non-Current Assets Total Assets CURRENT LIABILITIES: Trade and other payables Provisions Unearned revenue Total Current Liabilities NON-CURRENT LIABILITIES: Provisions Interest bearing loans Total Non-Current Liabilities Total Liabilities Net Assets EQUITY: Issued capital Reserves Accumulated losses Total Equity 12 11 12 13 14 16 17 17 18 19 19 2010 € 969,352 2,443,955 897,134 4,310,441 1,478,819 39,661 7,015,905 25,995,048 34,529,433 38,839,874 2,206,138 75,994 - 2009 € 6,622,329 2,348,206 810,749 9,781,824 1,953,326 23,062 5,831,885 28,911,578 36,719,851 46,501,135 3,090,601 184,285 841,004 2,282,132 4,115,890 2,846,186 5,519,347 8,365,533 10,647,665 28,192,209 44,659,630 2,080,996 (18,548,417) 28,192,209 2,361,575 9,637,183 11,998,758 16,114,649 30,386,486 44,599,315 2,011,990 (16,224,819) 30,386,486 The above consolidated statement of financial position should be read in conjunction with the accompanying notes to the financial statements. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 28 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2010 Revenue Operating costs Depreciation and amortisation expense Gross Profit Other income Employee benefit expense Share based payments Depreciation expense Corporate overheads Resource property costs impairment losses Results from operating activities Finance income Finance expenses Net finance income / (expenses) (Loss) / Profit before income tax expense Income tax benefit / (expense) NOTES 3 4 4 5 7 8 CONSOLIDATED 2010 € 7,157,331 (1,726,944) (2,821,596) 2,608,791 2009 € - - - - 60,658 38,607 (1,784,129) (1,375,594) (130,390) (18,603) (1,398,582) (544,792) (12,573) (973,604) (1,075,168) (5,108,595) (1,737,423) (7,976,551) 283,841 (803,315) (519,474) 1,001,603 (227,857) 773,746 (2,256,897) (7,202,805) (66,701) - (Loss) / Profit for the period (2,323,598) (7,202,805) OTHER COMPREHENSIVE INCOME: Foreign currency translation differences for foreign operations Other comprehensive income for the period - - (4,858,090) (4,858,090) Total comprehensive income for the period (2,323,598) (12,060,895) LOSS ATTRIBUTABLE TO: Owners of the company Loss for the period (2,323,598) (7,202,805) (2,323,598) (7,202,805) TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the Company (2,323,598) (12,060,895) Total comprehensive income for the period (2,323,598) (12,060,895) Basic and Diluted loss per share 9 (2.11) cents (6.99) cents The consolidated statement of comprehensive income should be read in conjunction with the accompanying notes to the financial statements. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 29 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010 Consolidated Consolidated ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share capital € Translation reserve € Option Accumulated reserve € losses € Total € Balance at 1 January 2009 32,736,250 6,050,359 544,982 (9,022,014) 30,309,577 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD: Loss for the period Other comprehensive income: Foreign currency translation differences Total comprehensive income for the period TRANSACTIONS WITH OWNERS RECORDED DIRECTLY IN EQUITY: Contributions by and distributions to owners Shares issued Share issue costs Share based payments - - - - (4,858,090) (4,858,090) 12,097,050 (504,038) 270,053 - - - - - - - - 274,739 (7,202,805) (7,202,805) - (4,858,090) (7,202,805) (12,060,895) - - - 12,097,050 (504,038) 544,792 Balance at 31 December 2009 44,599,315 1,192,269 819,721 (16,224,819) 30,386,486 Balance at 1 January 2010 44,599,315 1,192,269 819,721 (16,224,819) 30,386,486 TOTAL COMPREHENSIVE INCOME FOR THE PERIOD: Loss for the period Other comprehensive income Total comprehensive income for the period TRANSACTIONS WITH OWNERS RECORDED DIRECTLY IN EQUITY: Contributions by and distributions to owners Share issue costs Share based payments - - - (1,069) 61,384 - - - - - - - - - 69,006 (2,323,598) (2,323,598) - - (2,323,598) (2,323,598) - - (1,069) 130,390 Balance at 31 December 2010 44,659,630 1,192,269 888,727 (18,548,417) (28,192,209) The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes to the financial statements. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 30 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 STATEMENTS OF CASH FLOW FOR THE YEAR ENDED 31 DECEMBER 2010 CONSOLIDATED NOTES 2010 € 2009 € CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers 6,533,658 - Payments to suppliers and employees (4,959,381) (2,020,656) Interest received Interest paid 49,558 (345,604) 129,502 (400,708) Net cash inflow (outflow) from operating activities 10 (b) 1,278,231 (2,291,862) CASH FLOWS FROM INVESTING ACTIVITIES: Payments for non-current assets Payments on security deposits (44,339) (16,600) (8,442) - Payments for resource property costs (2,678,680) (12,043,902) Revenues received during commissioning phase Proceeds from sale of financial assets - - 981,321 630,000 Net cash outflow from investing activities (2,739,619) (10,441,023) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issues of shares Payments for share issue costs Proceeds from borrowings Repayments of borrowings - (1,069) - 12,097,050 (499,615) 5,279,269 (4,279,269) - Payments for borrowing costs (150,752) (297,637) Net cash inflow (outflow) from financing activities (4,431,090) 16,579,067 Net increase / (decrease) in cash held Cash and cash equivalents at 1 January 2010 Effects of exchange rate fluctuations on cash held Cash and cash equivalents at 31 December 2010 10 (a) (5,892,478) 6,622,329 239,501 969,352 3,846,182 2,948,689 (172,542) 6,622,329 The above consolidated statement of cash flow should be read in conjunction with the accompanying notes to the financial statements. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 31 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1.1 REPORTING ENTITY 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 2010 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, development and production of gas properties. 1.2 BASIS OF PREPARATION (a) STATEMENT OF COMPLIANCE The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASB’s) (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 14 March 2011. (b) 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. Where necessary, comparative information has been reclassified to achieve consistency in disclosure with the current financial year amounts and other disclosures. (c) FUNCTIONAL AND PRESENTATION CURRENCY The consolidated financial statements are presented in Euro, which is the Company’s and each of the entities in the Group’s functional currency. (d) 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. Impairment of non-current assets The ultimate recoupment of the value of resource property costs and property plant and equipment is dependent on successful development and commercial exploitation, or alternatively, sale, of the underlying properties. The Group undertakes at least on an annual basis, a comprehensive review for indicators of impairment of these assets. Should an impairment indicator exist, the area of interest is tested for impairment. There is significant estimation and judgment in determining the inputs and assumptions used in determining the recoverability amounts. The key areas of estimation and judgement in determining recoverable amounts include: • Recent drilling results and reserves and resources estimates • Environmental issues that may impact the underlying licences • The estimated market value of assets at the review date • Independent valuations of underlying assets at the review date • Fundamental economic factors such as the gas price and current and anticipated operating costs in the industry Rehabilitation provisions