Po Valley Energy Limited
Annual Report 2012

Plain-text annual report

Po Valley energy limited aBn 33 087 741 571 registered office level 28, 140 St. georges terrace Perth Wa 6000 tel: (08) 9278 2533 2 1 0 2 t r o P e r l a u n n a - d e t i i m l y g r e n e y e l l a V o P 2012 Annual Report 1 2 4 6 Highlights 30 Statement of Changes in equity Chairman’s letter to Shareholders 31 Statements of Cash Flow Chief executive officer’s report 32 notes to the Financial Statements Corporate governance Statement 69 directors’ declaration 12 directors’ report 70 independent auditor’s report 27 lead auditor’s independence declaration 72 Shareholder information 2011/2012 28 Statement of Financial Position 74 reserves & resources Statement 29 Statement of Comprehensive income Corporate Directory Directors Graham Bradley, Chairman Giovanni Catalano, Managing Director & CEO Michael Masterman, Non Executive Director Byron Pirola, Non Executive Director Gregory Short, Non Executive Director Kevin Eley, Non Executive Director Company Secretary Lisa Jones Registered Office Level 28, 140 St George’s Tce Perth, WA Australia 6000 Tel: +61 8 92782533 Rome Office Via Ludovisi, 16 00187 Rome, Italy Tel: +39 06 42014968 Po Valley Energy Limited Share Registry Link Market Services Limited 178 St George’s Tce 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.  Highlights Gas production 0.85 billion cubic feet €8.2 million (AUD 10.2 million) revenue €4.3 million (AUD 5.4 million) net cash flow from operating activities €4.5 million (AUD 5.6 million) EBITDA Annual average gas price €cent/Scm 33.46 (11.76 AUD/million standard cubic feet) Independently assessed portfolio:  Proven plus Probable Reserves 2P of 12.3 bcf;  Contingent Resources best estimate 2C of 79.5 bcf of gas and 10 MMbbls of oil;  Prospective Resources best case of 201.2 bcf. First offshore exploration permit awarded Two new farmout agreements negotiated and under finalisation €1.1 million (AUD 1.3 million) from private share placement 2 million Euro repaid to Lloyds and work well advanced for a new RBL A n n u a l R e p o r t 2 0 1 2 | 1  Chairman’s letter to Shareholders Dear Shareholder, On behalf of the Board of Directors, I am pleased to present the Company’s 2012 Annual Report. The past year has been one of steady progress which has laid a solid foundation for accelerated development in the period ahead. We maintained our positive net cashflows from operations, despite operational challenges at our major producing field Sillaro, reduced our debt and produced a maiden net profit after tax. We also secured our first offshore licence and successfully established InTrading, our direct gas sale operation, in association with Italtrading. Operating Results In 2012, our third year of gas production, we produced 0.85 bcf of gas. This brings total gas production from our Sillaro and Castello fields over the past three years to 2.8 bcf which generated cumulative revenue of over €24.0 million (AUD 30 million). Following successful drilling of the Vitabla-1dirA well in late 2012, our Castello field has produced steadily at a moderate but prudent level throughout the year. Production at Sillaro was, however, reduced in order to avoid the risk of condensate production pending installation of condensate separation equipment which was installed in April 2013. We expect Sillaro to now return to its previous production levels of around 75,000 scm per day for the balance of 2013. I am also pleased to report that we continue to operate safely throughout the year, with no reportable injuries or environmental incidents during the period. Financial Results Total revenues in 2012 were €8.2 million (AUD 10.2 million), down approximately 10 percent on the prior year, due mainly to reduced production rates. Gas prices were reasonably steady over the period. During 2012, however, operating efficiencies were achieved and this enabled the Company to achieve a slight increase in earnings before interest, tax, depreciation and amortisation to €4.5 million (AUD 5.6 million). The Company’s net profit after tax in 2012 was €2.37 million (AUD 2.9 million), compared to a loss in 2012 of €5.07 (AUD 7.2 million) in 2011. The Company recognised a deferred tax asset of €2.2 million (AUD 2.7 million) for the first time at a consolidated level in 2012. Excluding this tax benefit, the Company generated a net profit after tax for the period of €0.14 million. The Company declared no dividends for 2012. Future Developments One of our priorities for 2012 was to secure farm-in partners for certain of our future exploration wells, and I am pleased to report that we are close to reach an agreement with Petrorep Italiana S.p.a. and a second partner to farm into three of the wells that we hope to drill in the 2013/2014 period. We continue to seek additional farm-in partners to help us accelerate future developments. Solid progress was made in 2012 on our exploration and development projects. Following grant of our first offshore exploration permit (AR94PY) in the Adriatic Sea, we have progressed our geoscience work and will also be seeking farm-in partners for this project in the period ahead. Finally, in September we were awarded a preliminary production concession for our Bezzecca gas field which, following final and environmental approval, we hope will become our third producing gas field in 2014. 