Po Valley Energy Limited Annual Report 2011

Plain-text annual report

Bilancio_Po_Valley_2011_quartino_cop 7:copertina +dorso 5mm 16-04-2012 11:56 Pagina 1 PO VALLEY ENERGY LIMITED ABN 33 087 741 571 Registered Office Level 28, 140 St. Georges Terrace Perth WA 6000 Tel: (08) 9278 2533 Po Valley Energy Limited 2011 Annual Report 1 1 0 2 T R O P E R L A U N N A - D E T M L Y G R E N E Y E L L A V O P I I Bilancio_Po_Valley_2011_quartino_cop 7:copertina +dorso 5mm 16-04-2012 11:57 Pagina 2 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 Ughi e Nunziante Studio Legale Via Venti Settembre, 1 00187 Roma, Italy Auditor KPMG 235 St George’s Tce Perth, WA Australia 6000 Banks Bankwest 108 St George’s Tce Perth, WA Australia 6000 Lloyds TSB Bank 25 Gresham Street London, UK, EC2V 7HN Stock Exchange Listing Po Valley Energy Limited shares are listed on the Australian Stock Exchange under the code PVE. The Company is limited by shares, incorporated and domiciled in Australia. 2 3 4 14 18 22 30 31 32 33 34 35 65 66 68 70 Chairman’s Letter to Shareholders Chief Executive Officer’s Report Production & Development Exploration & New Ventures 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 2011/2012 Reserves & Resources Statement Highlights Gas production 28.9 million cubic metres (1.02 bcf) (8% up on 2010) 80,000 Scm (2.8 MScf) average daily production (8% up on 2010) € 9.1 million (AUD 12.2 million) operating revenue (27% up on 2010) € 3.3 million (AUD 4.5 million) net cash flow from operating activities (155% up on 2010) € 4.4 million (AUD 6.0 million) EBITDA (100% up on 2010) € 5.1 million (AUD 6.8 million) net loss after € 5.8 million non-cash write downs 35.9 € cent/scm average ENI gas release price for 2011 (22% up on 2010) I S T H G L H G H I 1 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P S R E D L O H E R A H S O T R E T T E L S N A M R A H C I ’ 2 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Chairman’s Letter to Shareholders Graham Bradley Chairman On behalf of the Board of Directors I am pleased to present the Company’s 2011 Annual Report. During the past year the Company achieved several important milestones including increased operating revenues, substantially increased earnings before interest, tax, depreciation and amortisation (EBITDA) and in the December quarter the successful drilling of our new Vitalba well. The Company’s Sillaro field produced steadily during 2011 at an average of 80,000 thousand cubic metres per day for total production of 28 million cubic metres (1.0 bcf ). Our Castello field was operated at a low level during the year, but production increased in February 2012 after completion of the Vitalba 1dirA well. The Company’s operating revenues for the year were € 9.1 million (AUD 12.2 million) compared to € 7.1 million in 2010. EBITDA in 2011 was € 4.4 million (€ 2.2 million in 2010). The Company made an after tax loss of € 5.1 million (AUD 6.8 million) in 2011, due primarily to the Directors’ decision that it was prudent, notwithstanding its return to production, to write-down the carrying value of our Castello field by €5.8 million (AUD 7.8 million). But for this write-down, the Company would have achieved a full-year after tax profit of around € 0.8 million (AUD 1.1 million). Improved revenues and returns were assisted by a rise in the Italian benchmark gas price from € 30.9 cents per cubic metre to around € 43.2 cents over the year and by operating cost efficiencies achieved by our management team. The Board declared no dividend for 2011 and will continue to reinvest free cashflow in exploiting the Company’s development opportunities. The Company continued to grow its exploration licence portfolio in 2011 with the grant of Cadelbosco di Sopra and Grattasasso permits in February and the preliminary award of Tozzona licence (Forlì province). In addition, we moved closer to final approval to drill wells in our assets at Gradizza and Fantuzza. In light of the Company’s share price during 2011, which in the view of the Directors does not fully reflect the value of the Company’s operating assets and our extensive portfolio of prospects, the Board decided to start seeking strategic partnerships, namely farm in partners, which would complement Po Valley Energy’s efforts within its short term work programme as well as its long term objectives. During the year, our technical team in Rome was further strengthened by the recruitment of Diego Balistreri, Development and Production Manager. I would like to thank our Chief Executive, Giovanni Catalano, and his team on their management of the many operating, regulatory and development challenges which the Company faced during the past year. Health, Safety and Environment continue to be of major importance to the Company and the completion of the Vitalba 1dirA well in 2011 without safety incidents demonstrated our commitment to excellence in operations and maintenance. The Board believes the Company is well-served by its management and technical team in Rome and we thank them for their extra efforts over the past year. I also thank my board colleagues for the continued dedication and commitment. I would like to say a special thank you to David McEvoy who retires from the Board at this AGM after serving with distinction since the Company’s ASX-listing in late 2004. David has provided highly valuable advice and technical expertise and contributed enormously to the Company during its formative years. Chief Executive Officer’s Report In my report to you last year, I referred to our commitment to realise value from our existing Italian portfolio. During the past year, we have made progress towards this objective by increasing our gas production, producing strong financial results and completing a work-over of our Castello gas field. Total gas production from the Company’s two producing fields, Castello and Sillaro, exceeded 55 million standard cubic meters (1.9 bcf ) since their initial connection to the pipeline in December 2009 and May 2010 respectively. Gas production during the 2011 calendar year totalled 28 million standard cubic metres (1 bcf ), generated primarily from the Sillaro gas field. Throughout the year, daily production from the Sillaro field averaged 80,000 standard cubic metres (2.8 MScf ) and continued at a slightly reduced rate in the first quarter of 2012. Exceptionally cold winter weather in Europe in the early months of 2012 required us to temporarily reduce production at the Sillaro field and will necessitate the installation of a three- phase condensate separator which we hope will be accomplished by mid-2012 to enable the field to return to its 2011 production rates. During the second half of the year, the Company successfully completed the drilling of the Vitalba 1dirA well at the Castello gas field. Production from the well recommenced in early February 2012 and was increased gradually to Giovanni Catalano Chief Executive Officer reach a stable production rate of 17,000 standard cubic metres per day (0.6 MScf ) in April 2012. The Company completed a static and dynamic model which incorporated the recent production data resulting in a revised proven and probable reserves of 51.0 million standard cubic metres (1.8 bcf ). The additional production from the Castello field will further strengthen the Company’s revenues during 2012. In 2011 gas prices in Italy hit record highs due to supply constraints, changes in European energy procurement behaviour and booming commodity markets. The benchmark ENI gas release price used in the Italian market showed remarkable growth starting the year at 30.92 € cents per cubic metre and closing at 43.25 € cents per cubic metre in the month of December. Gas prices are forecast to remain strong throughout 2012. As a company, we believe that market dynamics driven by Germany’s recent decision to phase out nuclear energy, the standstill on shale gas development in many European countries coupled with declining North Sea gas production will inevitably appreciate the value of domestic oil and gas plays. During the year, the Company reinforced its technical team with additions in the areas of geoscience and reservoir engineering and we continue to seek specific skills to complement our talented team through individuals with on-the-ground experience in Italy as we believe this plays an important role in the success of our endeavours. In 2012 the Company engaged Fugro Robertson Ltd. to perform an independent audit on its reserves and resources, the results of which were communicated to shareholders and are summarised in this annual report. Key operational priorities for 2012 include maintaining steady production at the Sillaro and Castello gas fields, drilling at least 2 new exploration wells, progressing an application for production concession for the Sant’Alberto gas field and securing the production concession for the Bezzecca field. Po Valley will also continue to seek out attractive new exploration and production opportunities to achieve long term growth. The near term will involve a considerable effort on the part of the Company’s executive team, given the extent of the work commitments necessary to maintain our current exploration portfolio. Ongoing new studies are leading to the development of a number of important new projects such as the shallow gas and heavy oil plays within the Cadelbosco di Sopra and Grattasasso licenses. These targets include two promising heavy oil plays which could add material value to the company’s growth prospects. The Company made a particular effort in 2011 to strengthen relationships in the local communities in which it operates. An Italian language web site started this initiative early in the year and was coupled with constructive interaction in a ‘community energy fair’ held mid-summer. It is pleasing to note that the Company operated 41.800 man hours during the year with no accidents or safety incidents and no material environmental issues. We take our responsibility to operate safely and with concern for the environment very seriously. I believe that the Company is well positioned with its proven operational track record to execute near and long term goals in order to unlock maximum shareholder value. I would like to thank our staff, Senior Management and our Board for all their hard work and loyalty shown throughout this pivotal year. I also thank our shareholders and reiterate our appreciation of your continued support. ’ I T R O P E R S R E C F F O E V T U C E X E F E H C I I 3 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Production & Development In 2011 41,800 operational man hours with no safety incidents Sillaro achieved first full year of production (28 MScm or 1 bcf) Vitalba1dirA successfully drilled, tested and completed Production restarted at Vitalba gas field in February 2012 Sant’Alberto and Bezzecca production concession applications lodged Drilling approval applications for 3 new wells lodged (Canolo-1,-2 and Zini-1) T N E M P O L E V E D & N O T C U D O R P I 4 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Production & Development ENI GAS RELEASE (€ CENT/SCM) TOTAL MAN HOURS 2005-2011: 183,700 TOTAL MAN HOURS 2011: 41,800 ,*#,'#+/+('0(#&%! "4$2"4!'()!*+,-.! -.'! "3$#%2!'()!*+,-.! #%,)($$()#-%! 11$/%2!'()! *+,-.! !"#$$#%&! ""#$%&%!'()!*+,-.! '(#%)*%(%+*! "$/&0!'()!*+,-.! ,*#,'#+! +('0(#&%! "4$2"4!'()! *+,-.! -.'! 3$"%2!'()! *+,-.! !"#$$#%&! /1$41%!'()! *+,-.! '(#%)*%(%+*! "#/!'()!*+,-.! 