The value of these provisions represents the discounted value of the present obligations to restore, dismantle and rehabilitate each well site. Significant judgment is required in determining the provisions for rehabilitation and closure as there are many Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 32 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued transactions and other factors that will affect ultimate costs necessary to rehabilitate the sites. The discounted value reflects a combination of management’s best estimate of the cost of performing the work required, the timing of the cash flows and the discount rate. A change in any, or a combination of, the key assumptions used to determine the provisions could have a material impact on the carrying value of the provisions. The provision recognised for each site is reviewed at each reporting date and updated based on the facts and circumstances available at that time. Changes to the estimated figure costs for operating sites are recognised in the balance sheet by adjusting both the restoration and rehabilitation asset and provision. Reserve estimates Estimation of reported recoverable quantities of Proven and Probable reserves include judgemental assumptions regarding commodity prices, exchange rates, discount rates, and production and transportation costs for future cash flows. It also requires interpretation of complex geological and geophysical models in order to make an assessment of the size, shape, depth and quality of reservoirs, and their anticipated recoveries. The economic, geological and technical factors used to estimate reserves may change from period to period. 1.3 SIGNIFICANT ACCOUNTING POLICIES 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. (a) PRINCIPLES OF CONSOLIDATION (i) Subsidiaries Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. In the Company’s financial statements, investments in subsidiaries are carried at cost. (ii) Joint controlled operations and assets The interest of the Group in unincorporated joint ventures and jointly controlled assets are brought to account by recognising in its financial statements the assets it controls, the liabilities that it incurs, the expenses it incurs and its share of income that it earns from the sale of goods or services by the joint venture. (iii) Transactions eliminated on consolidation Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (b) TAXATION Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity or in comprehensive income. 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. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 33 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued (c) IMPAIRMENT (i) Financial assets (including receivables) 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 and inventories, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash-generating units. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and them to reduce the carrying amount of the other assets in the unit on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (d) PROPERTY, PLANT AND EQUIPMENT (i) Recognition and measurement Items of property, plant and equipment are recorded at cost less accumulated depreciation, accumulated impairment losses and pre-commissioning revenue and expenses. The cost of plant and equipment used in the process of gas extraction are accounted for separately and are stated at cost less accumulated depreciation and impairment costs. 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. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 34 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued (ii) Depreciation Gas producing assets When the gas plant and equipment is installed ready for use, cost carried forward will be depreciated on a unit-of-production basis over the life of the economically recoverable reserve. The depreciation rate of gas plant and equipment incurred in the period for each project in production phase is as follows: Castello Sillaro 8.67% 8.08% Changes in factors such as estimates of economically recoverable reserves that affect the depreciation do not give rise to prior period financial period adjustments and are dealt with on a prospective basis. Other property, plant and equipment 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 depreciation will commence when the asset is installed ready for use. The estimated useful lives of each class of asset fall within the following ranges: Office furniture & equipment 2010 3 – 5 years 2009 3 – 5 years The residual value, the useful life and the depreciation method applied to an asset are reviewed at each reporting date. (e) 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 (i). Held-to-maturity investments If the Group has the positive intent and ability to hold debt securities to maturity, then they are classified as held-to- maturity. Held-to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Available-for-sale financial assets The Group’s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, and foreign exchange gains and losses on available-for-sale monetary items, are recognised directly in a separate component of equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss as finance income or expense. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 35 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued 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. (f) 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 and selling expenses. (g) RESOURCE PROPERTIES Resource property costs are accumulated in respect of each separate area of interest. Exploration properties Exploration properties are carried at balance sheet date at cost and accumulated impairment losses. Exploration properties include the cost of acquiring resource properties, mineral rights and exploration, evaluation expenditure relating to an area of interest. Exploration properties 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. 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. Development properties Development properties are carried at balance sheet date at cost less accumulated impairment losses. Development properties represent the accumulation of all exploration, evaluation and acquisition costs in relation to areas where the technical feasibility and commercial viability of the extraction of gas resources in the area of interest are demonstrable and all key project permits, approvals and financing are in place. When there is low likelihood of the development property being exploited, or the value of the exploitable development property has diminished below cost, the asset is written down to its recoverable amount. Production properties Production properties are carried at balance sheet date at cost less accumulated amortisation and accumulated impairment losses. Production properties represent the accumulation of all exploration, evaluation and development and acquisition costs in relation to areas of interest in which production licences have been granted and the related project moving to the production phase. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 36 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued Amortisation of costs is provided on the unit-of-production basis, separate calculations being performed for each area of interest. The unit-of-production base results in an amortisation charge proportional to the depletion of economically recoverable reserves. The amortisation rate incurred in the period for each project in production phase is as follows: Castello Sillaro 8.67% 8.08% Amortisation of resource properties commences from the date when commercial production commences. When the value of the exploitable production property has diminished below cost, the asset is written down to its recoverable amount. The Group reviews the recoverable amount of resource property costs 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 (refer Note 1.3 (c) (ii)). (h) 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. 