2 | A n n u a l R e p o r t 2 0 1 2  Chairman’s letter to Shareholders Funding In December 2012 the Company raised A$1.35 million (€1.1 million) through a private placement with the proceeds used to fund the condensate separation equipment at Sillaro and for general working capital purposes. The Company is well advanced in negotiating to secure a new reserves loan facility to replace the existing facility with Lloyds Bank which will expire in November 2013. Board Changes In May 2012, David McEvoy retired as a Non-Executive Director after serving the Company since listing in 2004. I again express the Board’s appreciation to David for his outstanding commitment to the Company during his nine years as a Director. I was also pleased to announce in June 2012 the appointment of Kevin Eley as a Non-Executive Director and CEO, Giovanni Catalano, as our Managing Director. Outlook We start 2013 with a solid cashflow which we expect will increase with increased production at Sillaro as the year progresses. We have our sights on bringing on stream our third producing asset early in 2014 and, subject to final approvals and financing, we expect to drill a further two or more exploration wells during the next 18 months as well as progressing a number of our highly prospective assets towards farm-out and development. I look forward to reporting further developments as the year progresses. In closing, I would like to thank our shareholders for their ongoing support, my board colleagues and our dedicated team in Rome for their commitment and hard work during the past year. Graham Bradley Chairman A n n u a l R e p o r t 2 0 1 2 | 3  Chief Executive Officer’s Report Dear Shareholder, This past year has been a year of progress, challenge and achievements. Our principal operational priority was maintaining steady production from the Vitalba gas field and working to re-open the main producing levels at Sillaro, closed in February 2012 to avoid the risk of condensate production. Despite Sillaro producing at a reduced rate the Company achieved a combined total production of 24.7 million cubic metres of gas (0.85 billion cubic feet). Production from Sillaro during 2012 was 19.3 million standard cubic meters, while production from Castello amounted to 5.3 million standard cubic metres of gas. Condensate extraction equipment was installed at the Sillaro plant in April 2013 and is now awaiting final authorisation to re-open the main levels with the aim of increasing production to about 75,000 scm/day. I am pleased to report that despite the reduced production, the Company’s consolidated balance sheet was strengthened by an improvement in net cash flow from operating activities €4.3 million showing an improvement of 33% compared to the previous year, and by a reduction in debt by €2.0 million. From a development perspective, significant progress was made during 2012 to secure and advance projects that will provide a foundation for future growth. One key milestone achieved was the award of our first offshore exploration permit AR94PY (previously AR168PY), located in the Adriatic Sea in 35 meters of water and containing two connected gas discoveries, Carola and Irma, formerly drilled and tested by ENI. Subsequent to the licence grant we purchased existing 3D seismic data covering the two structures and our technical team has started development planning and economic analysis to support an application for a production concession. Evaluations of this field indicate a low estimate Contingent Resources (1C) of 34.6 bcf and a best estimate Contingent Resources (2C) of 47.3 bcf. These resource estimates were independently audited by Robertson CGG Limited (formerly Fugro Robertson) in March 2013. The field’s development is now one of our highest priorities. In December 2012 we appointed Robertson CGC, a leading geological and petroleum reservoir consultancy firm, to prepare a Competent Persons Report (CPR) on the Company’s core asset portfolio. The CPR provides an estimate of the resources for certain development assets and exploration prospects and a related economic evaluation. The CPR was finalised in mid-April and the results, summarised in the table below, reaffirm the Company’s Contingent and Prospective Resources and confirmed additional contingent & prospective resources in the Selva and Vitalba West prospects.* Reserves (Bcf) Contingent Resources (Bcf) Prospective Resources (Bcf) 1P 2P 3P 1C 2C 3C Low Best High Proven Proven +Probable 7.3 12.3 Proven + Probable + Possible 7.6 Low Estimate Best Estimate High Estimate 51.8 79.5 113.1 133.1 201.2 289.0 Contingent Resources (MMbbls) 1C 5.9 2C 10.0 3C 15.8 * For a detailed table of all the PVE Reserves & Resources assets please refer to page 74 of this Annual Report In July 2012 we received the preliminary production concession for our Bezzecca gas field. The last step toward the final concession is the Environmental Impact Assessment which has been lodged with the Lombardy Region. Commencement of development at Bezzecca is another key priority for 2013. 