2005-2011 2011 ITALIAN GAS MARKET Being highly dependent on foreign energy sources, Italy has some of the highest energy prices in the world. What’s more, energy security and new found concerns regarding the dependence on and reliability of Russian and North African imports is putting a premium on commercial gas reserves within Europe. Consequently, reserves do not have to be large and geographically concentrated in order to be commercially viable. Indeed, high energy prices are coupled with an extensive national grid (over 29,000 km long) and strong demand which result in attractive development economics. Annual gas consumption in Italy, which reached 83 billion cubic metres, increased in 2010 marking the ﬁrst signs of growth since 2005. Key growth drivers stemmed from the residential (domestic and services) and industry sector both of which recorded a year on year increase of 7.1 percent. Although Italy has a solid potential for gas production, it continues to be heavily dependent on foreign energy sources. Gross demand was primarily met by net imports (approximately 90%) while national production remained steady at 10% of total gas consumption. Interestingly, events in February 2012 including extreme weather conditions have pushed domestic gas production into the Italian headlines and the top of the new government’s priority list. SUSTAINABILITY Po Valley Energy strives to maintain and continuously improve our already high standards of health, safety and environmental (HSE) practice throughout our operations. The commitment to HSE objectives is shared by Company’s staff and contractors and is a key priority for Po Valley. Safety remained a priority in 2011 when the Company undertook its ﬁrst seismic acquisition campaign and also during the workover of our Vitalba1dir A well. A simple and clear set of procedures helps the Company, its staff and contractors to avoid and manage emergency situations. Contractors are chosen according to Company HSE Policy and practices with the aim being to minimise possible environmental incidents and/or disturbance to local communities. At 31 December 2011 the Company had a cumulative total of 41,800 man hours on site without a single lost time incident thanks to strong safety controls. A clear, open and continuous dialogue with the local communities has been key to success for our operations. We are continuing to develop this approach and are encouraged by the positive and supportive response from the national, regional and local authorities. PROJECT PIPELINE & OPERATIONS MARCH 2012 EXPLORATION APPRAISAL/DEVELOPMENT PRODUCTION LICENCE APPLICATION LICENCE GRANTED • La Risorta - Ariano - Corcrevà - D. Delle Anime • La Prospera - Gradizza #1 - Pioppette - Capitello • Tozzona - (Preliminary granted) • P. Gallina - Cembalina - F. Perino • Torre del Moro • Opera - Barona Lead - Opera Lead • Terra del Sole LICENCE APPLICATION • AR168PY LICENCE GRANTED • Crocetta - Carola/Irma - Fantuzza #1 • Cadelbosco/ Grattasasso - Canolo #1, #2 - Zini #1 - Bagnolo (Oil) - Ravizza (Oil) LICENCE APPLICATION • S. Vincenzo - Sant’Alberto LICENCE GRANTED • C. Castello - Vitalba • C.S. Pietro - Bezzecca • Sillaro - Sillaro Undiscovered Prospective Resources Discovered Contingent Resources Reserves T N E M P O L E V E D & N O T C U D O R P I 5 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Production SILLARO SILLARO SILLARO: PRODUCING LEVELS O R A L L S / I I O R A L L S N O T C U D O R P I 6 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P KEY INFORMATION Interest: 100% Wells: 2 producing Location: Bologna, Emilia Romagna Production: 2.7 MScf/day Production start: Q2 2010 Remaining Reserves at 31/12/2011: 1P 6.3 bcf 2P 7.1 bcf Invested capital € 16.1m DEVELOPMENT PLAN: At the beginning of 2012, due to colder winter temperatures, low levels of condensate production were detected. The Company is currently evaluating the installation of onsite standard condensate processing equipment to address this minor condensate generation. In the meantime, in order to minimise condensate production, the PL2 C1+C2 producing level of the Sillaro-1 well was suspended in February 2012 and the new level PL2 B1 opened. As a result the Sillaro ﬁeld The Sillaro gas ﬁeld, located 30 km east of Bologna, produces from 2 wells in the Pliocene sequences – Sillaro-1 (3 levels completed) and Sillaro-2dir (6 levels completed) – to optimise total ﬁeld recovery. The ﬁeld commenced production in May 2010 from Sillaro-2dir and the following month the Sillaro-1dir well was tied-in. will produce at a lower daily rate of 60,000 Scm/day (2.1 MScf/day) until condensate handling equipment is installed. SILLARO - TOTAL GAS FLOW RATE (Scm/day) AND CUMULATIVE PRODUCTION (MScm) 2011 WORK: In 2011 Sillaro achieved its ﬁrst full year of production. In May a planned 3-day shut- down allowed the Company to record the bottom hole pressure, with the aim of evaluating reservoir behaviour one year after production started. The results conﬁrmed the remaining 1P (Proven) reserves of 178.4 MScm (6.3 bcf) of gas and 2P (Proven+Probable) reserves of 201.1 MScm (7.1 bcf). In July, in line with the ﬁeld development plan, the Company closed level PL2E (which had produced in excess of initial reserve estimates: 5.9 MScm vs 4.1MScm) and opened level PL2C0. During 2011 Sillaro achieved total production of 28 Mscm (1 bcf) at an average gas ﬂow rate of around 79,000 Scm/day (2.7 Mscf/day). Production CASCINA CASTELLO VITALBA CASCINA CASTELLO: GEOLOGICAL SECTION A B L A T V / I I O L L E T S A C A N C S A C N O T C U D O R P I 7 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P KEY INFORMATION Interest: 100% Wells: 1 producing Location: Milan, Lombardia Production: 0.6 MScf/day Production start: Q4 2009 1Q 2011 after workover Reserves (after Vit1dirA workover): 1P 1.0 bcf 2P 1.8 bcf Invested capital € 12.8m of SAN A2 gas bearing sand structurally higher than Agnadello. Regrettably the SAN A1 sand, although higher than in Agnadello, was found to be water bearing due to a rise in the gas/water contact. During well clean-up, the flow-rate from the Pliocene SAN A2 level reached 79,000 Scm/day (2.6 MScf/day) with a 1/4” choke, stabilising at 40,000 Scm/day (1.4 MScf /day) with a 3/16” choke and 17,000 Scm/day (0.6 MScf/day) with a 1/8” choke. Our Vitalba-1dir well, located east of Milan, was drilled in 2005 at a location structurally updip from the former ENI Agnadello-1 well which produced about 358 MScm of gas (12.6 bcf ) from 1980 to 1989. The Vitalba-1dir well was completed over two gas bearing levels (SAN A1 and SAN A2). In 2010, due to the pressure and flow rate drop and water incursion, the Company reduced production from the well and decided to side track the existing well to recover the remaining attic gas, estimated to be around 100 MScm (3.5 bcf ) based on seismic reinterpretation and a subsequent static and dynamic study from Dedicated Reservoir Engineering and Management (DREAM). 2011 WORK: In preparation of the planned work- over, which included a side track (Vitalba-1dirA), updip from Agnadello-1 and downdip from Vitalba-1 dir, civil works were carried out in September 2011, while drilling was undertaken in November 2011. The well reached a total measured depth of 1,730 metres (1,524 metres total vertical depth) and found 4 metres In all cases initial pressure was completely recovered and there was no water produced. Production restarted on 8 February 2012 from the Pliocene SAN A2 sand level at a rate of about 14,000 Scm/day (0.5 MScf/day) and gradually increased to reach a stabilised rate of 17,000 Scm/day (0.6 MScf/day). No safety incidents occurred during the work-over drilling and reconnection to the gas treatment plant. DEVELOPMENT PLAN: The Company will continue production while carefully monitoring the performance of the new well. Internal assessment of SAN A2 remaining gas reserves estimates Proven Reserves of 28.3 MScm (1.0 bcf ) and Proven plus Probable reserves of 51.0 MScm (1.8 bcf ). After the ﬁrst production phase an updated static and dynamic model of the ﬁeld will be developed. A C C E Z Z E B / I O L L E T S A C A N C S A C T N E M P O L E V E D 8 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Development CASCINA CASTELLO BEZZECCA BEZZECCA: SEISMIC LINE CR-305-78 The Bezzecca gas ﬁeld (former ENI Pandino gas ﬁeld) is located 35km east of Milan. The ﬁeld was originally brought into production in the 1950s by ENI and production from its 8 wells reached about 148 MScm (5.2 bcf ) of gas. Our Bezzecca-1 well was drilled in March-May 2009 to a depth of 2,010 metres and was tested across three gas bearing levels of lower Pliocene and upper Miocene sequences. The tests ﬂowed at stabilised rates up to 62,000 Scm/day (2.2 MScf/day) and exhibited rapid pressure recovery. The well was then completed in single-selective mode over the three levels. 2011 WORK: An application to increase the size of the existing Cascina Castello production licence to include the nearby Bezzecca area was lodged in January 2011. Interest: Location: Production start: KEY INFORMATION 100% Wells: 1 in place + 1 development to be drilled Milan, Lombardia Expected Production: Q2 2013 Contingent Resources: Invested capital € 4.7m 0.7 to 2.1 MScf/day 1C 0.7 bcf 2C 4.1 bcf development well Bezzecca-2 planned after 18 months of production to drain the area of the ﬁeld structurally updip from the Bezzecca-1 well. In the remaining part of the Cascina San Pietro exploration licence, near the Bezzecca and Vitalba areas, additional geological and geophysical interpretation work is planned in order to assess the residual gas potential of the former Gandini gas ﬁeld that produced 170 MScm (6.1 bcf ) of gas from 2 wells. APPLICATION FOR EXTENSION OF “C. CASTELLO” PRODUCTION CONCESSION “BEZZECCA” GAS FIELD, DEPTH MAP TOP MI3-T (c.i. 5m) In mid-2011, the Ministry requested additional technical and economic information and this was provided in October 2011. The ﬁnal Environmental Impact Assessment was submitted to the Ministry in February 2012. DEVELOPMENT PLAN: The Company’s current plan is to connect the Bezzecca-1 well to the existing Vitalba production plant via a 7 km gas gathering line. A two-stage development programme is envisaged for the ﬁeld, with a second Development SAN VINCENZO SANT’ALBERTO S. MADDALENA: SEISMIC LINE SV05-11PV The Santa Maddalena gas field (formerly ENI S. Pietro in Casale) is located 40 Km north of Bologna. The field was brought into production in the 1950s by ENI and historic production from its 14 wells reached about 480 MScm (17 bcf ), of which 178 MScm (6.2 bcf ) was from Block-5 where our Santa Maddalena1dir well is located. The Santa Maddalena1dir well was drilled in 2004 by the previous operator (Edison) and the test flowed up to 100,000 Scm/day (2.8 scf/day). In 2008 Po Valley gained 100% ownership of the licence. 2011 WORK: In February 2011, the Company shot 31 km of 60 fold 2D seismic lines. Seismic quality was good and the Company finalised a new seismic interpretation of the field. This was incorporated into an updated static KEY INFORMATION Interest: Location: Production start: 100% Wells: 1 in place + 1 development to be evaluated Bologna, Emilia Romagna Expected Production: 0.9 to1.8 MScf/day Q3 2013 Contingent Resources: 1 C 1.8 bcf 2C 2.1 bcf Invested capital € 1.6m DEPTH MAP LEVEL PL1-H (c.i. 10m) and dynamic reservoir model prepared by DREAM which indicated gas resources of 1C 51.0 MScm (1.8 bcf ) to be produced from our Santa Maddalena1dir well. The updated Production Concession application, which incorporated this evaluation of the remaining potential of the field, was submitted to the Ministry in February 2012. DEVELOPMENT PLAN: Once the S. Alberto production licence is granted, the development plan is to produce from the single completed S. Maddalena1dir well. The Company will then evaluate the feasibility of a second well in the eastern portion of Block-5, based on the production behaviour of the Santa Maddalena1dir well, as well as new seismic reinterpretation of the area using additional existing ENI seismic which will be purchased, reprocessed and integrated with the 2011 data. O T R E B L A T N A S / ’ I O Z N E C N V N A S T N E M P O L E V E D 9 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P O N A P N I I O L O N G A B , I , I N Z O L O N A C / A R P O S I D O C S O B L E D A C T N E M P O L E V E D 10 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Development CADELBOSCO DI SOPRA CANOLO, ZINI, BAGNOLO IN PIANO DEPTH MAP TOP BAGNOLO LIMESTONE Fm (c.i. 20 m) TOP PL2/D (DEPTH) - CANOLO PROSPECT KEY INFORMATION Interest: Location: 100% Wells (Quat+Plioc): 3 appraisal/ development (Zini-1; Canolo-1; -2) Reggio Emilia, Emilia Romagna Expected gas production (Quat+Plioc): 2.5 to 4.3 MScf/day Gas production start: Q2 2014 Expected oil production: ≥ 500 bbls/day Oil production start: Q1 2015 Gas Contingent Resources:1C 2.2 bcf (Quat+Plioc): 2C 7.4 bcf Oil Contingent Resources: 1C 3.7 mmbbls 2C 4.3 mmbbls Invested capital € 0.7m DREAM, assessed the remaining Quaternary and Pliocene potential. Two Quaternary prospects, Canolo-1 and Zini-1 (2C: 31.2 MScm and 76.5 MScm, respectively 1.1 bcf and 2.7 bcf ), and one Pliocene prospect named Canolo-2 (2C: 101.9 MScm, 3.6 bcf ) have been identified and drilling approval applications were lodged in 2012. The licence also includes the Bagnolo in Piano deep (Cretaceous carbonates) oil discovery (three wells drilled by ENI in the 1980s). Structural seismic interpretation together with former well information and core data has been reviewed to determine the oil potential of the feature. DEPTH MAP TOP PLQ-B (c.i. 2m) - ZINI PROSPECT LICENCE STATUS: Cadelbosco di Sopra exploration permit, together with the adjacent Grattasasso permit, was awarded to the Company in February 2011. UPDATE: In 2009 a preliminary exploration assessment of the former ENI Correggio gas field (which produced 7.1 BScm / 253 bcf from 41 productive wells) confirmed the presence of remaining gas potential in this area. During 2011 the Company processed 111km of 2D seismic (purchased from ENI) and together with a dynamic study and history match analysis carried out by Development GRATTASASSO RAVIZZA CADELBOSCO - GRATTASASSO: PLAY MAP DEPTH MAP RAVIZZA LIMESTONE (c.i. 20m) KEY INFORMATION Interest: Location: Production start: 100% Wells: To be evaluated Reggio Emilia, Emilia Romagna Expected oil Production: ≥ 500 bbls/day Q1 2015 Oil Contingent Resources: 1C 2.2 mmbbls 2C 5.7 mmbbls Invested capital € 31k to perform a static reservoir study and to determine the oil potential of the feature. The drilling of the quaternary Canolo-1 prospect referred to above, which borders the Cadelbosco permit, will provide indications on the gas extension of the related seismic anomaly in the Grattasasso permit. LICENCE STATUS: This licence, north of Cadelbosco di Sopra, was awarded to the Company in January 2011. It includes the deep Oligocene/Eocene Ravizza oil discovery (1 well and 3 side-tracks drilled by ENI in the 1980s). UPDATE: Structural seismic interpretation, together with prior well information and core data, was collected I A Z Z V A R / O S S A S A T T A R G T N E M P O L E V E D 11 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P LINE A84-265 Development AR168PY IRMA CAROLA LICENCE STATUS: AR168PY is located offshore in the north Adriatic sea (water depth: 30 - 50m). ENI previously drilled and tested positive gas ﬂows in separate wells during the 1980s