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 against the relevant rehabilitation asset, as appropriate for changes in legislation, technology or other circumstances including drilling activity and are accounted for an a prospective basis. Cost estimates are not reduced by potential proceeds from the sale of assets. (i) FINANCE INCOME AND EXPENSES Finance income comprises interest income on funds invested and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance expenses comprise interest expense on borrowings or other payables and unwinding of the discount of provisions and changes in the fair value of financial assets through profit and loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of qualifying assets are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported as net amounts. (j) EMPLOYEE BENEFITS (i) Long-term service benefits The Group’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including on-costs and expected settlement dates, and is discounted using the rates attached to the 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. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 37 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued (iii) Superannuation The Group contributes to defined contribution superannuation plans. Contributions are recognised as an expense as they are due. (iv) Share-based payments The executive and employee share option plan grants options to employees as part of their remuneration. The fair value of options granted is recognised as an employee expense with a corresponding increase in reserves. 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. (k) FOREIGN CURRENCY (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Euro, which is Po Valley Energy Limited’s functional and presentation currency (refer note 1.2 (c) above). (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 profit or loss 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 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 Euro at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to Euro 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. (l) EARNINGS/LOSS 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. (m) OTHER INDIRECT 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. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 38 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued 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 net 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. (n) SEGMENT REPORTING Determination and presentation of operating statements The Group determines and presents operating segments based on the information that internally is provided to the CEO, who is the Group’s chief operating decision maker. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and resource property costs. (o) REVENUE Revenues is measured at fair value of the consideration received or receivable, net of the amount of value added tax (“VAT”) payable to the taxation authority. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, and the associated costs can be estimated reliably there is no continuing management involved with the goods, and the amount of revenue can be measured reliably. Sale of gas Gas sales revenue is recognised when control of the gas passes at the delivery point. Proceeds received in advance of control passing are recognised as unearned revenue. (p) LEASED ASSETS Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Group`s balance sheet. (q) 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 2010, but have not been applied in preparing this financial report. • AASB 9 Financial Instruments includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the project to replace AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 will become mandatory for the Group’s 31 December 2013 financial statements. Retrospective application is generally required, although there are exceptions, particularly if the entity adopts the standard for the year ended 31 December 2012 or earlier. The Group has not yet determined the potential effect of the standard. • AASB 124 Related Party Disclosures (revised December 2009) simplifies and clarifies the intended meaning of the definition of a related party and provides a partial exemption from the disclosure requirements for government-related entities. The amendments, which will become mandatory for Group’s 31 December 2011 financial statements, are not expected to have any impact on the financial statements. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 39 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued • IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments addresses the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability. IFRIC 19 will become mandatory for the Group’s 31 December 2011 financial statements, with retrospective application required. The Group has not yet determined the potential effect of the interpretation. • AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB9 make amendments to a number of statements as a consequence of issuance of AASB 9 Financial Instruments in December 2010. The amendments will become mandatory for the Group’s 31 December 2013 financial statements. The Group has not yet determined the potential effect of these amendments. NOTE 2: FINANCIAL RISK MANAGEMENT Exposure to credit, market and liquidity risks arise in the normal course of the Group’s business. 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 assurance that major business risks are identified, consistently assessed and appropriately addressed. (i) Credit Risk The Group invests in short term deposits and trades with recognised, creditworthy third parties. There is a concentration of credit risk in relation to receivables due to indirect tax from the Italian tax authorities (see note 12). 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. Management has a credit policy in place whereby credit evaluations are performed on all customers and parties the Company and its subsidiaries deal with. The exposure to credit risk is monitored on an ongoing 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 functional currencies of consolidated entities. The currency giving rise to this risk is primarily Australian Dollars. In respect to monetary assets held in currencies other than Euro, 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 seeks to encourage all employees of the Group to hold ordinary shares. Both management and employees participate in the Group’s employee share scheme and to date the Company has enocuraged employees to opt for shares in lieu of cash for earned bonuses. 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. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 40 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 2: FINANCIAL RISK MANAGEMENT continued 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. There are no externally imposed restrictions on capital management. (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. Management prepares monthly cash flow forecasts taking into consideration debt facility obligations. Capital expenditures are planned around cash flow availability. NOTE 3: REVENUE Gas sales NOTE 4: EMPLOYEE BENEFIT EXPENSES Wages and salaries Equity settled share-based payment transactions (cid:129) Shares issued in lieu of salaries and bonus (cid:129) Options vested during the period NOTE 5: CORPORATE OVERHEADS Corporate overheads comprises: Company administration and compliance Professional fees Office costs Travel and entertainment Other expenses CONSOLIDATED 2010 € 7,157,331 2009 € - CONSOLIDATED 2009 € 1,375,594 270,053 274,739 544,792 1,920,386 CONSOLIDATED 2009 € 136,389 411,652 199,222 184,318 42,023 973,604 2010 € 1,784,129 61,384 69,006 130,390 1,914,519 2010 € 179,377 541,756 328,428 180,470 168,551 1,398,582 Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 41 NOTES TO THE FINANCIAL STATEMENTS NOTE 6: AUDITORS’ REMUNERATION Remuneration for audit or review of the financial reports of the subsidiary NSI and the Group: AUDITORS OF THE COMPANY – KPMG AUSTRALIA: Audit and review services Under-accrued from prior year The auditors received no other benefits. NOTE 7: FINANCE INCOME AND EXPENSE RECOGNISED IN PROFIT AND LOSS: Interest income Foreign exchange gains Finance income Interest expense Amortisation of borrowing costs Unwind of discount on site restoration provision Fair value movement on financial assets Finance expense Net finance income / (expense) CONSOLIDATED 2009 € 39,961 - 39,961 CONSOLIDATED 2009 € 129,521 872,082 1,001,603 6,038 - 249,315 (27,496) 227,857 773,746 2010 € 67,809 10,132 77,941 2010 € 40,951 242,890 283,841 380,301 212,185 210,829 - 803,315 (519,474) RECOGNISED IN OTHER COMPREHENSIVE INCOME: Foreign currency translation differences for foreign operations - (4,858,090) Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 42 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 8: INCOME TAX EXPENSE CURRENT TAX: Current period DEFERRED TAX: Origination and reversal of temporary differences Changes in unrecognised deductible temporary differences Deferred tax benefit Total income tax expense CONSOLIDATED 2010 € 66,701 (3,931) 3,931 - (66,701) 2009 € - 725 (725) - - NUMERICAL RECONCILIATION BETWEEN TAX EXPENSE AND PRE-TAX ACCOUNTING PROFIT / (LOSS): Loss for the period before tax (2,256,897) (7,202,805) Income tax (benefit) / expense using the Company’s domestic tax rate of 30 per cent (2009: 30%) (677,069) (2,160,842) Non-deductible expenses: Share based payments Impairment losses Other Foreign exchange differences Effect of tax rates in foreign jurisdictions Current year losses for which no deferred tax asset was recognised Tax losses utilised in current year Change in unrecognised temporary differences Tax effect of regional taxes in Italy - current Income tax expense 32,138 322,550 (34,448) - (6,287) 367,301 (69,150) (3,931) 66,701 (66,701) 163,438 1,532,586 218,098 (261,762) 33,037 474,720 - 725 - - Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 43 NOTES TO THE FINANCIAL STATEMENTS NOTE 9: LOSS PER SHARE Basic loss per share (€ cents) CONSOLIDATED 2010 € (2.11) 2009 € (6.99) The calculation of basic loss per share was based on the loss attributable to shareholders of €2,323,598 (2009: €7,202,805) and a weighted average number of ordinary shares outstanding during the year of 110,240,942 (2009: 102,990,833). Diluted loss per share is the same as basic loss per share. The number of weighted average shares is calculated as follows: Number of shares on issue at beginning of the year 212,642 issued on 19 September 2010 156,338 issued on 31 December 2010 7,004,167 issued on 26 February 2009 495,833 issued on 3 March 2009 294,729 issued on 6 May 2009 833,333 issued on 16 September 2009 5,500,000 issued on 6 October 2009 1,283,768 issued on 18 November 2009 No. of days 365 104 1 309 302 240 106 86 43 2010 Weighted average no. 2009 Weighted average no. 110,179,926 94,768,096 60,588 428 5,929,555 410,251 193,794 242,009 1,295,890 151,238 110,240,942 102,990,833 Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 44 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 10: (a) CASH AND CASH EQUIVALENTS CONSOLIDATED 2010 € 2009 € (a) Cash and cash equivalents 969,352 6,622,329 The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 22. (b) Reconciliation of cash flows from operating activities - - Loss for the period (2,323,598) (7,202,805) ADJUSTMENT FOR NON-CASH ITEMS: Unrealised net foreign exchange (gains) / loss Share-based payments Depreciation and amortisation Resource property costs impairments Fair value movement on financial assets Unwind of discount on site restoration provision Amortisation of borrowing costs Capitalised interest CHANGE IN OPERATING ASSETS AND LIABILITIES: (Increase) decrease in receivables Decrease (increase) in other assets Increase (decrease) in trade and other payables Increase in provisions and accruals (239,501) 130,390 2,840,198 1,075,168 - 210,829 212,185 (935,681) 544,792 12,573 5,108,595 (27,496) 249,314 - - (394,670) 378,758 - (897,907) (108,291) 80,012 (6,391) 275,133 4,762 Net cash outflow from operating activities 1,278,231 (2,291,862) Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 45 NOTES TO THE FINANCIAL STATEMENTS NOTE 11: INVENTORY Well equipment – at cost CONSOLIDATED 2010 € 897,134 2009 € 810,749 NOTE 12: TRADE AND OTHER RECEIVABLES Accrued gas sales revenue Sundry debtors Indirect taxes receivable (a) CONSOLIDATED 2010 € 376,638 75,080 1,992,237 1,866,838 2009 € - 236,071 2,112,135 2,348,206 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 1,985,308 1,478,819 2,078,848 1,953,326 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. We note that VAT remitted on oil and gas sales in Italy is 10%. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 46 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 13: PROPERTY PLANT & EQUIPMENT CONSOLIDATED OFFICE FURNITURE & EQUIPMENT: At cost Accumulated depreciation PLANT & EQUIPMENT UNDER CONSTRUCTION: At cost Accumulated depreciation GAS PRODUCING PLANT AND EQUIPMENT: At cost Accumulated depreciation RECONCILIATIONS: Reconciliation of the carrying amounts for each class of Plant & equipment are set out below: OFFICE FURNITURE & EQUIPMENT: Carrying amount at beginning of year Additions Depreciation expense Foreign exchange difference Carrying amount at end of year PLANT & EQUIPMENT UNDER CONSTRUCTION: Carrying amount at beginning of year Additions Transfer to gas producing assets Carrying amount at end of year GAS PRODUCING ASSETS: Carrying amount at beginning of period 2010 € 163,168 (98,878) 64,290 - - - 7,557,376 (605,761) 6,951,615 7,015,905 38,554 44,339 (18,603) - 64,290 5,793,331 1,078,081 (6,871,412) - - Transferred from exploration and development assets 685,964 Transferred from plant and equipment under construction 6,871,412 Additions Depreciation expense Carrying amount at end of period - (605,761) 6,951,615 7,015,905 2009 € 118,829 (80,275) 38,554 5,793,331 - 5,793,331 - - - 5,831,885 42,971 8,442 (12,573) (286) 38,554 - 5,793,331 - 5,793,331 - - - - - - 5,831,885 Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 47 NOTES TO THE FINANCIAL STATEMENTS NOTE 14: RESOURCE PROPERTY COSTS CONSOLIDATED RESOURCE PROPERTY COSTS: Exploration phase Development phase Production phase RECONCILIATION OF CARRYING AMOUNT OF RESOURCE PROPERTIES: Exploration Phase Carrying amount at beginning of period Foreign exchange difference Exploration expenditure Change in estimate of rehabilitation assets Impairment losses Carrying amount at end of period 2010 € 5,923,127 - 20,071,921 25,995,048 6,139,221 - 323,077 (265,357) (273,814) 5,923,127 2009 € 6,139,221 22,772,357 - 28,911,578 7,689,974 (1,060,034) 4,617,876 - (5,108,595) 6,139,221 Resource property costs in the exploration and evaluation phase have not yet reached a stage which permits a reasonable assessment of the existence of or otherwise of economically recoverable reserves. The ultimate recoupment of resource property costs