4 | A n n u a l R e p o r t 2 0 1 2  Chief Executive Officer’s Report New drilling opportunities are in the pipeline. In early 2013 the Company was awarded the final approval to drill the Gradizza-1 exploration well. A farmout of 25% of this project for a promoted carry will allow us to limit our investment risk while maintaining operatorship. The drilling programs for the wells Zini-1, Canolo-1d and Canolo-2d, located in the Cadelbosco di Sopra permit, are under review by the Ministry and the Region. Subject to the necessary authorisations, we plan to drill the first of these wells in 4Q 2013. I am pleased to note that in the summer of 2012, the Company farmed out a 15% working interest in these wells with a promoted carry. During the year we expanded and consolidated our exploration portfolio. We were awarded a new exploration licence Torre Del Moro (55km south east of Bologna, an area of 111 square kilometres) and received a positive Environmental Impact Assessment from the Emilia Romagna Region for our Tozzona application. Once these licences are fully awarded, the technical team will conduct geological and geophysical studies on the new permit areas to evaluate a number of already identified leads. The importance of increasing the Italian hydrocarbon production was recognised and corroborated in the Italian National Energy Strategy (SEN) prepared by the Ministry of Economic Development. One of the main objectives is to double the country’s domestic oil and gas production by 2020. This objective is part of a package of measures which the Minister maintains will help reduce imports to 67% of the country's energy needs (from 84% in 2012), while also slashing €14 billion ($18.23 billion) per year from its €62 billion energy import bill. The SEN has now been established as a Ministerial Decree and will be used as a proposed strategic framework for the future government. In conclusion, 2013 will be another challenging but exciting year with key operational priorities including a continued effort to secure farm out partners, progress our drilling plans and bring new production on-line. We will continue to strive to deliver future value to shareholders and to this end I would like to thank our staff, Senior Management and our Board for all their hard work and loyalty shown throughout this pivotal year and last but not least our shareholders for their continued support. Giovanni Catalano Chief Executive Officer & Managing Director A n n u a l R e p o r t 2 0 1 2 | 5  Corporate Governance Statement The Board is committed to implementing 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. This corporate governance statement summarises the corporate governance practices that have been adopted by the Company and, as required by the ASX Listing Rules, provides details of the extent to which the Company has followed the ASX Corporate Governance Recommendations during the reporting period. ASX Principle 1 – Lay solid foundations for management and oversight Role of the Board 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 general responsibility for the oversight, management and performance of the Company. Its specific responsibilities include the following:  Set the strategic direction for the Company and monitor implementation of those strategies;  Monitor performance of the Company, the Board and management;  Appoint and manage performance of the CEO, approve the Company’s overall remuneration policy and oversee the senior management team in terms of performance evaluation, succession planning and remuneration;  Approve and monitor the business plan, annual exploration and development work programs and budgets in accordance with the approved strategy and monitor the Company’s overall financial position and capital requirements;  Authorise and monitor significant investment and strategic commitments;  Approve and monitor financial and other reporting to shareholders;  Review and ratify the Company’s policies and systems for health, safety and environmental management, risk management and internal control; codes of conduct and regulatory compliance;  Appoint and remove the external auditors;  Evaluate the performance of the Board and identify and appoint new directors to the Board;  Take responsibility for corporate governance. Delegation to Senior Management Other than the matters specifically reserved for the Board, responsibility for the operation and administration of the Company has been delegated to the Chief Executive Officer. Internal control processes are in place to allow management to operate within board approved limits and the Managing Director cannot commit the Company to additional obligations or expenditure outside of those delegated authorities without Board approval. 6 | A n n u a l R e p o r t 2 0 1 2  Corporate Governance Statement (Continued) ASX Principle 2 – Structure the Board to Add Value Composition of the Board There are currently five Non-Executive Directors and one Executive Director 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. The Board seeks to ensure that its members together have the following combination of skills and experience:  Technical expertise and experience in oil and gas exploration, development and production;  Finance and accounting;  Company strategy and business planning and business and corporate development;  Local and international experience; and  Public company affairs and corporate governance. The Directors Report contains further details of the experience of each Director and their term of office. Retirement and Rotation Retirement and rotation of the