and 1990s – Irma1, Carola1, Carola2 – prior to relinquishing the area. The exploration licence was preliminarily awarded to Po Valley in 2008 and during 2009 the environmental clearance was completed. The preliminary award was challenged in the Regional Administrative Tribunal by the unsuccessful bidder, however the Tribunal rejected the appeal clearing the way for the ﬁnal grant of the licence to Po Valley. UPDATE: During 2011 a new licence perimeter was deﬁned to comply with the new coastal protection law and the licence now covers an area of 205 square kilometres. The ﬁnal award is expected soon. The Company is proceeding with the review of the Carola/Irma discoveries and has received all existing technical documentation from the Ministry. The process of selecting key seismic 3D data to be purchased from ENI is underway. Interest: Location: Production start: KEY INFORMATION 100% Wells: 2 to be drilled Northern Adriatic Expected Production: 3.5 to 7.0 MScf/day Q1 2015 Contingent Resources: 1C 22.0 bcf 2C 24.8 bcf Invested capital € 0.2m DEPT MAP TOP Qu4-A (c.i. 2m) TOP Qu-D1 (DEPTH) + SEISMIC AMPLITUDE ANOMALY (3D DATA) A L O R A C A M R I / 8 6 1 R A T N E M P O L E V E D 12 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Development CROCETTA FANTUZZA FANTUZZA SEISMIC LINE FOR 200 LICENCE STATUS: After the award of the Sillaro Production Concession, the Crocetta Exploration Licence is now under a three year extension. This permit contains the former Budrio gas ﬁeld discovered by ENI, in the 1950s, that produced around 10 MScm (0.35 bcf ) of gas from 2 wells. UPDATE: In June-July 2010 DREAM carried out a static and dynamic reservoir re-assessment of the recoverable reserves through a comprehensive seismic reinterpretation together with existing ENI well data. The Fantuzza-1 well (estimated depth of 2,600 metres) is designed to prove the gas potential of this upper Miocene reservoir. The resulting estimated resources are: 1C 51 MScm (1.8 bcf ) from 1 well and 2C 161.4 MScm (5.7 bcf ) from 2 wells. DEVELOPMENT PLAN: The Fantuzza-1 drilling program has received environmental clearance and KEY INFORMATION Interest: Location: Production start: 100% Wells: 1 appraisal + 1 development to be evaluated Bologna, Emilia Romagna Expected Production: 1.6 to 3.2 MScf/day Q1 2014 Contingent Resources: 1C 1.8 bcf 2C 5.7 bcf Invested capital € 0.3m the final drilling approval from the Ministry is expected shortly. Anticipated production from the 2-well development is estimated to be in a range of 45,000/90,000 Scm/day (1.6/3.2 MScf/day). Once completed, the wells will be connected to existing Sillaro production facility via approximately 2 km of gas gathering line. DEPTH MAP TOP OF MIOCENE (c.i. 20m) A Z Z U T N A F / A T T E C O R C T N E M P O L E V E D 13 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Exploration & New Ventures New oil opportunities of Ravizza and Bagnolo in Piano evaluated Acquisition, processing and interpretation of 2D seismic survey in San Vincenzo and Podere Gallina permits completed Tozzona exploration block preliminarily awarded; EIA clearance under way Adjusted perimeter of AR168PY accepted by the Ministry, final grant to follow Gradizza-1 and Fantuzza-1 final drilling approval expected shortly S E R U T N E V W E N & N O T A R O L P X E I 14 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Exploration LA PROSPERA GRADIZZA DEPTH MAP INTRA ASTI SAND Fm (c.i. 5m) GRADIZZA PROSPECT GRADIZZA SEISMIC LINE RO 74-10 KEY INFORMATION Interest: Location: Production start: 100% Wells: 1 exploration (Gradizza-1) Ferrara, Emilia Romagna Expected Production: Q4 2013 Prospective Resources: Invested capital € 0.4m 3.0 MScf/day Best 9.0 bcf High 16.0 bcf LICENCE STATUS: This licence, located in the Ferrara province north of Bologna, was awarded in September 2008. A subsequent seismic interpretation of 68km of ENI seismic lines has identified within the Quaternary sequence the Gradizza prospect, with predicted target depth of 1,000 metres and prospective best estimates gas resources of 254.9 MScm (9.0 bcf ). The drilling program was lodged during January 2010 and the Environmental Impact Assessment (EIA) has received formal clearance; final drilling approval is expected soon. UPDATE: During 2011 the Company focused on progressing the technical work needed to obtain the final drilling approval and strengthening the Company’s relationship with the local municipality. The PVE drilling plan was presented and accepted by the local community as an important element for their local energy strategy. I A Z Z D A R G / A R E P S O R P A L N O T A R O L P X E I 15 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Exploration PODERE GALLINA CEMBALINA TOP OF PLIOCENE 1A (TWT) & 2D 2011 SEISMIC LINES ACQUIRED (14.7 km, PG-1-2-3) LICENCE STATUS: The exploration permit area measures about 331 Km2 and it is situated in the eastern part of the Po Plain, South of the Po Delta, among the Ferrara and Bologna provinces, in the Emilia-Romagna region. The licence was awarded in 2008. UPDATE: During 2011, the assessment of the Cembalina shallow gas prospect (predicted depth of 1,200 metres) in the Podere Gallina exploration permit was finalised. The prospect carries prospective best estimate resources of 87.8 MScm (3.1 bcf ). Cembalina’s final structural framework was defined by interpreting 15 Km of acquired 2D seismic lines in February/March 2011. Assessment of the remaining potential KEY INFORMATION Interest: Location: Production start: 100% Wells: 1 exploration (Cembalina-1) Ferrara, Emilia Romagna Expected Production: Q1 2014 Prospective Resources: Invested capital € 0.6m 1.7 MScf/day Best 3.1 bcf High 3.9 bcf of the nearby Monestirolo gas field (20 MScm / 0.7 bcf produced from two wells) will be finalised after the purchase of existing seismic data from ENI. Within the same licence area, priority will be given in 2012 to additional geological and geophysical interpretation work to assess the residual gas potential of the Selva gas field, where the Fondo Perino lead has been identified. Selva produced 2.3 BScm (83.8 bcf ) of gas from 15 wells over 35 years. PLAY MAP I I A N L A B M E C / A N L L A G E R E D O P N O T A R O L P X E I 16 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P New Ventures Within LA RISORTA exploration permit (preliminarily granted), located in the north east of the Ferrara province, the Company is progressing studies for promising gas prospects (Dosso delle Anime, Ariano and Corcrevà) with target depths ranging from 1,200 and 2,100 metres. Preliminary evaluation of total best prospective resources amounts to 1.2 BScm (43.7 bcf - unrisked). The company plans to purchase existing ENI seismic in order to finalise the evaluation of the gas potential of the prospects and select drilling locations. The regulatory process is proceeding slowly due to local regulations. The TOZZONA application, filed in June 2010, was preliminarily granted to Po Valley in February 2011, but the Ministry’s decision has been contested through court appeal by the unsuccessful bidder. In the meantime, environmental impact clearance is underway and expected to be finalised soon. The application area lies along the eastern border of TOZZONA EXPLORATION LICENCE TORRE DEL MORO EXPLORATION LICENCE VILLAFORTUNA-TRECATE OIL FIELD GEOLOGICAL SKETCH S E R U T N E V W E N 17 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P LA RISORTA EXPLORATION LICENCE the existing ENI gas production licence containing the Santerno gas field (905 MScm/ 32 bcf of gas produced to date). The main gas targets are represented by Mio-Pliocene reservoirs within structural traps. The TORRE DEL MORO application (similar to the Villafortuna oil carbonate play) was lodged with the Ministry 13 July 2011. No competing company has applied for this area, therefore a preliminary grant of the licence is expected soon. The Reserves & Resources statement summary table can be found on page 70. Corporate Governance Statement T N E M E T A T S E C N A N R E V O G E T A R O P R O C 18 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P PO VALLEY ENERGY (“the Company” or “PVE”) and its Board of Directors are committed to achieving a high standard of corporate governance, which they acknowledge is essential to create and build sustainable value for shareholders. The Directors endeavour to meet the standards of best corporate governance for listed companies as set out in the Corporate Governance Principles and Recommendations of the ASX Corporate Governance Council (ASX Corporate Governance Recommendations) as appropriate for a company of PVE’s nature and size. The Company’s corporate governance practices are summarised below. BOARD & MANAGEMENT The primary responsibility of the Board and management is to preserve and increase 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 is responsible for establishing a company culture of high ethical, environmental, health and safety standards. The Board has a formal charter and has defined the functions reserved to the Board and those delegated to senior management. The primary responsibilities of the PVE Board are to review, advance and approve PVE’s objectives and strategies, business plan and annual budget, exploration and development programs and capital management. PVE’s businesses, financial performance and corporate governance are monitored by the Board which also ensures that 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. STRUCTURE OF THE BOARD There are currently five Non Executive Directors on the Board. The Board has been structured to include Directors with a versatile set of skills, expertise and experience to enable the Board to execute its duties and responsibilities for the proper and effective management of the Company. In particular, the Directors’ have skills and experience spanning the areas of resources and mining, finance, management consulting, public company affairs and corporate governance. The Directors Report on page 22 contains further details of the experience of each Director and their term of office. One-third of the Board is subject to re-election at each annual general meeting in accordance with the Company’s Constitution. INDEPENDENCE The Company currently has three independent Non Executive Directors, Graham Bradley (the Chairman), David McEvoy and Gregory Short. Byron Pirola and Michael Masterman are not considered to be independent as they currently are substantial shareholders, each holding more than 5% of the Company’s shares. The independence of Directors is regularly assessed by the Board and in doing so it has careful regard to Corporate Governance Statement the ASX Corporate Governance Recommendations. The Board assesses the materiality of the interest or relationship when determining if it would be such as to interfere with a Director’s independence. The Board considers the following to be material: • A Director is a professional adviser or consultant to PVE and/or its affiliates (or officer of or associated with such person) and/or the payments from PVE to such an 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; • A Director is a supplier or customer to PVE or its affiliates (or officer of or associated with such person) and/or 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 In connection with their duties and responsibilities, Directors have the right, to seek independent professional advice at the Company’s reasonable expense. Prior approval of the Chairman is required which will not be unreasonably withheld. REMUNERATION AND NOMINATIONS COMMITTEE The Company has a Remuneration and Nominations Committee which provides recommendations to the Board on matters including: • Appointment and evaluation of the CEO and the process for evaluation of Senior Executives. • The Company’s remuneration policies and practices and the remuneration of the CEO, Senior Executives, and Non Executive Directors. • 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. Graham Bradley (Chairman), Byron Pirola and Michael Masterman are the current members of the committee. Attendance details of the committee meetings held during 2011 can be found on page 24 of the Directors Report. The committee is structured in accordance with the ASX Corporate Governance Guidelines in so far as it is chaired by an independent chair and has three members, however, it does not consist of a majority of independent directors given that two of its members, Mr Masterman and Dr Pirola are not considered independent due to their substantial shareholdings. Board performance is reviewed annually by the committee. As part of the annual Board review, all Directors must complete a Board Evaluation Questionnaire, the results of which are then analysed and considered by the Board. The last such review was conducted in December 2011. The Board has not formalised the procedures for selection and appointment of new directors or re-election of incumbent directors, however, the Board regularly reviews its composition to determine whether it has the right mix of skills and experience. The Remuneration and Nominations Committee is also responsible for ensuring an appropriate process is followed for the review of the performance of the CEO and Senior Executives. At the beginning of each year, the committee approves company and individual performance objectives for the CEO and Senior Executives. Performance is evaluated and any performance based remuneration for the CEO, Senior Executives and management is approved at the end of each year. Performance objectives are a combination of company and individual objectives. The Remuneration and Nominations Committee evaluated the performance of the CEO and Senior Executives in accordance with this process in December 2011. AUDIT AND RISK COMMITTEE The Company has established an Audit and Risk Committee which provides advice and assistance to the Board in fulfilling its corporate governance and oversight responsibilities in relation to internal and external audit, risk management systems, financial and market reporting, internal accounting, financial control systems and other items as requested by the Board. The committee has adopted a formal charter. In fulfilling its obligations, the committee has direct access to employees, the auditors or any other independent experts and advisers it considers appropriate to carry out its duties. Byron Pirola (who chairs the committee), David McEvoy and Gregory Short are the current members of the committee which has been structured to comply with the ASX Corporate Governance Guidelines and: • 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 number of Audit and Risk Committee meetings held in 2011 and Director attendance is set out in the Directors Report on page 24. Committee member qualifications are set out on Page 23. RISK MANAGEMENT Risk recognition and management are considered critical to creating and maintaining shareholder value and the successful execution of the Company’s strategies in gas exploration and development. The Board has 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. During the year, senior management was required to design and implement a risk management and internal control system for the management of material business risk and, during the year, management reported to the Board on the on the effectiveness of this system. 