in the exploration phase is dependent upon the successful development and exploitation, or alternatively sale, of the respective areas of interest at an amount greater than or equal to the carrying value. Development Phase Carrying amount at beginning of period Foreign exchange difference Development expenditure Commissioning revenue received (i) Reclassed as Plant & Equipment Transfer to production assets Carrying amount at end of period Production Phase Carrying amount at beginning of period Reclassed from development expenditure (ii) Additions Change in estimate of rehabilitation assets Amortisation of producing assets Impairment loss Carrying amount at end of period 22,772,357 - 200,704 - (685,964) (22,287,097) - - 22,287,097 262,873 539,139 (2,215,834) (801,354) 20,071,921 22,366,345 (3,151,065) 9,490,725 (140,317) (5,793,331) - 22,772,357 - - - - - - - Commercial production on the Castello well began on 12 January 2010. An impairment trigger was identified with regard to Castello during the second quarter of 2010 as a result of decline in pressure and the field was stopped for testing. Accordingly, the associated resource property costs and related plant and equipment (as a cash generating unit) have been tested for impairment. The recoverable amount has been determined by reference to a discounted cashflow forecast model. The key assumptions adopted in that model, based on a two well development, include gas pricing, expected gas production, operating and capital expenditure and a discount rate. The expected production and reserves have been independently reviewed. The recoverable amount is most sensitive to the gas production, gas price assumption and the discount rate. As result of the impairment test, the recoverable amount for Castello has been determined to be €9.1million resulting in an impairment expense of €801,354. Commercial production from the Sillaro well commenced on 18 May 2010. (i) Relates to gas sales generated prior to commercial production having occurred. (ii) Reclassification from development expenditure relates to capitalised costs for gas fields classified as production assets in 2010. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 48 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 15: DEFERRED TAX ASSETS AND LIABILITIES CONSOLIDATED 2010 € 2009 € UNRECOGNISED DEFERRED TAX ASSETS: Deferred tax assets have not been recognised in respect of the following items: Losses available for offset against future taxable income 3,795,144 3,269,073 Share issue expenses Capitalised borrowing costs Accrued expenses and liabilities 101,821 117,389 22,230 144,869 185,143 8,163 Unrecognised deferred tax assets 4,036,584 3,607,248 UNRECOGNISED DEFERRED TAX LIABILITIES: Deferred tax liabilities have not been recognised in respect of the following items: Interest receivable Unrecognised deferred tax liabilities - - (2,754) (2,754) Net deferred tax asset not recognised 4,036,584 3,604,494 Deferred tax benefit will only be obtained if: (i) The relevant company derives future assessable income of a nature and of an amount sufficient to enable the benefit from the deductions for the losses to be realised; (ii) The relevant company continues to comply with the conditions for deductibility imposed by tax legislation; and (iii) No changes in tax legislation adversely affect the relevant company in realising the benefit from the deductions for the losses. Movement in temporary differences during the year CONSOLIDATED: Losses available for offset against future taxable income Balance 1 January 2009 Profit and loss Equity 31 December Profit or loss 2009 Equity Balance Balance 31 December 2010 2,566,860 642,845 59,368 3,269,073 481,376 44,696 3,795,145 Share issue expenses 54,351 - 90,518 144,869 - (43,048) 101,821 Capitalised borrowing costs Accrued expenses and liabilities Income receivable Total unrecognised deferred tax asset 148,169 36,974 7,433 (2,748) 730 (6) - - - 185,143 (67,754) 8,163 14,067 (2,754) 2,754 - - - 117,389 22,230 - 2,774,065 680,543 149,886 3,604,494 430,442 1,648 4,036,585 Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 49 NOTES TO THE FINANCIAL STATEMENTS NOTE 16: TRADE AND OTHER PAYABLES Trade payables and accruals Other payables CONSOLIDATED 2010 € 2,136,289 69,849 2,206,138 2009 € 3,079,103 11,498 3,090,601 The Group’s exposure to currency and liquidity risks related to trade and other payables are disclosed in note 22. NOTE 17: PROVISIONS CURRENT: Provision for legal claim Employee leave entitlements NON CURRENT: Restoration provision RECONCILIATION OF RESTORATION PROVISION: Opening balance Increase in provision due to revised estimates Increase in provision from unwind of discount rate Closing balance CONSOLIDATED 2010 € - 75,994 75,994 2009 € 125,000 59,285 184,285 2,846,186 2,361,575 2,361,575 273,782 210,829 2,846,186 1,239,301 872,959 249,315 2,361,575 Provision has been 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. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 50 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 18: 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. NON-CURRENT LIABILITIES: Bank of Scotland finance facility CONSOLIDATED 2010 € 2009 € 5,519,347 9,637,183 The Group’s exposure to currency, interest rate and liquidity risks related to loans are disclosed in note 22. TERMS AND DEBT REPAYMENT SCHEDULE: Terms and conditions of outstanding loans were as follows: 31 December 2010 31 December 2009 Currency Nominal Interest rate Year of maturity Face value $ Carrying amount $ Face value $ Carrying amount $ CURRENT LIABILITIES: Secured bank loan Euro Euribor + 1.8% 2013 5,519,347 5,519,347 9,637,183 9,637,183 The amount presented is disclosed net of borrowing costs of €480,653 (2009: €642,085). Bank of Scotland have provided a €25,000,000 finance facility which provided an initial borrowing base of €5,000,000 to the Group to finance the construction program of the Castello and Sillaro fields and a senior facility of €20,000,000. The senior facility became available on 19 June 2009 when the Company received its formal production concessions and final development approval for the Castello and Sillaro fields. This senior debt replaced the initial tranche of €5,000,000 and matures on 15 November 2013. The current borrowing limit for the six months to 30 June 2011 is set to €9,110,000 and incorporates the semi annual borrowing base review during December 2010. Interest is currently payable at Euribor plus 180 basis points. In 2010, the Company repaid €4,279,269 of the senior facility. The facility is secured over the assets of Northsun Italia SpA and Po Valley Operations Pty Ltd. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 51 NOTES TO THE FINANCIAL STATEMENTS NOTE 19: CAPITAL AND RESERVES SHARE CAPITAL: Opening balance - 1 January Shares issued during the year: ORDINARY SHARES 2010 number 2009 number 110,179,926 94,768,096 Share issue at € 0.24 ($0.33) each on 19 September 2010 Share issue at € 0.16 ($0.21) each on 31 December 2010 212,642 156,338 Share issue at € 0.69 ($1.20) each on 26 February 2009 Share issue at € 0.69 ($1.20) each on 3 March 2009 Share issue at € 0.91 ($1.60) each on 6 May 2009 Share issue at € 0.69 ($1.20) each on 16 September 2009 Share issue at € 0.93 ($1.55) each on 6 October 2009 Share issue at € 0.97 ($1.55) each on 18 November 2009 - - - - - - 7,004,167 495,833 294,729 833,333 5,500,000 1,283,768 Closing balance – 31 December 110,548,906 110,179,926 All ordinary shares are fully paid and carry one vote per share and the right to dividends. In the event of winding up the Company, ordinary shareholders rank after creditors. Ordinary shares have no par value. The Company issued 368,980 shares to employees pursuant to the employees share purchase plan. These shares were issued at a price as detailed in the table below: Date issued No of shares 19 September 2010 31 December 2010 212,642 156,338 Issue price € 0.24 (A$0.33) € 0.16 (A$0.21) Translation Reserve The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. Options Reserve The option reserve is used to record the value of equity benefits provided to employees and directors as part of their remuneration. Refer to note 20 for further details of these plans. Dividends No dividends were paid or declared during the current year (2009: NIL). Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 52 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 20: SHARE BASED PAYMENTS 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. 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. The vesting provisions issued during 2009 and 2008 have included share price hurdles and continued employment with the Group. 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: 2010 2009 Number of options Weighted average exercise price Number Weighted average of options exercise price Balance at beginning of year 3,175,000 Granted Exercised Lapsed Balance at end of year Exercisable at end of year - - (75,000) 3,100,000 3,100,000 €1.00 - - €1.11 €1.00 3,150,000 150,000 - (125,000) 3,175,000 2,175,000 €1.00 €1.00 - €1.07 €1.00 The options outstanding at 31 December 2010 have an exercise of A$1.75 (€1.00) and a weighted average contractual life of 3 years. OPTIONS GRANTED DURING THE REPORTING PERIOD PURSUANT TO EIOS: No options were granted in the reporting period. Number granted Grant date Vesting period Expiry date Exercise price 2010 2009 - - - - - 150,000 30 April 2009 2.08 years 31 May 2011 €1.00 (A$1.75) 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 Black-Scholes model, with the following inputs: Fair value of share options and assumptions 2010 Fair value at grant date Share price at grant date Exercise price Expected volatility Option life Risk-free interest rate - - - - - - 2009 €0.18 €0.91 (A$1.60) €1.00 (A$1.75) 40% 2.08 years 5.45% Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 53 NOTES TO THE FINANCIAL STATEMENTS NOTE 20: SHARE BASED PAYMENTS continued Options held at the end of the reporting period pursuant to EIOS. Number of options Grant date Vesting date Expiry date Exercise price 3,000,000 31 May 2008 33% 1 June 2009 31 May 2011 €1.00 (A$1.75) 34% 1 June 2010 33% 1 June 2008 100,000 30 April 2009 1 June 2009 31 May 2011 €1.00 (A$1.75) NOTE 21: FINANCIAL REPORTING BY SEGMENTS The Group reportable segments as described below are the Group’s strategic business units. The strategic business units are classified according to field licence areas which are managed separately. All strategic business units are in Italy. For each strategic business unit, the CEO reviews internal management reports on a monthly basis. Exploration, Development and Production gas and oil are the operating segments identified for the Group. The individual exploration, development and production operations have been aggregated. In euro Exploration Development & Production Total 2010 € 2009 € 2010 € 2009 € 2010 € 2009 € External revenues - - 7,157,331 Segment (loss) / profit before tax Depreciation and amortisation Impairment on resource property costs REPORTABLE SEGMENT ASSETS: (273,814) (5,108,595) 1,087,438 - - (2,821,595) (273,814) (5,108,595) (801,354) - - - - 7,157,331 - 1,533,624 (5,108,595) (2,821,595) - (1,075,168) (5,108,595) Resource property costs 5,923,127 6,139,221 20,071,921 22,772,357 25,995,048 28,911,578 Plant & Equipment Receivables Inventory - - - - - - 6,951,614 5,793,330 6,951,614 5,793,330 376,638 - 376,638 - 897,134 810,749 897,134 810,749 Capital expenditure 323,077 4,617,876 463,577 9,624,733 786,654 14,242,609 Movement in rehabilitation assets Reportable segment liabilities (265,357) - 539,139 - 273,782 - (1,466,206) (1,755,316) (2,908,420) (3,878,186) (4,374,626) (5,633,502) Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 54 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 21:FINANCIAL REPORTING BY SEGMENTS continued Reconciliation of reportable segment profit or loss, assets and liabilities PROFIT OR LOSS: Total profit / (loss) for reportable segments 2010 € 2009 € 1,533,624 (5,108,595) UNALLOCATED AMOUNTS: Net finance income / (expense) Other corporate expenses Consolidated loss before income tax ASSETS: Total assets for reportable segments Other assets Consolidated total assets LIABILITIES: Total liabilities for reportable segments Other liabilities Consolidated total liabilities (519,474) (3,271,047) (2,256,897) 34,220,434 4,619,439 38,839,873 (4,374,626) (6,273,039) (10,647,665) 773,746 (2,867,956) (7,202,805) 35,515,657 10,985,478 46,501,135 (5,633,502) (10,481,146) (16,114,648) Other Segment Information All of the Group’s revenue is currently attributed to gas sales in Italy with two customers. NOTE 22: FINANCIAL INSTRUMENTS (A) INTEREST RATE RISK EXPOSURES Profile At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was: VARIABLE RATE INSTRUMENTS: Financial assets Financial liabilities CONSOLIDATED 2010 € 969,352 (5,519,347) (4,549,995) 2009 € 6,622,329 (9,637,183) (3,014,854) 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 or equity. 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 2009. Effect in €’s Profit or loss Equity 2010 2009 2010 2009 31 December Variable rate instruments (50,306) 66,623 (50,306) (35,569) A decrease of 100 basis points would have an equal and opposite effect on profit or loss. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 55 NOTES TO THE FINANCIAL STATEMENTS NOTE 22: FINANCIAL INSTRUMENT 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 Company has limited its credit risk with current gas customers by requiring each customer to either (i) make a prepayment on gas sales; or (ii) issue a bank guarantee on the Company’s behalf in the event of no payment or late payments. The Group has a concentration of credit risk exposure to the Italian Government for VAT receivable (see note 12.) The carrying amount of the Group’s financial assets represents the maximum credit exposure and is shown in the table below. Cash and cash equivalents Receivables – Current Receivables – Non-current Other assets CONSOLIDATED Carrying Amount Note 10 12 12 2010 € 969,352 2,443,955 1,478,819 39,661 4,931,787 2009 € 6,622,329 2,348,206 1,953,326 23,062 10,946,923 No receivables are considered past due nor were any impairment losses recognised during the period. (C) LIQUIDITY RISK The following are the contractual maturities of financial liabilities, including estimated interest payments: Consolidated 31 December 2010 in € Carrying amount Contractual cash flows 6 moths or less 6 to 12 months 1-2 years 2-5 years Trade and other payables (2,206,138) (2,206,138) (2,206,138) - - - Secured bank loan (5,519,347) (6,462,033) (78,090) (78,090) (156,180) (6,305,853) (7,725,485) (8,668,171) (2,284,228) (78,090) (156,180) (6,305,853) Consolidated 31 December 2009 in € Carrying amount Contractual cash flows 6 moths or less 6 to 12 months 1-2 years 2-5 years Trade and other payables (3,090,601) (3,090,601) (3,090,601) - - - Secured bank loan (9,637,183) (11,677,516) (178,500) (178,500) (713,998) (10,606,518) (12,627,784) (14,768,117) (3,269,101) (178,500) (713,998) (10,606,518) D) NET FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES The carrying amounts of financial assets and liabilities (excluding borrowing costs) as disclosed in the balance sheet equate to their estimated net fair value. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 56 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 22: FINANCIAL INSTRUMENT 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 Euro. The currency giving rise to this risk is primarily Australian Dollars. AMOUNTS RECEIVABLE/(PAYABLE) IN FOREIGN CURRENCY OTHER THAN FUNCTIONAL CURRENCY: Cash Current – Payables Net Exposure CONSOLIDATED 2010 € 73,852 (45,591) 28,261 2009 € 4,647,220 (104,713) 4,542,507 The following significant exchange rates applied during the year: Australian Dollar ($) Average rate Reporting date spot rate 2010 0.6939 2009 0.5631 2010 0.7669 2009 0.6231 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 2009. 31 December 2010 Australian Dollar to Euro (€) 31 December 2009 Australian Dollar to Euro (€) CONSOLIDATED Profit or loss € 2,826 454,251 Equity € 2,826 454,251 A 10 percent weakening of the Australian dollar against the Euro (€) at 31 December would have the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. NOTE 23: COMMITMENTS AND CONTINGENCIES CONTRACTUAL COMMITMENTS There are no material commitments or contingent liabilities not provided for in the financial statements of the Company or the Group as at 31 December 2010. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 57 NOTES TO THE FINANCIAL STATEMENTS NOTE 24: RELATED PARTIES KEY MANAGEMENT PERSONNEL COMPENSATION The key management personnel compensation included in employee benefit expense (see note 4) is as follows: Short-term employee benefits Other long term benefits Post-employment benefits Share-based payments CONSOLIDATED 2010 € 676,578 - - 112,332 788,910 2009 € 597,200 - - 434,171 1,031,371 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. Lisa Jones, Company Secretary, is not a key management personnel (“KMP”) but is a specified executive, and her remuneration is included in the tables in the remuneration 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. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 58 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 24: RELATED PARTIES 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 Held at 31 Dec 2009 Granted Exercised Forfeited 31 Dec 2010 (i) DIRECTORS: G Bradley M Masterman D McEvoy B Pirola G Short EXECUTIVES: G Catalano D Colkin (resigned 31 July 2010) DIRECTORS: G Bradley M Masterman D McEvoy B Pirola EXECUTIVES: D Colkin D Del Borrello (resigned 21 October 2009) (i) Or the date of ceasing to be a KMP 600,000 1,000,000 600,000 600,000 - 2,800,000 - 200,000 200,000 Held at - - - - - - - - - - - - - - - - - - - - - - - - - - - 600,000 1,000,000 600,000 600,000 - 2,800,000 - 200,000 200,000 Held at 31 Dec 2008 Granted Exercised Forfeited 31 Dec 2009 (i) 600,000 1,000,000 600,000 600,000 2,800,000 200,000 - - - - - - 150,000 150,000 350,000 150,000 - - - - - - - - - - - - - - 600,000 1,000,000 600,000 600,000 2,800,000 200,000 (125,000) 175,000 (125,000) 375,000 Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 59 NOTES TO THE FINANCIAL STATEMENTS NOTE 24: RELATED PARTIES continued The details of the number of options held by key management personnel at 31 December 2010 are as follows: $1.75 Exercise price, expiring 31 May 2011 Total - 2010 Total - 2009 DIRECTORS: G Bradley M Masterman D McEvoy B Pirola G Short EXECUTIVES: G Catalano D Colkin (resigned 31 July 2010) 600,000 1,000,000 600,000 600,000 - - 200,000 3,000,000 600,000 1,000,000 600,000 600,000 - - 200,000 3,000,000 600,000 1,000,000 600,000 600,000 - - 200,000 3,000,000 Equity holdings and transactions The movement during the reporting period in the number of ordinary shares of the Company, held directly and indirectly by each specified director and specified executive, including their personally-related entities is as follows: Held at 31 Dec 2009 Purchased Share based payments Options exercised Held at 31 Sold Dec 2010 (iii) DIRECTORS: G Bradley 1,123,880 M Masterman (i) 23,972,569 3,750,000 D McEvoy B Pirola (i) G Short 314,270 7,112,782 - - - - 32,523,501 3,750,000 EXECUTIVES: G. Catalano D Colkin (resigned 31 July 2010) - 40,935 40,935 Held at 31 Dec 2008 Purchased DIRECTORS: G Bradley 1,133,981 - - - - - - - - - 268,255 - 268,255 1,123,880 (1,500,000) 26,222,569 - - - 314,270 7,112,782 - (1,500,000) 34,773,501 - - - 268,255 40,935 309,190 - - - - - - - - Share based payments Options exercised Held at 31 Sold Dec 2009 (iii) - M Masterman (i) 23,447,064 898,905 59,600 D McEvoy B Pirola (ii) EXECUTIVES: D Colkin D Del Borrello (ii) (resigned 21 October 2009) 304,593 7,112,782 9,677 - - - 31,998,420 908,582 59,600 - 3,684 37,251 114,796 114,796 6,189 9,873 62,581 99,832 (i) Does not include shares held by related parties which amount to 1,040,000 shares (ii) Included above are shares held by related parties (iii) Or the date ceasing to be a KMP - - - - - - - - (10,101) 1,123,880 (433,000) 23,972,569 - - 314,270 7,112,782 (443,101) 32,523,501 - 40,935 (118,769) 64,797 (118,769) 105,732 Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 60 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 NOTE 24: RELATED PARTIES continued Other related party disclosures The Company has a replated party relationship with its controlled entities. Transactions between the Company and its controlled entities consisted of: a) Loans advanced by the Company to its controlled entities. These loans are interest free, unsecured and repayable at call. As at 31 December 2010, loans to controlled entities amounted to €37,012,016 (2009: €37,881,346) b) Technical services provided to controlled entities by consultants and contractors. Technical service recharges to controlled entities is included in other income of the Company. During the year the Company recharged to its controlled entites €150,255 for technical services. c) Expenses incurred by the Company are on-charged to controlled entities at cost. NOTE 25: PARENT ENTITY DISCLOSURES Financial Position ASSETS: Current assets Non-current assets Total assets LIABILITIES: Current liabilities Non-current liabilities Total liabilities Net Assets EQUITY: Issued capital Reserves Accumulated losses Total equity FINANCIAL PERFORMANCE: Loss for the year Other comprehensive income 2010 € 743,905 48,203,947 2009 € 6,437,740 48,021,776 48,947,852 54,459,516 246,858 5,519,347 5,766,205 442,923 9,637,183 10,080,106 43,181,647 44,379,410 44,659,630 44,599,315 888,727 819,721 (2,366,710) (1,039,626) 43,181,647 44,379,410 (1,327,084) (4,134,941) - - Total comprehensive income (1,327,084) (4,134,941) CONTINGENT LIABILITIES OF THE PARENT ENTITY: For details on contingent liabilities, refer note 23. COMMITMENTS OF THE PARENT ENTITY: For details on commitments, see note 23. Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 61 NOTES TO THE FINANCIAL STATEMENTS NOTE 26: GROUP ENTITIES The parent and ultimate controlling party of the Group is Po Valley Energy Limited. The investments held in controlled entities are included in the financial statements of the parent at cost at 31 December 2010 and 2009 and are as follows: Name: incorporation shares investment € investment € Holding % Country of Class of 2010 2009 Northsun Italia S.p.A (“NSI”) Italy Ordinary 9,570,433 9,535,924 Po Valley Operations Pty Limited (“PVO”) PVE USA Inc. Australia Ordinary 597,870 594,259 United States of America Ordinary 806 806 10,169,109 10,130,989 100 100 100 NOTE 27: SUBSEQUENT EVENT There were no events between the end of the financial year and the date of this report that, in the opinion of the Directors, affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 62 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 DIRECTORS’ DECLARATION 1. In the opinion of the Directors of Po Valley Energy Ltd (“the Company”): i) The financial statements and notes, as set out on pages 28 to 62, 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 2010 and of their performance, for the financial year ended on that date; and b. Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Cooperations Regulations 2001; ii) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by 295A of the Corporations Act 2001 by the chief executive officer and chief financial officer for the financial year ended 31 December 2010 pursuant to Section. Dated at Sydney this 14th day of March 2011. Signed in accordance with a resolution of the Directors: Graham Bradley Chairman Byron Pirola Non Executive Director Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 63 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF PO VALLEY ENERGY LIMITED REPORT ON THE FINANCIAL REPORT Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 64 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 65 SHAREHOLDER INFORMATION 2010/2011 Additional information required by the Australian Stock Exchange Limited Listing Rules and not disclosed elsewhere in this report is set out below. The information was prepared based on share registry information processed up to 28 February, 2011. SHAREHOLDINGS SUBSTANTIAL SHAREHOLDERS Name Michael Masterman Hunter Hall Investment Management Pty Ltd Beronia Investments Pty Ltd1 Joan Masterman 1 Interests associated with Non Executive Director, Byron Pirola Number of ordinary shares held Percentage of capital held % 26,222,569 15,884,751 7,112,782 4,788,444 23.72% 14.37% 6.43% 4.33% DISTRIBUTION OF SHARE AND OPTION HOLDINGS Size of Holdings 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - over Ordinary Shares Options Number of holders Number of shares Number of holders Number of options 189 300 188 483 116 59,081 914,459 1,475,130 16,529,367 91,570,869 1,276 110,548,906 0 0 0 1 5 6 0 0 0 100,000 3,000,000 3,100,000 Number of ordinary shareholders with less than a marketable parcel 260 166,062 VOTING RIGHTS OF SHARES AND OPTIONS Refer to Note 19 and Note 20. ON-MARKET BUY-BACK There is no current on-market buy-back. Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production, Development, Exploration Corporate Governance Statement Directors’ Report Lead Auditor’s Independence Declaration Statement of Financial Position 66 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 TWENTY LARGEST SHAREHOLDERS Name 1 Michael Masterman 2 Cogent Nominees Pty Limited 3 Joan Masterman 4 Symmall Pty Ltd 5 HSBC Custody Nominees 6 Mr Gary Douglas Roser+Mrs Tania Louise Roser 7 Michael George Masterman 8 Dr Byron Pirola 9 Beronia FS Pty Ltd10 Beronia FS Pty Ltd 11 Mr Ming Lov+Mrs Chiu Lov 12 Citicorp Nominees Pty Limited 13 Tucabia Investments Pty Ltd 14 Beronia Investments Pty Ltd 15 Beronia Investments Pty Ltd 16 William Taylor Nominees Pty Ltd 17 Mr Terry Bailey+Mrs Deanne Bailey 18 Mcindoe Superannuation Fund Pty Ltd 19 Mr Chris Carr+Mrs Betsy Carr 20 Fuiloro Pty Ltd OPTION HOLDERS – UNQUOTED Name 1 Michael Masterman 2 Graham Bradley 3 David McEvoy 4 Byron Pirola 5 Douglas Colkin (Resigned 31 July 2010) 6 Dom Del Borrello (Resigned 21 October 2009) The total number of option holders is 6. Number of ordinary shares held Percentage of capital held % 21,163,632 15,939,344 4,788,444 3,358,937 3,251,820 1,838,674 1,700,000 1,700,000 1,680,000 1,600,240 1,500,000 1,278,230 1,271,035 1,171,721 1,076,202 1,050,000 1,000,000 978,592 700,000 679,677 19.14% 14.42% 4.33% 3.04% 2.94% 1.66% 1.54% 1.54% 1.52% 1.45% 1.36% 1.16% 1.15% 1.06% 0.97% 0.95% 0.90% 0.89% 0.63% 0.61% 67,726,548 61.26% Number of ordinary options held Percentage of options held % 1,000,000 600,000 600,000 600,000 200,000 100,000 32.26% 19.35% 19.35% 19.35% 6.45% 3.23% 3,100,000 100.00% Statement of Comprehensive Income Statement of Changes in Equity Statements of Cash Flow Notes to the Financial Statements Directors Declaration Independent Auditor’s Report Shareholder Information Reserves & Resources Statement PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 67 RESERVES & RESOURCES STATEMENT LICENCE PROJECT PVE INTEREST C. Castello Sillaro Vitalba(2) Sillaro(2) San Vincenzo Sant’Alberto(1) (5) C. San Pietro Bezzecca(1) Crocetta Fantuzza(2) 100% 100% 100% 100% 100% 100% Cadelbosco/ Grattasasso Canolo + Zini(4) (5) Correggio Pliocene 100% Ravizza Bagnolo in Piano AR168PY Carola, Irma Azzurra Ginevra Adele La Prospera Gradizza(3) Pioppette Capitello Podere Gallina Cembalina(*) Fondo Perino La Risorta Ariano(3) Opera Corcrevà(3) D. delle Anime(3) Barona Donnino GR27NS Sicily offshore 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% RESOURCES (bcf) CONTINGENT 3C 2C 1C PROSPECTIVE (UNRISKED) LOW BEST HIGH RESERVES (bcf) 3P 1P 0.1 7.5 2P 3.6 8.2 3.9 0.7 1.5 1.2 8.9 18.5 3.1 5.4 4.2 5.8 8.0 6.9 UNDER REVIEW 4.5 9.0 16.0 UNDER REVIEW 3.6 9.8 19.7 UNDER REVIEW 10.6 16.6 7.0 8.8 13.8 18.3 24.7 11.3 24.4 UNDER REVIEW These figures are based upon independent evaluations in accordance with 2007 SPE/WPC/AAPG/SPEE Petroleum Resource Management System. (1) RPS; (2) DREAM; (3) Internal evaluation (Information in this figures relates to Hydrocarbon Reserves and or Resources based on information compiled by Mr Giovanni Catalano, CEO of Po Valley Energy who has consented to the inclusion of that information in the form and context in which it appears. Mr Catalano has over 32 years experience in Exploration and Development in the Oil and Gas Industry. He is member of SEAPEX and AAPG and holds a Masters Degree in Geology from the University of Ferrara); (4) The 1C value is from RPS, the 2C and 3C values are from DREAM; (5) The RPS values quoted are the arithmetic sum of the values from two separate reservoirs. (*) Under re-evaluation RESERVES are those quantities of hydrocarbon anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions. Proved Reserves are those quantities of hydrocarbon, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods, and government regulations (1P). Probable Reserves are those additional Reserves which analysis of geoscience and engineering data indicate are less likely to be recovered than Proved Reserves but more certain to be recovered than Possible Reserves. It is equally likely that actual remaining quantities recovered will be greater than or less than the sum of the estimated Proved plus Probable Reserves (2P). Possible Reserves are those additional reserves which analysis of geoscience and engineering data suggest are less likely to be recoverable than Probable Reserves. The total quantities ultimately recovered from the project have a low probability to exceed the sum of Proved plus Probable plus Possible (3P) Reserves, which is equivalent to the high estimate scenario. CONTINGENT RESOURCES are those quantities of hydrocarbon estimated, as of a given date, to be potentially recoverable from known accumulations, but the applied project(s) are not yet considered mature enough for commercial development due to one or more contingencies. PROSPECTIVE RESOURCES are those quantities of hydrocarbon estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. For Contingent Resources, the general cumulative terms low/best/high estimates are denoted as 1C/2C/3C respectively. For Prospective Resources, the general cumulative terms low/best/high estimates still apply. No specific terms are defined for incremental quantities within Contingent and Prospective Resources. 68 PO VALLEY ENERGY (cid:129) ANNUAL REPORT 2010 Po Valley Energy Limited ABN 33 087 741 571 0 1 0 2 T R O P E R L A U N N A - I D E T M I L Y G R E N E Y E L L A V O P PO VALLEY ENERGY LIMITED ABN 33 087 741 571 Registered Office Level 28, 140 St. Georges Terrace Perth WA 6000 Tel: (08) 9278 2533 2010 Annual Report