directors is governed by the Corporations Act 2001 and the Company’s Constitution. In accordance with the Constitution, one-third of the Board is required to retire at each annual general meeting with retiring directors being eligible for re-election. Independence The Board currently has a majority of Non-Executive Directors, 50% of whom are independent including the Chairman. The independence of Directors is regularly assessed by the Board and in doing so it has careful regard to the guidelines set out in the ASX Corporate Governance Recommendations for the evaluation of director independence. Based on the application of those guidelines, the Board currently considers that it has three independent Directors being Graham Bradley (the Chairman), Kevin Eley and Gregory Short. Giovanni Catalano is the Managing Director and hence not considered independent. Byron Pirola and Michael Masterman are not considered to be independent as they each have substantial shareholdings of more than 5% of the Company’s shares. 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. Board Committees Remuneration & Nominations Committee The Company has a Remuneration & Nominations Committee which provides recommendations to the Board on matters including:  The 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;  The composition of the Board and competencies of Board members;  Succession planning for Directors and senior management; A n n u a l R e p o r t 2 0 1 2 | 7  Corporate Governance Statement (Continued)  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 2012 can be found in the Directors Report. The committee is structured in accordance with the ASX Corporate Governance Recommendations 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. The last review was conducted in February 2013. 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 & 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 committee evaluated the performance of the CEO and senior executives in accordance with this process in December 2012. Audit & Risk Committee The Company has established an Audit & 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. Kevin Eley (who chairs the committee), Byron Pirola and Gregory Short are the current members of the committee. The committee has been structured to comply with the ASX Corporate Governance Recommendations so that it:  Has three members;  Consists only of Non-Executive Directors;  Has a majority of independent Directors;  Is chaired by an independent chair, who is not the chair of the Board; and  Comprises members with the appropriate financial and business expertise to act effectively as a member of the committee. The number of Audit & Risk Committee meetings held in 2012 and director attendance is set out in the Directors Report on page 14. Committee member qualifications are set out on page 12 and 13. 8 | A n n u a l R e p o r t 2 0 1 2  Corporate Governance Statement (Continued) ASX Principle 3 – Promote Ethical and Responsible Decision-Making Code of Conduct All executives and employees are required to abide by laws and regulations, to respect confidentiality and the proper handling of information and act with the highest standards of honesty, integrity, objectivity and ethics in all dealings with each other, the Company, customers, suppliers and the community. The Company has adopted a code of conduct. 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 20 full time employees, of whom, 10 are men and 10 are women. The Company’s senior executives include women in the roles of Chief Financial Officer and Company Secretary. Women also hold key roles in the areas of accounting, corporate and public relations. The Company's employees are drawn from a variety of nationalities, age, ethnic and cultural backgrounds. The Company currently has no female directors. 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. Securities Trading Policy 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. Directors and employees are prohibited from trading the Company’s securities at any time while in possession of price sensitive information and are also prohibited from trading securities during “blackout” periods around the announcement of the Company’s half yearly and yearly results. Directors and employees must not engage in short term trading of the Company’s securities and 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 & Risk Committee (in the case of the Chairman) or the CEO or Company Secretary (in the case of other employees). ASX Principle 4 – Safeguard Integrity in Financial Reporting The Board is committed to ensuring that the Company’s financial reports present a true and fair view of the Company’s financial position and comply with relevant accounting standards. The Audit & Risk Committee assists the Board in discharging its responsibilities for financial reporting and to ensure that appropriate internal controls are in place. Please refer to the commentary on ASX Principle 2 above for further details in relation to the Audit & Risk Committee and to the Directors’ Report for details of the names and qualifications of the members of the committee and attendance at meetings in 2012. A n n u a l R e p o r t 2 0 1 2 | 9  Corporate Governance Statement (Continued) ASX Principle 5 – Make Timely and Balanced Disclosure The Board is committed to