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 laws and regulations, to respect confidentiality and the proper handling of information and act with the highest standards of honesty, T N E M E T A T S E C N A N R E V O G E T A R O P R O C 19 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Corporate Governance Statement T N E M E T A T S E C N A N R E V O G E T A R O P R O C 20 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P integrity, objectivity and ethics in all dealings with each other, the Company, customers, suppliers and the community. The Company has adopted a code of conduct, which will be regularly reviewed and updated as necessary to ensure it reflects the highest standards of behavior and professionalism. DIVERSITY The Company's policy is to ensure that hiring, employment and board selection policies avoid gender bias and encourage diversity to the extent possible for a small organisation. Po Valley currently employs 12 full time employees of whom 5 are men and 7 are women. Our Senior Executive ranks include a degree of diversity with women occupying the roles of Company Secretary and General Manager Finance (our most senior finance executive). Additionally, Po Valley has women holding key roles including, head of accounting and in the area of corporate and public relations. The Company's employees and Directors are drawn from a variety of nationalities, age, ethnic and cultural backgrounds. The Board believes that, given the highly specialised nature of the Company’s most senior positions which are of a technical nature, it is unrealistic to set gender diversity targets at this time in the Company's evolution. The Board is committed to maintaining a corporate culture which supports workplace diversity. CONTINUOUS DISCLOSURE The Company is committed to complying with its continuous disclosure obligations as set out in the ASX Listing Rules and the ASX Corporate Governance Recommendations. The Company has adopted a Continuous Disclosure Policy designed to ensure that investors can readily access sufficient information to ascribe a fair value to the Company’s securities, understand the Company’s objectives and strategies and evaluate the Company’s financial position and growth prospects. SECURITIES TRADING The Company has adopted a Securities Trading Policy which complies with ASX Listing Rule 12.2. This policy provides guidance to Directors and employees on the laws relating to insider trading and provides them with practical guidance to avoid unlawful transactions in Company securities. Specifically, Directors and employees are not permitted to engage in short term trading of the Company’s securities and are prohibited from trading securities during “blackout” periods (the "blackout” period is defined as between the close of the listed entity’s financial period and the announcement of its half-year or full-year result). Directors and employees are also prohibited from dealing in any derivative products issued in respect of the Company’s shares. 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 obliged to inform the Chairman of any related party contract or potential contract. The Chairman will advise the Board and the reporting party will be required to remove himself / herself from all discussions and decisions involving the matter. When appropriate the Board may take further action to avoid conflicts of interest in related party matters. SHAREHOLDER COMMUNICATIONS The Company has implemented a Shareholder Communications Policy to ensure that shareholders, on behalf of whom they act, and the financial market have timely access to material information concerning the Company. The Policy sets out the communication guidelines established by the Company. The Company website is used to complement the official ASX release of material information and periodic reports to the market. The website ensures that all press releases, ASX announcements, notices and presentations from the past three years are easily accessible to the public. The Company is committed to ensuring that all 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 the opportunity to submit written questions for consideration by the Board at the annual general meeting. CORPORATE GOVERNANCE POLICIES AND CHARTERS Further information regarding 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 under the ‘About Us’ / ‘Corporate Governance’ link. • Constitution; • Board & Governance Statement; • Code of Conduct; • Hydrocarbons Reserve Policy; • Continuous Disclosure Policy; • Securities Trading Policy; • Shareholder Communications Policy; • Audit & Risk Committee Charter; • Remuneration & Nominations Committee Charter. HEALTH & SAFETY POLICY OVERVIEW Po Valley Energy is dedicated to pursuing the highest Health and Safety standards in the workplace. We regard Environmental awareness and Sustainability as key strengths in planning and carrying out our business activities. PVE’s daily operations are conducted in a way that adheres to these principles and we are committed to their continuous improvement. Environmental sustainability and Health and Safety in the workplace are recognised as an integral part of our business strategy and corporate citizenship. In every instance, we aim to employ the most advanced technology and know-how and to apply the most suitable precautionary measures to each situation while adhering to the highest safety standards. SCOPE AND PURPOSE The Company’s main objective is to create a work environment where risks are constantly monitored and minimised, therefore limiting the exposure to risk for our workers, contractors, consultants and visitors. Health and Safety in the work place and environmental Corporate Governance Statement HSE REPORT 2011 MAN HOURS FROM LAST INJURY 55,100 protection are part of the responsibilities of each individual involved in our operations, and PVE aims to supply all necessary tools to guarantee the highest level of safety awareness and engagement by our employees and contractors. Appropriate protection policies are an important selection criteria for contractors, whose activities are monitored for compliance. PROCESSES PVE has developed a series of procedures and routine checks (including periodical audits) to ensure compliance with all legal and regulatory requirements and best practices. These are summarised in our integrated HSE Management System (SGSL). Management endorses these principals at all Company levels and actively integrates them into the HSE Management System. Management and site supervisors are responsible for the correct application of the HSE Management System and its upkeep. Contractors and subcontractors’ activities are required to be carried out in full compliance with the Company’s HSE policy and in complete compliance with all HSE laws currently in force. The Company’s Health, Safety and Environmental policies are also based on the principle of transparent communication. Specifically, each project is managed to ensure open and constructive communication flow with relevant stakeholders. Furthermore, PVE is committed to maintaining effective communication with government authorities, both national and local, and directly with the communities where our operational activities take place. T N E M E T A T S E C N A N R E V O G E T A R O P R O C 21 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 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 2011. T R O P E R ’ S R O T C E R D I 22 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 1 DIRECTORS The directors of the Company at any time during or since the end of the ﬁnancial year are: DIRECTORS M. Masterman DATE OF APPOINTMENT 22 June 1999 (Managing Director) 11 October 2010 (Non Executive Director) B. Pirola 10 May 2002 G. Bradley 30 September 2004 D. McEvoy 30 September 2004 G. Short 5 July 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. Graham Bradley Chairman BA, LLB (Hons), LLM, FAICD Age 63 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 and Company. Mr Bradley is currently Chairman of Stockland Corporation Limited, HSBC Bank Australia Limited and Anglo American Australia Limited and a director of GI Dynamics Inc. Graham is Chairman of the Remuneration and Nomination Committee and was a member of the Audit and Risk Committee until December 2010. Directors’ Report Michael Masterman Non Executive Director BEcHons Age 49 Byron Pirola Non Executive Director BSc, PhD Age 51 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 and 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 and Nomination Committee from 1 January 2011. David McEvoy Non Executive Director BSc, Grad Diploma (Appl. Geophysics) Age 65 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, AWE Limited and Innamincka Petroleum Limited. David is a member of the Audit and Risk Committee. 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 and 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. Gregory Short Non Executive Director, BSc Age 61 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. Greg became a member of the Audit and Risk Committee from 1 January 2011. 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 and commercial practice of Allen Allen and 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. T R O P E R ’ S R O T C E R D I 23 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Directors’ Report 3. Directors Meetings The number of formal meetings of the Board of Directors held during the financial year and the number of meetings attended by each director is provided below: 15 km 2D seismic acquisition campaign in the Podere Gallina permit area on the Cembalina prospect. During the reporting period, the Company expanded its portfolio with the grant of exploration licences Cadelbosco di G Bradley M Masterman D McEvoy B Pirola G Short 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 * attended meeting as an observer 8 8 n/a 2* 2 2 8 8 n/a 2* 2 2 8 8 3 3 n/a 2* 8 8 3 3 2 2 8 7 3 3 n/a 1* Sopra and Grattasasso in the Po Valley basin. The company purchased and analysed 111 km of ENI 2D seismic lines related to these fields. Supplementary geological and geophysical studies have resulted in the identification of two low risk gas plays and two oil plays located in these two permits. Geological, exploration and appraisal work advanced on a number of other company prospects. Based on this work our forward drilling program for the next 24 T R O P E R ’ S R O T C E R D I 24 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 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 € 4.57 cents (2010: € 2.11 cents). 