ensuring 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. The Company has adopted policies and procedures, including a Continuous Disclosure Policy, designed to ensure compliance with ASX Listing Rules disclosure requirements and to ensure accountability at a senior executive level for that compliance. ASX Principle 6 – Respect the Rights of Shareholders 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 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. ASX Principle 7 – Recognise and Manage Risk Risk Management Risk recognition and management are considered critical in 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 & Risk Committee. The Board requires management 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 and CFO have confirmed in writing to the Board for each reporting period confirming that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. Reserves Reporting The progression of the Company’s discovered hydrocarbon reserves from appraisal studies through to development and production is core to the Company’s purpose and market value. The Company has adopted a Hydrocarbon Reserves Policy in order to assist in the implementation of processes, standard and controls to ensure reliable hydrocarbon reserves estimates, consistent with industry best practice to facilitate effective business management decision-making and accurate reporting of the Company’s reserves. The CEO is responsible for the implementation of the policy while the Board oversees and approves the policy and monitors its implementation. 10 | A n n u a l R e p o r t 2 0 1 2  Corporate Governance Statement (Continued) Health, Safety and Environment 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. Appropriate protection policies are an important selection criteria for contractors, whose activities are monitored for compliance. The Company has adopted an HSE Management System which provides for a series of procedures and routine checks (including periodical audits) to ensure compliance the Company’s compliance with all legal and regulatory requirements and best practices in this area. ASX Principle 8 – Remuneration Fairly and Responsibly The Board seeks to ensure that the Company adopts remuneration practices which will enable it to attract and retain high calibre and qualified employees, executives and directors whose interests are aligned with those of shareholders. The Remuneration & Nominations Committee is responsible for reviewing and recommending compensation arrangements for the Directors, the CEO and senior management. For full details regarding the Company’s remuneration practices and the composition and responsibilities of the Remuneration & Nominations Committee please refer to the commentary in relation to ASX Principle 2 above and to the Remuneration Report. 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; • Corporate 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; • Risk Management Policy. A n n u a l R e p o r t 2 0 1 2 | 11  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 2012. 1. Directors The Directors of the Company at any time during or since the end of the financial year are: Directors M Masterman B Pirola G Bradley D McEvoy G Short K Eley G Catalano Date of Appointment 22 June 1999 (Managing Director) 11 October 2010 (Non-Executive Director) 10 May 2002 30 September 2004 Retired 28 May 2012 5 July 2010 19 June 2012 19 June 2012 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 64 Graham joined PVE as a director and Chairman in September 2004 and is based in Sydney. He is an experienced Chief Executive Officer and listed public company director. Graham previously served as Chief Executive Officer of one of Australia’s major listed funds management and financial services groups, Perpetual Limited. He was formerly Managing Partner of a national law firm, Blake Dawson Waldron and was a senior Partner of McKinsey & Company. Mr Bradley is currently 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. Giovanni Catalano — Managing Director and Chief Executive Officer MGeol, Age 59 Giovanni joined PVE in October 2010 as Chief Executive Officer and was appointed Managing Director in June 2012. Mr. Catalano holds a masters degree in Geology and has had almost thirty years in the upstream oil and gas industry. His last position held was as CEO with Mediterranean Oil & Gas plc in UK and Italy. Prior to that, Giovanni was with Woodside Energy Pty Ltd, Perth, Western Australia as Business Development Manager Far East and lately North Africa. Prior to Woodside, Mr Catalano was posted worldwide with AGIP and LASMO International. He is a former Director of Mediterranean Oil & Gas Plc, Director of Woodside Energy UK and AGIP Mauritania BV companies and former Chairman of Woodside Energias SA in Spain. He is member of SEAPEX and AAPG. Michael Masterman — Non-Executive Director, BEcHons, Age 50 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 12 | A n n u a l R e p o r t 2 0 1 2  Directors’ Report (Continued) US capital markets issue. Prior to joining Anaconda Nickel, he spent 8 years at McKinsey & Company serving major international resources companies principally in the area of strategy and development. He is also Chairman of W Resources Plc, an AIM listed company with tungsten and gold assets in Spain and Portugal. Mr. Masterman became a member of the Remuneration & Nomination Committee from 1 January 2011. Byron Pirola — Non-Executive Director, BSc, PhD, Age 52 Byron is a co-founder of PVE and is based in Sydney. He is currently a Director of Port Jackson Partners Limited, a Sydney based strategy management consulting firm. Prior to joining Port Jackson Partners in 1992, Byron spent six years with McKinsey & Company working out of the Sydney, New York and London Offices and across the Asian Region. He has extensive experience in advising CEOs and boards of both large public and small developing companies across a wide range of industries and geographies. Byron is a member of the Audit and Risk Committee and member of the Remuneration and Nominations Committee. Gregory Short — Non-Executive Director, BSc, Age 62 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. Kevin Eley — Non-Executive Director, CA, F FIN, Age 63 Kevin Eley was appointed Non-Executive Director in June 2012. Kevin is based in Sydney and was the Chief Executive of HGL Limited for 25 years until his retirement in 2011. He has management and investment experience in a broad range of industries including, manufacturing, mining, retail and financial services with experience in the direction of early stage companies and public company governance. Kevin joined the PVE Audit & Risk Committee as Chairman and is a Chartered Accountant and a Fellow of the Financial Services Institute of Australasia. Kevin is currently a Non- Executive director of HGL Ltd, Kresta Holdings Limited, Milton Corporation Limited and Equity Trustees Limited. David McEvoy — Non-Executive Director, BSc, Grad Diploma (Appl. Geophysics), Age 66 Retired 28 May 2012 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 resigned in May 2012 after 8 years of valuable service for PVE. A n n u a l R e p o r t 2 0 1 2 | 13  Directors’ Report (Continued) 2. Company Secretary Lisa Jones – Company Secretary, LLB Lisa was appointed to the position of Company Secretary in October 2009. She is a corporate lawyer with over 16 years experience in commercial law and corporate affairs, working with large public companies and emerging companies in Australia and in Europe. She was a senior associate in the corporate & commercial practice of Allen Allen & Hemsley and spent several years working in Italy, including as international legal counsel at Pirelli Cavi and as an associate in the Rome office of a national Italian firm. 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: G Bradley M Masterman D McEvoy1 B Pirola G Short K Eley2 G Catalano3 9 9 - 2* 2 2 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 Notes: 9 8 - - 2 2 4 3 2 - - 1* 9 9 2 2 2 2 9 9 2 2 - 2* 4 5 1 1 - - 4 9 - 2* - 2* 1. Mr McEvoy resigned as a director with effect from 28 May 2012. 2. Mr Eley was appointed as a director with effect from 19 June 2012 and attended one prior meeting as an observer. 3. Mr Catalano was appointed as a director with effect from 19 June 2012 and prior to that attended all board and committee meetings at the invitation of the Board in his role as CEO. 14 | A n n u a l R e p o r t 2 0 1 2  Directors’ Report (Continued) 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 earnings per share for the Company was 2.12 € cents (2011: loss 4.57 € 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 24.7 million cubic metres of gas (0.85 billion cubic feet). In February 2012, the sidetracked Vitalba1dirA well at the Cascina Castello concession, north of Milan commenced production. Production from the Pliocene SAN A2 sand level started at a rate of about 14 thousand standard cubic meters per day and was gradually increased to reach the target rate of 17 thousand standard cubic meters per day. The field continued to produce at the target rate throughout the rest of the year without incident. Production from the Castello field during the year amounted to 5.3 million standard cubic metres of gas. In December 2012 Robertson CGG certified SAN A2 gas remaining reserves as at 1 January 2013 at Proved (1P) Reserves of 23.0 MScm (0.8 bcf), Proved + Probable (2P) Reserves of 45.7 MScm (1.6 bcf) and Proved + Probable + Possible Reserves (3P) of 52.3 MScm (1.8 bcf). These estimates are in line with the Reserve Audit carried out by Robertson CGG in April of the same year. The impact of colder weather conditions in January 2012 resulted in an increase in condensate production at the Sillaro gas site and production was halted for four days while excess condensate was removed from the processing facility. The situation was thoroughly evaluated by the Company and it was confirmed that condensate production was originating from the PL2 C1+C2 producing level. While the condensate produced is negligible, the Company decided to install condensate extraction equipment in the Sillaro production facility before reopening level PL2 C1+C2. The installation of the condensate extraction equipment is underway and daily production from Sillaro is planned to return to previous rates in April 2013. As a result of the reduced daily production rate, cumulative production from Sillaro during 2012 was 19.3 million standard cubic meters at a rate of circa 54,000 standard cubic meters per day (1.9 million cubic feet per day). The Company submitted an application to the Ministry to enlarge the size of the existing