6. Operating and Financial Review During the year, the Company produced from both its Castello and Sillaro fields with a total combined production of 28.9 million cubic metres of gas (1 billion cubic feet). During the first 8 months of the year, Vitalba-1dir operated at limited rates producing at approximately 3,000 cubic metres per day. In November, the planned Vitalba-1dirA well was deviated from the current Castello plant location and subsequently connected to the existing gas treatment plant. Production from the deviated well commenced 8 February 2011 with initial production at the rate of approximately 15,000 cubic metres per day which will be increased gradually. Production from Castello during the reporting period amounted to 718 thousand cubic metres. Sillaro produced 28.3 million cubic meters in 2011 and produced at approximately 80,000 cubic metres per day during 2011. In May, Sillaro production was stopped for 3 days to record bottom hole pressure readings. The results are encouraging, confirming previously estimated reserves. The Company plans to conduct pressure readings in 2012. The Company also made progress on the development front by submitting the development plan for Bezzecca in January 2011 and finalising an updated development plan for Sant’ Alberto. The updated plan for Sant’Alberto is expected to be submitted in early 2012. As part of the development plan finalisation process, new seismic was shot on the Sant’ Alberto field in February and March 2011. The Company also completed a months is expected to cover the appraisal of the Fantuzza gas field, the appraisal of two Quaternary/Pliocene gas prospects in Cadelbosco di Sopra and the drilling of the exploration gas prospects of Gradizza and Cembalina, subject to ongoing technical assessments, regulatory approvals and available finances. In 2011, the Company lodged two new exploration licence applications (Torre di Moro and Tozzona) and will continue to scout new opportunities in 2012. With the assistance from US advisory firm Moyes and Co, a farm out package, including a number of assets was finalised and the partner search process initiated. Several companies have completed the due diligence phase. The Company plans to maintain operatorship on all permits. Commensurate with its planned work programme, the Company selectively recruited a number of professional staff in 2011, namely in the geoscience and reservoir engineering area and continues to seek specific skills to complement our talented technical team. The year ahead will bring new challenges and opportunities as we manage the increased acreage under tenure including the drilling of exploration wells, together with the potential of a new production concession award. Total revenue from our full year of gas production was € 9,115,046 showing a year on year growth of € 1,957,715 or 27%. Gas prices have increased steadily over the last 12 months. Specifically, average realised gas price for the full year was €/c 31 per cubic metre compared to €/c 29 in 2010. Operating efficiencies were achieved and evidenced by the continuous improvement in operating margins. The Company made a net loss for the 2011 year of € 5,070,764. The Company did, however, generate its first net profit of € 367,010 (unaudited) for the 6 months ended 30 June 2011, but generated a net loss in the second half due primarily to the impairment of resource property costs related to its Castello field by € 5,829,915. But for this non-cash item and other minor impairments, net profit (loss) in the second half would have been approximately € 759,151 (unaudited). Net profit before impairment expense is reconciled to comprehensive loss for the period as follows: Comprehensive profit reconciliation table (in Euro) 2011 2010 Net proﬁt (loss) before impairment expense (unaudited) Impairment on resource property costs for the Castello ﬁeld Impairment on exploration assets and inventory Comprehensive loss for the period 860,797 (1,248,428) (5,829,915) (101,646) (5,070,764) (801,354) (273,814) (2,323,596) Directors’ Report 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, Earnings before interest, tax, impairment, depreciations and amortisation amounted to € 4,411,011 for the year. and remain in place as at the date of this report, for the Directors and executives of the Company. EBITDA (unaudited) is reconciled to statutory results from operating activities as follows: Remuneration Policy The Remuneration and Nominations Committee (Committee) EBITDA reconciliation table (in Euro) 2011 2010 EBITDA 4,411,011 2,218,896 Depreciation and amortisation expense (2,534,799) (2,821,596) Depreciation expense Impairment losses Interest income con current accounts Results from operating activities (25,709) (18,603) (5,931,561) (1,075,168) (5,504) (40,951) (4,086,563) (1,737,423) is responsible for reviewing and recommending compensation arrangements for the Directors, the Chief Executive Officer and the Senior Executive 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 Company’s drawings on the Lloyds (formerly Bank of Scotland) facility amount to € 6 million at 31 December 2011. No repayments were made during the year. The borrowing base ceiling review in November resulted in a borrowing limit of € 7.6 million for the first half of 2012. Share issues during the period were limited to employee bonuses. A total of 598,490 shares were issued at a price of € 0.18 (A$0.25) (338,604 shares issued) and € 0.14 (A$0.19) (259,886 shares issued). The share price was calculated as the market value of shares on date payment was approved by the Board. 7. Dividends No dividends have been paid or declared by the Company during the year ended 31 December 2011. 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 seek a suitable farm-out partner for selected assets. The company also plans to continue to invest in its current exploration portfolio through geological and geophysical studies and, subject to available finances, a drilling program. 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 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. 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 respect of 2011, executive bonuses were paid in 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 Group’s performance and benefits for shareholders wealth the Board has regard to the following indices in respect of the current financial year and the previous financial period: T R O P E R ’ S R O T C E R D I 25 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Directors’ Report Indices 2011 2010 2009 2008 2007 Loss attributable to owners of the company (€'000s) * Earnings / (loss) per share (€ cents per share) * Dividends paid Share Price at year end - AU $ * 2008 and 2007 are restated to Euro (5,071) (2,324) (7,203) (4,172) (1,572) (4.57) NIL 0.16 (2.11) NIL 0.21 (6.99) NIL 1.68 (4.54) NIL 1.10 (1.78) NIL 1.50 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: 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 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 which are not reflected in the aforementioned 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. More specifically, objectives mainly refer to operating performance from both a financial and technical standpoint and growth and development of the Company’s asset base. The Board exercises its discretion when 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 in the financial year to 31 December 2011 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 approved the maximum agreed remuneration pool for Non Executive Directors at the annual general meeting in May 2011 at € 250,000 per annum. The total fees paid in 2011 to Non Executive Directors was € 182,000 (2010 € 104,900). Directors Graham Bradley, Chairman • Commencement Date: 30 September 2004 / re-elected 19 May 2010 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December 2011: € 50,000 • No termination benefits David McEvoy, Non Executive Director • Commencement Date: 30 September 2004 / re-elected 20 May 2009 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December 2011: € 33,000 • No termination benefits Byron Pirola, Non Executive Director • Commencement Date: 10 May 2002 / re-elected 13 May 2011 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December 2011: € 33,000 • No termination benefits Gregory Short, Non Executive Director • Commencement Date: 21 July 2010 / elected 13 May 2011 • Term of Appointment: 3 years • Fixed remuneration for the year ended 31 December 2011: € 33,000 • No termination benefits Michael Masterman, Non Executive Director • Commencement Date: 22 June 1999 / elected 13 May 2011 • Term of Agreement: 3 years • Fixed remuneration as a Non Executive Director: € 33,000 • No termination benefits Executives Giovanni Catalano, Chief Executive Officer • Commencement Date: 11 October 2010 as Chief Executive Officer (CEO) • Term of Agreement: Indefinite but terminable 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, 75% of which is to be paid through the issue of shares and 25% in cash. The first two installments were settled in 2010 through the issue of shares and a further installment settled in 2011 through issue of shares with the remainder paid in cash T R O P E R ’ S R O T C E R D I 26 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Directors’ Report • 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 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$2,500 to the end of 31 December 2011) to provide company secretarial and corporate governance services • No termination benefit Executives during the year is presented in the table below. There are no Executive officers of the Group other than those listed. Notes in relation to the table of directors’ and executive officers’ remuneration Short term incentive bonuses awarded as remuneration to specified executives is related to performance hurdles established by the Remuneration Committee. The performance hurdles are a combination of company targets and objectives specific to the executive. Analysis of bonuses included in remuneration Details of the vesting profile of the short-term incentive bonus awarded as remuneration are detailed below. Short-Term Post- Employment Share-Based Payments Salary and Fees € Accommo -dation € Car € Other € Total Base € STI Cash € DIRECTORS G Bradley, Chairman Non Executive D McEvoy, Non Executive B Pirola, Non Executive G Short, Non Executive 2011 2010 2011 2010 2011 2010 2011 2010 M Masterman, Non Executive 2011 50,000 36,000 33,000 24,000 33,000 24,000 33,000 12,500 33,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - 50,000 36,000 33,000 24,000 33,000 24,000 33,000 12,500 33,000 - - - - - - - - - 2010 132,000 26,717 518 5,106 164,341 140,000 * D Colkin, Chief Operating Ofﬁcer 2011 - - Total for Directors SPECIFIED EXECUTIVES G Catalano Chief Executive Ofﬁcer 2011 2010 2011 2010 Resigned 31 July 2010 Lisa Jones, Company Secretary Total for Speciﬁed Executives TOTAL DIRECTORS AND EXECUTIVES 2010 2011 2010 2011 2010 2011 2010 182,000 - - - 182,000 - 228,500 26,717 518 5,106 260,841 140,000 180,000 30,800 9,060 6,709 226,569 55,000 96,750 15,781 94,789 13,236 22,279 19,204 - - - - - - - - - 112,531 - - - 771 108,796 43,750 - - 22,279 19,204 - - 202,279 30,800 9,060 6,709 248,848 55,000 210,743 29,017 - 771 240,531 43,750 384,279 30,800 9,060 6,709 430,848 55,000 439,243 55,734 518 5,877 501,372 183,750 Short Term Incentive Superannuation Bonus Shares € Beneﬁts € Proportion Value of Options of Remuneration as Proportion Performance Related % of Remuneration % Options Total € € - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 39,191 43,327 - - - - 39,191 43,327 39,191 43,327 50,000 49,801 33,000 37,801 33,000 37,801 33,000 12,500 33,000 13,801 - 13,801 - 13,801 - - - - - - - - - - - - - 28% - 37% - 37% - - - 23,001 327,342 50% 6% - - - - - 3% - - - 182,000 64,404 465,245 - - - 320,760 155,858 - - - 29% 28% - 4,601 157,147 28% - - - - - 22,279 19.204 343,039 4,601 332,209 - 525,039 69,005 797,454 T R O P E R ’ S R O T C E R D I 27 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P * Paid in respect of 2009 calendar year performance. No bonus was paid for the 2010 calendar year. Directors and Executive Officers’ Remuneration - Consolidated The remuneration details of each Director and specified Bonuses paid by issue of shares and included in share based payments to each director and specified executive. Directors and Speciﬁed Executives G Catalano M Masterman D Colkin Cash Bonus € 55,000 - - 2011 Bonus Paid by Issue of Shares € 39,191 - - % Vested in Year 100% - - Cash Bonus € - 140,000 43,750 2010 Bonus Paid by % Vested Issue of Shares € in Year 43,327 - - 100% 70% 100% Directors’ Report 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 2010 and 2011 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. Options over equity instruments granted as compensation No options were granted as compensation to directors or key management personnel during the reporting period (2010: NIL). The following options vested in the period: Exercise and lapse of options granted as compensation No options granted as compensation were exercised during 2011. 3,100,000 options granted as compensation in prior periods lapsed on expiration date of 31 May 2011. Analysis of options over equity instruments granted as compensation All options granted as remuneration to each director of the Company and key management personnel are vested in prior years lapsed on 31 May 2011; no options were exercised by directors or key management personnel. DIRECTORS G Bradley D McEvoy B Pirola M Masterman EXECUTIVES D Colkin (Resigned 31 July 2010) No. of Options Vested During 2010 No. of Options Vested During 2011 200,000 200,000 200,000 333,333 66,666 - - - - - 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. 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: DIRECTORS G Bradley D McEvoy B Pirola G Short M Masterman SPECIFIED EXECUTIVES G Catalano L Jones Granted in Year € Value of Options Exercised in Year € Lapsed in Year € (A) - - - - - - - - - - - - - - - - - - - - - (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. 2,800,000 options lapsed in the year. 