Cascina Castello production licence to include the nearby Bezzecca area in January 2011. A technical and economic evaluation of the development project was carried out by the Ministry of Economic Development in July 2012 resulting in a Preliminary Production Concession. The final award of the production licence is subject to the results of the related Environmental Impact Assessment (EIA), which has already been completed and lodged with the Lombardy Region. The first hearing was held in November 2012 and the local authorities visited the site at the beginning of December. Once the production licence has been granted, the Company will initiate activity on the field development plan, which primarily includes the construction of a 2 inch pipeline 7 km in length needed to connect the two producing sites. The updated plan for Sant’Alberto was submitted during the year and the final concession award is subject to the EIA clearance from the Emilia Romagna Region. The field was previously drilled by Edison in 2004 and the Competent Persons Report from Robertson CGG in December 2012 certified low estimate Contingent Resources (1C) 1.8 Bcf (51 MSm) and best estimate Contingent Resources (2C) of 2.1 Bcf (59.5 MSm). A n n u a l R e p o r t 2 0 1 2 | 15  Directors’ Report (Continued) The Company executed a farm-in agreement with Petrorep Italiana S.p.a. in June 2012 for the Cadelbosco di Sopra exploration licence while in February 2013 two farm-in agreements with Petrorep Italiana S.p.a. and Aleanna Resources Ltd respectively were finalised and executed in respect of the La Prospera exploration licence. The Company was awarded its first offshore exploration permit named AR94PY (previously denominated AR168PY). The permit is located in the shallow waters of the Adriatic Sea and contains two connected gas discoveries, Carola and Irma, both drilled and tested by the former operator, ENI. Resource evaluations of the combined two gas fields have a low estimate Contingent Resources (1C) of 22 bcf and best estimate Contingent Resources (2C) of 24.8 bcf. These resource estimates have been independently audited by Robertson CGG in April 2012. Final recovery estimates will be formalised on conclusion of the development plan which is underway. 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 months is expected to cover the exploration gas prospect Gradizza located in the La Prospera License, the appraisal of three Quaternary/Pliocene gas prospects in Cadelbosco di Sopra subject to ongoing regulatory approvals and available finances. During the reporting period, the Company expanded its portfolio with the grant of preliminary exploration licences Torre del Moro and Tozzona in the Po Valley basin. The Company intends to conduct geological and geophysical studies on the new permit area, once awarded, to fully evaluate a number of leads already identified and, assuming positive results, will then prepare plans for an exploration well. 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 the full year of gas production was €8,208,468 showing a year on year decline of €906,578 or 10%. Gas prices have remained steady over the last 12 months. Operating efficiencies were achieved and evidenced by the continuous improvement in operating margins. The Company made a net profit before tax for the 2012 year of €201,570. The Company recognised a deferred tax asset for the first time at consolidated level in 2012. First time recognition generates a tax benefit as shown in the income statement. We refer to Note 15 to the Financial Statements for additional details concerning the nature of the deferred tax asset and the recognition criteria. Excluding the tax benefit arising from the recognition of the deferred tax asset, the Company would have generated a comprehensive profit for the period of €144,746. Net profit before impairment expense is reconciled to comprehensive profit / (loss) for the period as follows: Comprehensive profit reconciliation table ( in Euro ) 2012 2011 Net profit / (loss) before impairment expense (unaudited) 2,418,792 860,797 Impairment on resource property costs for the Castello field - (5,829,915) Impairment on exploration assets and inventory (45,951) (101,646) Comprehensive profit / (loss) for the period 2,372,841 (5,070,764) Earnings before interest, tax, impairment, depreciations and amortisation amounted to €4,511,086 for the year. 16 | A n n u a l R e p o r t 2 0 1 2  Directors’ Report (Continued) EBITDA (unaudited) is reconciled to statutory results from operating activities as follows: EBITDA reconciliation table ( in Euro ) 2012 2011 EBITDA 4,511,086 4,411,011 Depreciation and amortisation expense (3,455,620) (2,534,799) Depreciation expense Impairment losses Interest income on current accounts Results from operating activities (16,425) (25,709) (45,951) (5,931,561) (38,071) (5,504) 955,019 (4,086,563) Company’s drawings on the Lloyds (formerly Bank of Scotland) facility amounted to €4 million at 31 December 2012. One repayment equal to €2 million was made during the year. The borrowing base ceiling review in December resulted in a borrowing limit of €4.0 million for the first half of 2013. Work to refinance the facility, which expires in November 2013, is underway. The amount drawn is classified as current as at 31 December 2012. In December the Company raised A$ 1.35 million through a private placement under which a total of 11,266,667 shares were issued at an issue price of $0.12c. The first tranche of 7,416,667 shares was issued on 6 December 2012 to several Australian institutional and sophisticated investors. The Company was pleased to receive the support of several of its Non-Executive Directors in the placement and a second tranche of 3,850,000 shares was issued to participating directors on 7 March 2013 following shareholder approval obtained at an EGM on 15 February 2013. The proceeds will be used to upgrade the gas plant at Sillaro in order to enable higher production rates and for general working capital. No other share issues were made during the period. 