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 as follows: G Bradley M Masterman D McEvoy B Pirola G Short Ordinary Shares 1,123,880 26,722,569 314,210 7,112,782 - T R O P E R ’ S R O T C E R D I 28 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Directors’ Report 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 30 and forms part of the Directors’ report for the financial year ended 31 December 2011. This report has been made in accordance with a resolution of Directors. Graham Bradley Chairman Sydney, NSW Australia 19 March 2012 T R O P E R ’ S R O T C E R D I 29 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 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 there are no unissued ordinary shares of the Company under option. 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 in connection with any legal proceeding involving the Company or entities within the Group which is brought against the director as a result of his capacity as an officer. During the financial year the Company paid premiums to insure the Directors against certain liabilities arising out of the conduct while acting on behalf of the Company. Under the terms and conditions of the insurance contract, the nature of liabilities insured against and the premium paid cannot be disclosed. 16. Non Audit Services During the year KPMG, the Group’s auditor, has performed other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year and is satisfied that the provision of those non-audit services is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 and APES 110 “Code of Ethics for Professional Accountants”. 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 Lead Auditor’s Independence Declaration UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 I N O T A R A L C E D E C N E D N E P E D N I ’ I S R O T D U A D A E L 30 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Statement of Financial Position AS AT 31 DECEMBER 2011 CONSOLIDATED CURRENT ASSETS: Cash and cash equivalents 10 (a) 1,889,879 NOTES 2011 € Trade and other receivables Inventory Total Current Assets Non-Current Assets Receivables Other assets Property, plant and equipment Resource property costs Total Non-Current Assets Total Assets CURRENT LIABILITIES: Trade and other payables Provisions 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 3,332,495 701,187 5,923,561 1,622,980 39,282 6,548,101 23,306,114 31,516,477 37,440,038 5,613,516 91,305 5,704,821 2,747,922 5,771,830 8,519,752 14,224,573 23,215,465 44,753,650 1,192,269 (22,730,454) 23,215,465 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 2,282,132 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 The above consolidated statement of financial position should be read in conjunction with the accompanying notes to the financial statements. I I I N O T S O P L A C N A N F F O T N E M E T A T S I 31 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Statement of Comprehensive Income FOR THE YEAR ENDED 31 DECEMBER 2011 CONSOLIDATED E M O C N I I E V S N E H E R P M O C F O T N E M E T A T S 32 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Revenue Operating costs Royalties Depreciation and amortisation expense Gross Profit Other income Employee benefit expense Share based payments Depreciation expense Corporate overheads Impairment losses Results from operating activities Finance income Finance expenses Net finance expenses Loss before income tax expense Income tax benefit / (expense) Loss for the period Other comprehensive income Other comprehensive loss for the period NOTES 3 4 4 5 14 7 8 2011 € 9,115,046 (1,504,085) (130,375) (2,534,799) 4,945,787 54,727 (1,851,829) (97,333) (25,709) (1,180,645) (5,931,561) (4,086,563) 5,504 (810,513) (805,009) (4,891,572) (179,192) (5,070,764) - - 2010 € 7,157,331 (1,726,944) (2,821,596) 2,608,791 60,658 (1,784,129) (130,390) (18,603) (1,398,582) (1,075,168) (1,737,423) 283,841 (803,315) (519,474) (2,256,897) (66,701) (2,323,598) - - Total comprehensive loss for the period (5,070,764) (2,323,598) Loss attributable to: Owners of the company Loss for the period Total comprehensive loss attributable to: Owners of the Company Total comprehensive loss for the period (5,070,764) (5,070,764) (5,070,764) (5,070,764) Basic and Diluted loss per share 9 (4.57) cents (2,323,598) (2,323,598) (2,323,598) (2,323,598) (2.11) cents The above consolidated statement of financial position should be read in conjunction with the accompanying notes to the financial statements. Statement of Changes in Equity FOR THE YEAR ENDED 31 DECEMBER 2011 Consolidated ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY Share Capital € Translation Reserve € Option Reserve € Accumulated Losses € Total € 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 Balance at 1 January 2011 44,659,630 1,192,269 888,727 (18,548,417) 28,192,209 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 Options expired Share issue costs Share based payments - - - - (3,313) 97,333 - - - - - - Balance at 31 December 2011 44,753,650 1,192,269 - - - (5,070,764) (5,070,764) - - (5,070,764) (5,070,764) (888,727) 888,727 - - - - - - (3,313) 97,333 (22,730,454) 23,215,465 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes to the financial statements. I Y T U Q E N I S E G N A H C F O T N E M E T A T S 33 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Statement of Cash Flow W O L F H S A C F O S T N E M E T A T S 34 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P FOR THE YEAR ENDED 31 DECEMBER 2011 CONSOLIDATED NOTES 2011 € 2010 € CASH FLOWS FROM OPERATING ACTIVITIES: Receipts from customers 8,742,349 6,533,658 Payments to suppliers and employees (5,182,557) (4,959,381) Interest received Interest paid Net cash inflow (outflow) from operating activities Cash flows from investing activities Payments for non-current assets Payments on security deposits 5,504 (300,451) 49,558 (345,604) 10 (b) 3,264,845 1,278,231 (12,888) 379 (44,339) (16,600) Payments for resource property costs (2,328,496) (2,678,680) Net cash outflow from investing activities (2,341,005) (2,739,619) Cash flows from financing activities Proceeds from the issues of shares Payments for share issue costs Proceeds from borrowings Repayments of borrowings Payments for borrowing costs Net cash inflow (outflow) from financing activities Net increase / (decrease) in cash held Cash and cash equivalents at 1 January Effects of exchange rate fluctuations on cash held - (3,313) - - - (3,313) 920,527 969,352 - Cash and cash equivalents at 31 December 10 (a) 1,889,879 - (1,069) - (4,279,269) (150,752) (4,431,090) (5,892,478) 6,622,329 239,501 969,352 The above consolidated statement of financial position should be read in conjunction with the accompanying notes to the financial statements. Notes to the Financial Statements FOR THE YEAR ENDED 31 DECEMBER 2011 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 2011 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, appraisal, development and production of gas properties in the Po Valley region in Italy. 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 19 March 2012. (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 I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 35 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 36 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) • The estimated market value of assets at the review date • Fundamental economic factors such as the gas price and current and anticipated operating costs in the industry • Future production rates 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 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. Notes to the Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (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. (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. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 37 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 38 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The depreciation rate of gas plant and equipment incurred in the period for each project in production phase is as follows: Castello Sillaro 2011 0.72% 12.34% 2010 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 and equipment 3 – 5 years 2011 2010 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. 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 Notes to the Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 less 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. Areas of interest which no longer satisfy the above policy are considered to be impaired and are measured at their recoverable amount, with any subsequent impairment loss recognised in the profit and loss. 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 has moved to the production phase. 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. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 39 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 40 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) The amortisation rate incurred in the period for each project in production phase is as follows: Castello Sillaro 2011 0.72% 12.34% 2010 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 on 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. (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 Notes to the Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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. 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. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 41 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 42 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (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 recognized 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 2011, but have not been applied in preparing this financial report. • AASB 9 Financial Instruments (December 2010) and AASB2010-7 Amendments to Australian Accounting Standards arising from AASB9 (2010; includes requirements for the classification and measurement of financial assets that are generally consistent with the equivalent requirements in AASB 139 Financial Instruments: Recognition and Measurement except in respect of the fair value option and certain derivatives linked to unquoted equity instruments. 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. • AASB10 Consolidated Financial Statements introduces a new approach to determining which investees should be consolidated. An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. AASB 10 will become mandatory for the Group’s 31 December 2013 financial statements. Retrospective application is required where there is a change in the control conclusion between AASB127/Interpretation 112 and AASB10. There are specific requirements when retrospective application is impracticable. The Group has not yet determined the potential effect of the standard. • AASB11 Joint Arrangements will apply if the parties have rights to and obligations for underlying assets and liabilities, the joint arrangement is considered a joint operation and partial consolidation is applied. Otherwise the joint arrangement is considered a joint venture and the entity must use the equity method to account for their interest. AASB11 will become mandatory for the Group’s 31 December 2013 financial statements. Retrospective application with specific restatement requirements for certain transition. The Group has not yet determined the potential effect of the standard. Notes to the Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) • AASB 12 Disclosure of Interests In Other Entities contains disclosure requirements for entities that have subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. AASB 12 will become mandatory for the Group’s 31 December 2013 financial statements; early application is available for entities if AASB10 and AASB11 are applied at the same time. The Group has not yet determined the potential effect of the standard. • AASB 13 Fair value Measurement explains how to measure fair value when required by other AASBs. It does not introduce new fair value measurements, nor does it eliminate the practicability exceptions to fair value that currently exist in certain standards. AASB 13 will become mandatory for the Group’s 31 December 2013 financial statements. 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 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 and 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. Please refer to Note 22 (b) for further details on customer credit risk management. 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 encouraged 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. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 43 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 44 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 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 CONSOLIDATED 2011 € 2010 € 9,115,046 7,157,331 CONSOLIDATED 2011 € 2010 € Wages and salaries 1,851,829 1,784,129 Equity settled share-based payment transactions • Shares issued in lieu of salaries and bonus • 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 97,333 - 97,333 1,949,162 61,384 69,006 130,390 1,914,519 CONSOLIDATED 2011 € 221,693 436,022 283,560 137,602 101,768 2010 € 179,377 541,756 328,428 180,470 168,551 1,180,645 1,398,582 Notes to the Financial Statements NOTE 6. AUDITORS’ REMUNERATION CONSOLIDATED 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 Tax services 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 Foreign exchange losses Finance expense 2011 € 67,757 - 15,000 82,757 2011 € 5,504 - 5,504 327,952 252,482 227,695 2,384 810,513 Net finance income / (expense) (805,009) 2010 € 67,809 10,132 - 77,941 CONSOLIDATED 2010 € 40,951 242,890 283,841 380,301 212,185 210,829 - 803,315 (519,474) I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 45 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements 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 NUMERICAL RECONCILIATION BETWEEN TAX EXPENSE AND PRE-TAX ACCOUNTING PROFIT / (LOSS) CONSOLIDATED 2011 € 2010 € 179,192 66,701 (327,076) 327,076 - 179,192 (3,931) 3,931 - 66,701 Loss for the period before tax (4,891,572) (2,256,897) Income tax (benefit) / expense using the Company’s domestic tax rate of 30 per cent (2010: 30%) (1,467,472) (677,069) Non-deductible expenses: Share based payments Impairment losses 46 Other Effect of tax rates in foreign jurisdictions 29,201 1,748,975 180,048 (41,074) Current year losses for which no deferred tax asset was recognised 329,192 Tax losses utilised in current year Change in unrecognised temporary differences Tax effect of regional taxes in Italy – current Income tax expense (451,794) (327,076) 179,192 179,192 32,138 322,550 34,448 (6,287) 367,301 (69,150) (3,931) 66,701 66,701 I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements NOTE 9. LOSS PER SHARE Basic loss per share (€ cents) CONSOLIDATED 2011 € (4.57) 2010 € (2.11) The calculation of basic loss per share was based on the loss attributable to shareholders of € 5,070,764 (2010: € 2,323,598) and a weighted average number of ordinary shares outstanding during the year of 110,953,152 (2010: 110,240,942). 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 338,604 issued on 14 March 2011 259,886 issued on 29 June 2011 212,642 issued on 19 September 2010 156,338 issued on 31 December 2010 No. of days 365 293 186 104 1 2011 Weighted average no. 2010 Weighted average no. 110,548,906 110,179,926 271,811 132,435 - - - - 60,588 428 110,953,152 110,240,942 I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 47 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements NOTE 10. CASH AND CASH EQUIVALENTS (a) Cash and cash equivalents 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 CONSOLIDATED 2011 € 1,889,879 2010 € 969,352 Loss for the period (5,070,764) (2,323,598) ADJUSTMENT FOR NON-CASH ITEMS: Unrealised net foreign exchange (gains) / loss Share-based payments Depreciation and amortisation Resource property costs impairments Inventory impairments Loss on disposal of assets Unwind of discount on site restoration provision Amortisation of borrowing costs 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 Net cash outflow from operating activities NOTE 11. INVENTORY Well equipment – at cost 2,384 97,333 2,560,508 5,863,464 68,097 9,678 227,695 252,482 (1,032,701) - 271,358 15,311 3,264,845 (239,501) 130,390 2,840,198 1,075,168 - - 210,829 212,185 378,758 - (897,907) (108,291) 1,278,231 CONSOLIDATED 2011 € 701,187 2010 € 897,134 I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 48 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements NOTE 12. TRADE AND OTHER RECEIVABLES Trade receivables Accrued gas sales revenue Sundry debtors Indirect taxes receivable (a) CONSOLIDATED 2011 € 1,474,397 535,170 50,409 1,272,519 3,332,495 2010 € - 376,638 75,080 1,992,237 2,443,955 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 1,197,810 1,622,980 1,985,308 1,478,819 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%. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 49 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 50 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P NOTE 13. PROPERTY PLANT AND EQUIPMENT CONSOLIDATED OFFICE FURNITURE AND EQUIPMENT: At cost Accumulated depreciation PLANT AND 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 and equipment are set out below: OFFICE FURNITURE AND EQUIPMENT: Carrying amount at beginning of year Additions Disposals Depreciation expense Carrying amount at end of year PLANT AND EQUIPMENT UNDER CONSTRUCTION: Carrying amount at beginning of year Additions Transfer to gas producing assets Carrying amount at end of year GAS PRODUCING ASSETS: 2011 € 163,994 (122,203) 41,791 - - - 7,668,967 (1,162,657) 6,506,310 6,548,101 64,290 12,888 (9,678) (25,709) 41,791 - - - - Carrying amount at beginning of period 6,951,615 Transferred from exploration and development assets Transferred from plant and equipment under construction Additions Depreciation expense Carrying amount at end of period - - 111,591 (556,896) 6,506,310 6,548,101 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) - - 685,964 6,871,412 - (605,761) 6,951,615 7,015,905 Notes to the Financial Statements NOTE 14. RESOURCE PROPERTY COSTS CONSOLIDATED RESOURCE PROPERTY COSTS: Exploration Phase Development Phase Production Phase 2011 € 6,814,557 - 16,491,557 23,306,114 RECONCILIATION OF CARRYING AMOUNT OF RESOURCE PROPERTIES Exploration Phase Carrying amount at beginning of period Exploration expenditure Change in estimate of rehabilitation assets Impairment losses Carrying amount at end of period 5,923,127 1,156,991 (232,013) (33,548) 6,814,557 2010 € 5,923,127 - 20,071,921 25,995,048 6,139,221 323,077 (265,357) (273,814) 5,923,127 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 Development expenditure Reclassed as Plant and Equipment Transfer to production assets Carrying amount at end of period Production Phase Carrying amount at beginning of period Reclassed from development expenditure (i) Additions Change in estimate of rehabilitation assets Amortisation of producing assets Impairment loss Carrying amount at end of period - - - - - 20,071,921 - 4,321,399 (93,945) (1,977,903) (5,829,915) 16,491,557 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 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. At that time, the associated resource property costs and related plant and equipment (as a cash generating unit) were tested for impairment and an impairment expense was charged at year-end 2010. Subsequent to the drilling of the deviated well, a second impairment trigger was identified with regard to Castello during the fourth quarter of 2011 as a result of a change in the expected daily production rate. Accordingly, the associated resource property costs and related plant and equipment (as a cash generating unit) were tested again for impairment. The recoverable amount has been determined by reference to a discounted cashflow forecast model. The key assumptions adopted in that model include gas pricing, remaining reserves, expected daily gas production, operating expenditure and a discount rate. The recoverable amount is most sensitive to the remaining reserves and daily gas production. As result of the impairment test, the recoverable amount for Castello has been determined to be € 7.2 million resulting in an impairment expense of € 5,829,915 (2010: € 801,354). Impairment losses are reconciled as follows: Impairment expense Castello gas field Exploration costs Inventory Total impairment losses (5,829,915) (33,549) (68,097) (5,931,561) (801,354) (273,814) - (1,075,168) (i) Reclassification from development expenditure relates to capitalised costs for gas fields classified as production assets in 2010. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 51 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements NOTE 15. DEFERRED TAX ASSETS AND LIABILITIES CONSOLIDATED 2011 € 2010 € 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 3,897,320 3,795,144 Share issue expenses Capitalised borrowing costs Accrued expenses and liabilities Unrecognised deferred tax assets UNRECOGNISED DEFERRED TAX LIABILITIES: Deferred tax liabilities have not been recognised in respect of the following items: Interest receivable Unrecognised deferred tax liabilities 62,379 93,427 57,360 101,821 117,389 22,230 4,110,486 4,036,584 - - - - Net deferred tax asset not recognised 4,110,486 4,036,584 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 Balance 1 Jan 2010 Profit and loss Equity Balance 31 Dec 2010 Profit or loss Equity Balance 31 Dec 2011 CONSOLIDATED: Losses available for offset against future taxable income 3,269,073 481,376 44,696 3,795,145 62,071 40,104 3,897,320 Share issue expenses 144,869 - (43,048) 101,821 - (39,442) 62,379 Capitalised borrowing costs Accrued expenses and liabilities 185,143 (67,754) 8,163 14,067 Income receivable (2,754) 2,754 - - - 117,389 (23,962) 22,230 35,130 - - - - - 93,427 57,360 - Total unrecognised deferred tax asset 3,604,494 430,442 1,648 4,036,585 73,239 662 4,110,486 I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 52 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements NOTE 16. TRADE AND OTHER PAYABLES Trade payables and accruals Other payables CONSOLIDATED 2011 € 5,292,381 321,135 5,613,516 2010 € 2,136,289 69,849 2,206,138 The Group’s exposure to currency and liquidity risks related to trade and other payables are disclosed in note 22. NOTE 17. PROVISIONS CURRENT: Employee leave entitlements NON CURRENT: Restoration provision RECONCILIATION OF RESTORATION PROVISION: Opening balance (Decrease) / Increase in provision due to revised estimates Increase in provision from unwind of discount rate Closing balance CONSOLIDATED 2011 € 2010 € 91,305 75,994 2,747,922 2,846,186 2,846,186 (325,958) 227,694 2,747,922 2,361,575 273,782 210,829 2,846,186 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. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 53 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements 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: Lloyds (formerly Bank of Scotland) finance facility CONSOLIDATED 2011 € 2010 € 5,771,830 5,519,347 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: Current Liabilities Currency Nominal Interest Rate Year of Maturity 31 December 2011 Carrying Face Amount Value $ $ 31 December 2010 Carrying Amount $ Face Value $ Secured bank loan Euro Euribor + 1.8% 2013 6,000,000 5,771,830 6,000,000 5,519,347 I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 54 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P The amount presented is disclosed net of borrowing costs of € 228,170 (2010: € 480,653). Lloyds (formerly 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 2012 is set to € 7,596,582 which is based on the semi annual borrowing base review performed during December 2011. Interest is currently payable at Euribor plus 180 basis points. In 2010, the Company repaid € 4,279,269 of the senior facility. No principal repayments have been made during the current year. The facility is secured over the assets of Northsun Italia SpA and Po Valley Operations Pty Ltd. Notes to the Financial Statements NOTE 19. CAPITAL AND RESERVES SHARE CAPITAL: Opening balance - 1 January Shares issued during the year: ORDINARY SHARES 2011 Number 2010 Number 110,548,906 110,179,926 Shares issue at € 0.18 ($ 0.25) each on 14 March 2011 Shares issued at € 0.14 ($ 0.19) each on 29 June 2011 Share issue at € 0.24 ($ 0.33) each on 19 September 2010 Share issue at € 0.16 ($ 0.21) each on 31 December 2010 338,604 259,886 - - - - 212,642 156,338 Closing balance - 31 December 111,147,396 110,548,906 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 598,490 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 14 March 2011 29 June 2011 No of shares 338,604 259,886 Issue price € 0.18 (A $ 0.25) € 0.14 (A $ 0.19) 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 (2010: NIL). I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 55 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements 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: 2011 2010 Number of options Weighted average no. exercise price Number of options Weighted average no. exercise price Balance at beginning of year 3,100,000 € 1.00 3,175,000 € 1.00 Granted Exercised Lapsed Balance at end of year Exercisable at end of year - - (3,100,000) - - € 1.00 - - - (75,000) 3,100,000 3,100,000 - - € 1.11 € 1.00 Options granted during the reporting period pursuant to EIOS: No options were granted in the reporting period. Options held at the end of the reporting period pursuant to EIOS. No options were held at the end of the reporting period. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 56 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements 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. Exploration Development and Production Total 2011 € 2010 € 2011 € 2010 € 2011 € 2010 € External revenues - - 9,115,046 7,157,331 9,115,046 7,157,331 Segment (loss) / profit before tax (33,548) (273,814) (952,225) 1,807,438 (985,773) 1,533,624 Depreciation and amortisation - - (2,534,799) (2,821,595) (2,534,799) (2,821,595) Impairment losses (33,548) (273,814) (5,829,915) (801,354) (5,863,463) (1,075,168) REPORTABLE SEGMENT ASSETS: Resource property costs Plant and Equipment Receivables Inventory 6,814,557 5,923,127 16,491,557 20,071,921 23,306,114 25,995,048 - - - - - - 6,506,310 6,951,614 6,506,310 6,951,614 2,009,567 376,638 2,009,567 376,638 701,187 897,134 701,187 897,134 Capital expenditure 1,156,991 323,077 4,432,990 463,577 5,589,981 786,654 Movement in rehabilitation assets (232,013) (265,357) (93,945) 539,139 (325,958) 273,782 Reportable segment liabilities (1,093,441) (1,466,206) (6,250,267) (2,908,420) (7,343,708) (4,374,626) Reconciliation of reportable segment profit or loss, assets and liabilities 2011 € 2010 € PROFIT OR LOSS: Total profit / (loss) for reportable segments UNALLOCATED AMOUNTS: Net finance income / (expense) Other corporate expenses (985,773) 1,533,624 (805,009) (519,474) (3,100,790) (3,271,047) Consolidated loss before income tax (4,891,572) (2,256,897) ASSETS: Total assets for reportable segments Other assets Consolidated total assets LIABILITIES: Total liabilities for reportable segments Other liabilities 32,523,178 34,220,434 4,916,860 4,619,439 37,440,038 38,839,873 (7,343,708) (4,374,626) (6,880,865) (6,273,039) Consolidated total liabilities (14,224,573) (10,647,665) Other Segment Information All of the Group’s revenue is currently attributed to gas sales in Italy with two customers. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 57 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements 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 2011 € 2010 € 1,889,879 969,352 (5,771,830) (5,519,347) (3,881,951) (4,549,995) 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 2010. Effect in €’s 31 December Profit or loss Equity 2011 € 2010 € 2011 € 2010 € Variable rate instruments (41,101) (50,306) (41,101) (50,306) A decrease of 100 basis points would have an equal and opposite effect on profit or loss. (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). In addition, the Group has a concentration risk with sales as all production is sold to two customers. The carrying amount of the Group’s financial assets represents the maximum credit exposure and is shown in the table on the opposite page. No receivables are considered past due nor were any impairment losses recognised during the period with the exception of € 952,405 in trade receivables which are considered past due. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 58 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements NOTE 22. FINANCIAL INSTRUMENTS (continued) Cash and cash equivalents Receivables – Current Receivables – Non-current Other assets NOTE 10 12 12 CONSOLIDATED CARRYING AMOUNT 2011 € 1,889,879 3,332,495 1,622,980 39,282 6,884,636 2010 € 969,352 2,443,955 1,478,819 39,661 4,931,787 (C) LIQUIDITY RISK The following are the contractual maturities of financial liabilities, including estimated interest payments: CONSOLIDATED 31 DECEMBER 2011 In € Carrying Amount Contractual Cash Flows 6 Months or Less 6 to 12 Months 1 – 2 Years 2 – 5 Years Trade and other payables (5,613,516) (5,613,516) (5,613,516) - - Secured bank loan (5,771,830) (6,389,965) (101,730) (101,730) (6,186,505) (11,385,346) (12,003,481) (5,715,246) (101,730) (6,186,505) CONSOLIDATED 31 DECEMBER 2010 In € Carrying Amount Contractual Cash Flows 6 Months 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) (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. (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 2011 € 49,508 (8,654) 40,854 2010 € 73,852 (45,591) 28,261 I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 59 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 60 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P NOTE 22. FINANCIAL INSTRUMENTS (continued) The following significant exchange rates applied during the year: Australian Dollar ($) Average rate Reporting date spot rate 2011 € 0.7414 2010 € 2011 € 0.6939 0.7856 2010 € 0.7669 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 2010. 31 DECEMBER 2011 Australian Dollar to Euro (€) 31 DECEMBER 2010 Australian Dollar to Euro (€) CONSOLIDATED Profit or loss € 4,388 Equity € 4,388 2,826 2,826 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 2011. 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 2011 € 463,569 - - 39,191 502,760 2010 € 665,918 - - 112,332 778,250 Notes to the Financial Statements NOTE 24. RELATED PARTIES (continued) 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. 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: DIRECTORS G Bradley M Masterman D McEvoy B Pirola G Short EXECUTIVES G Catalano DIRECTORS G Bradley M Masterman D McEvoy B Pirola EXECUTIVES G Catalano D Colkin Held at 31 Dec 2010 Granted Exercised Lapsed Held at 31 Dec 2011 600,000 1,000,000 600,000 600,000 - 2,800,000 - - - - - - - - - - - - - - - - - - (600,000) (1,000,000) (600,000) (600,000) - (2,800,000) - - - - - - - - - - Held at 31 Dec 2009 Granted Exercised Lapsed Held at 31 Dec 2010 (i) 600,000 1,000,000 600,000 600,000 2,800,000 - 200,000 200,000 - - - - - - - - - - - - - - - - - - - - - - - - 600,000 1,000,000 600,000 600,000 2,800,000 - 200,000 200,000 (i) Or the date of ceasing to be a KMP I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 61 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Notes to the Financial Statements I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 62 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P NOTE 24. RELATED PARTIES (continued) The details of the number of options held by key management personnel at 31 December are as follows: DIRECTORS: G Bradley M Masterman D McEvoy B Pirola G Short EXECUTIVES: G Catalano D Colkin (resigned 31 July 2010) Total 2011 Total 2010 $ 1.75 exercise price, expiring 31 May 2011 - - - - - - - - 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 2010 Purchased Share based payments Options Exercised Sold Held at 31 Dec 2011 (ii) DIRECTORS: G Bradley 1,123,880 - M Masterman (i) 26,222,569 1,000,000 D McEvoy B Pirola G Short 314,270 7,112,782 - - - - 34,773,501 1,000,000 - - - - - - EXECUTIVES: G Catalano 268,255 268,255 - - 259,886 259,886 - - - - - - - - - 1,123,880 (500,000) 26,722,569 - - - 314,270 7,112,782 - (500,000) 35,273,501 - - 528,141 528,141 Held at 31 Dec 2009 Purchased Share based payments Options Exercised Sold Held at 31 Dec 2010 (ii) DIRECTORS: G Bradley 1,123,880 M Masterman (i) 23,972,569 3,750,000 D McEvoy B Pirola 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 - - - 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 - - - - - - - - (i) Does not include shares held by related parties which amount to 1,040,000 shares. (ii) Or the date ceasing to be a KMP Notes to the Financial Statements NOTE 24. RELATED PARTIES (continued) OTHER RELATED PARTY DISCLOSURES The Company has a related 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 have historically been interest free, unsecured and repayable at call. In 2011, for the first time, interest of € 296,553 was charged to Northsun Italia. As at 31 December 2011, loans to controlled entities amounted to € 36,639,908 (2010: € 37,012,016) 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 has not recharged services to its controlled entities for technical services (2010: € 150,255). c) Expenses incurred by the Company are on-charged to controlled entities at cost. d) Northsun Italia SpA (‘NSI’) is a fully owned subsidiary of Po Valley Energy. During the year, a director of NSI, Roberto Fazioli, also served on the board as Chairman of a customer, Elettrogas SpA. During the year NSI entered into the following transactions, in the ordinary course of business, with this related party. 2011 2010 Gas Sales (€) (excluding VAT) 4,475,406 3,097,283 Amount receivable at 31 December 952,405 - 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 Total Comprehensive income 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. 2011 € 386,301 47,897,861 48,284,162 225,473 5,771,830 5,997,303 2010 € 743,905 48,203,947 48,947,852 246,858 5,519,347 5,766,205 42,286,859 43,181,647 44,753,650 44,659,630 - (2,466,791) 42,286,859 888,727 (2,366,710) 43,181,647 (988,808) (1,327,084) - - (988,808) (1,327,084) I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 63 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 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 2011 and 2010 and are as follows: Name Country of Incorporation Class of Shares 2011 Investment 2010 Investment € € Northsun Italia S.p.A (“NSI”) Italy Ordinary 9,603,268 9,570,433 Australia Ordinary 631,056 597,870 Holding % 100 100 Po Valley Operations Pty Limited (“PVO”) PVE USA Inc. United States of America Ordinary 806 806 100 10,235,130 10,169,109 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. I S T N E M E T A T S L A C N A N F E H T O T S E T O N I 64 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 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 31 to 64, 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 Group’s financial position as at 31 December 2011 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 Corporations 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 finance manager for the financial year ended 31 December 2011. Dated at Sydney this 19th day of March 2012. Signed in accordance with a resolution of the directors: Graham Bradley Chairman Byron Pirola Non Executive Director I N O T A R A L C E D ’ S R O T C E R D I 65 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Independent Auditor’s Report ’ I T R O P E R S R O T D U A E C N E D N E P E D N I 66 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P ’ I T R O P E R S R O T D U A E C N E D N E P E D N I 67 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 2 1 0 2 / 1 1 0 2 N O T A M R O F N I I R E D L O H E R A H S 68 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P Shareholder Information 2011 / 2012 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 31 March, 2012. SHAREHOLDINGS SUBSTANTIAL SHAREHOLDERS Name Michael Masterman Hunter Hall Investment Management Pty Ltd Beronia Investments Pty Ltd * * Interestes associated with Non Executive Director Byron Pirola Number of ordinary Shares Held Percentage of Capital Held % 27,778,486 20,443,094 7,112,782 24.99 18.39 6.40 DISTRIBUTION OF SHARE AND OPTION HOLDINGS Size of Holdings 1 1,001 5,001 - - - 1,000 5,000 10,000 10,001 - 100,000 100,001 - over * Options expired 31 May 2011 Ordinary Shares Options* Number of holders Number of Shares Number of Holders Number of Options 183 260 140 401 101 52,701 794,461 1,127,775 13,508,084 95,664,375 1,085 111,147,396 0 0 0 1 5 6 0 0 0 100,000 3,000,000 3,100,000 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. Shareholder Information Number of Ordinary Shares Held Percentage of Capital Held % 21,220,664 21,163,632 4,788,444 3,605,917 2,400,000 2,008,937 1,778,938 1,700,000 1,680,000 1,600,240 1,500,000 1,288,653 1,271,035 1,171,721 1,100,000 1,076,202 1,000,000 1,000,000 978,592 850,000 19.09 19.04 4.31 3.24 2.16 1.81 1.60 1.53 1.51 1.44 1.35 1.16 1.14 1.05 0.99 0.97 0.90 0.90 0.88 0.76 73,182,975 65.84 Number of ordinary shares held Percentage of capital held % 2 1 0 2 / 1 1 0 2 N O T A M R O F N I I R E D L O H E R A H S 69 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P 1,000,000 600,000 600,000 600,000 200,000 100,000 3,100,000 32.26 19.35 19.35 19.35 6.45 3.23 100.00 TWENTY LARGEST SHAREHOLDERS Name 1 J P Morgan Nominees Australia Limited 2 Michael Masterman 3 Joan Masterman 4 Mr Michael George Masterman 5 Kevin Bailey Corporation 6 Symmall Pty Ltd 7 Greenvale Asia Limited 8 Dr Byron Pirola 9 Beronia FS Pty Ltd 10 Beronia FS Pty Ltd 11 Mr Ming Lov & Mrs Chiu Lov 12 Tangar Boring & Excavations Pty Ltd 13 Tucabia Investments Pty Ltd 14 Beronia Investments Pty Ltd 15 Mr Gary Douglas Roser & Mrs Tania Louise Roser 16 Beronia Investments Pty Ltd 17 Mr Chris Carr & Mrs Betsy Carr 18 Pershing Australia Nominees Pty Ltd 19 McIndoe Superannuation Fund Pty Ltd 20 Mr Stephen Lloyd Jones 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 - Options expired 31 May 2011 Reserves & Resources Statement The following table summarises the status of the Reserves & Resources as of 31st December 2011 for certain assets with Po Valley Energy 100% Interest. The assesment work was undertaken by the Company and audited by Fugro Robertson Limited. T N E M E T A T S S E C R U O S E R & S E V R E S E R 70 1 1 0 2 T R O P E R L A U N N A / Y G R E N E Y E L L A V O P LICENCE PROJECT Sillaro Castello Sillaro Castello LICENCE PROJECT San Vincenzo Sant’Alberto C. San Pietro Crocetta Cadelbosco Bezzecca Fantuzza Zini (Qu-B) Canolo (Qu-A) Canolo Pliocene AR168PY Carola / Irma * under review LICENCE PROJECT Grattasasso Cadelbosco Ravizza Bagnolo in Piano LICENCE PROJECT Cadelbosco Zini (Qu-A) La Prospera Podere Gallina La Risorta Opera Gradizza Pioppette Capitello Cembalina Fondo Perino Ariano Corcrevà Dosso delle Anime Barona Lead Opera Lead RESERVES, GAS (bcf) 1P 6.3 1.0 2P 7.1 1.8 3P - 2.5 CONTINGENT RESOURCES, GAS (bcf) 1C 1.8 0.7 * 1.8 1.1 0.7 0.4 22.0 2C 2.1 4.1 * 5.7 2.7 1.1 3.6 24.8 3C 2.8 6.7 * 8.3 4.6 1.7 10.5 26.9 CONTINGENT RESOURCES, OIL (mmbbls) 1C 2.2 3.7 2C 5.7 4.3 3C 10.7 5.1 CONTINGENT RESOURCES, GAS (bcf) Low - 4.5 7.1 5.5 2.5 10.2 10.6 7.0 13.8 3.3 29.0 Best 1.4 9.0 12.6 9.3 3.1 14.6 16.6 8.8 18.3 5.0 47.0 High - 16.0 20.8 14.4 3.9 20.5 24.7 11.3 24.4 7.3 73.0 Reserves & Resources Statement Fantuzza Contingent Resources are subject to Company and FRL review - still ongoing. These figures are based upon independent evaluations in accordance with 2007 SPE/WPC/AAPG/SPEE Petroleum Resource Management System. Prospective Resources are unrisked. Information in this report that relates to Hydrocarbon Reserves and or Resources is based on information compiled by Mr. Giovanni Catalano, CEO of Po Valley Energy who have consented to the inclusion of that information in the form and context in which it appears. Mr Catalano has over 30 years experience in Exploration and Development in the Oil and Gas Industry. He is a member of SEAPEX and AAPG and holds a master Degree in Geology from the University of Ferrara, Italy. 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. T N E M E T A T S S E C R U O S E R & S E V R E S E R 71 1 1 0 2 T R O P E R L A U N N A / 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

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