7. Dividends No dividends have been paid or declared by the Company during the year ended 31 December 2012. 8. Events subsequent to reporting date The Company completed a capital raising of A$ 1.35 million through a private placement in December 2012. The participation of the company's Non-Executive Directors in the placement was subject to shareholder approval and as a result the Company held an extraordinary general meeting (EGM) of shareholders on 15 February 2013. Shareholder approval was obtained and subsequently the second tranche of 3,850,000 shares was issued. There were no other 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. A n n u a l R e p o r t 2 0 1 2 | 17  Directors’ Report (Continued) 10. Environmental Regulation The Company’s operations are subject to environmental regulations under both national and local municipality legislation in relation to its mining exploration and development activities in Italy. Company management monitor compliance with the relevant environmental legislation. The Directors are not aware of any breaches of legislation during the period covered by this report. 11. Remuneration Report - audited The Remuneration Report outlines the remuneration arrangements which were in place during the year, and remain in place as at the date of this report, for the Directors and executives of the Company. Remuneration Policy The Remuneration & Nominations Committee (Committee) 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 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. 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. Indices Production (scm000) EBITDA (€'000s) 2012 2011 2010 2009 2008* 24,673 28,995 26,793 638 - 4,511 4,411 2,219 (6,935) (4,097) Profit / (loss) attributable to owners of the company (€'000s) * 2,373 (5,071) (2,324) (7,203) (4,172) Earnings / (loss) per share (€ cents per share) * 2.12 (4.57) (2.11) (6.99) (4.54) Share Price at year end - AU $ 0.12 0.16 0.21 1.68 1.10 * 2008 restated to Euro 18 | A n n u a l R e p o r t 2 0 1 2  Directors’ Report (Continued) 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, accommodation and other benefits, 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 2012 and has no plans to issue options in the immediate future. Non-Executive Directors The remuneration of PVE Non-Executive Directors comprises cash fees. There is no current scheme to provide performance based bonuses or retirement benefits to Non-Executive Directors. 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. Fees for Non-Executive Directors were reviewed by the Remuneration & Nominations Committee in early 2012, the first such review since the Company's listing in 2004. The Board determined that, after reviewing fees paid by comparably sized companies, and in recognition of the increased complexity of the Company as the Company's asset portfolio has grown and the Company has moved from exploration to production, an increase in directors fees was appropriate, and it was determined that the board fees would now be denominated in Euros rather than Australian dollars. Accordingly, basic fees for Non-Executive Directors were increased from A$40,000 to Euro 40,000 and the Chairman's fees were increased from A$60,000 to Euro 60,000. No additional fees are paid by the Company in respect of board committees. The total fees paid in 2012 to Non-Executive Directors was €210,500 (2011 €182,000). A n n u a l R e p o r t 2 0 1 2 | 19  Directors’ Report (Continued) Service contracts The major provisions of the service contracts held with the specified Directors and executives, in addition to any performance related bonuses and/or options are as follows: Directors: Graham Bradley, Chairman  Commencement Date: 30 September 2004 (re-elected 28 May 2012)  Fixed remuneration for the year ended 31 December 2012: €60,000  No termination benefits Byron Pirola, Non-Executive Director  Commencement Date: 10 May 2002 (re-elected 13 May 2011)  Fixed remuneration for the year ended 31 December 2012: €40,000  No termination benefits Gregory Short, Non-Executive Director  Commencement Date: 21 July 2010 (elected 13 May 2011)  Fixed remuneration for the year ended 31 December 2012: €40,000  No termination benefits Michael Masterman, Non-Executive Director  Commencement Date: 22 June 1999 (elected 13 May 2011)  Fixed remuneration as a Non-Executive Director: €40,000  No termination benefits Kevin Eley, Non-Executive Director  Commencement Date: 19 June 2012  Fixed remuneration as a Non-Executive Director: €40,000  No termination benefits The Non-Executive Directors are not appointed for any fixed term but rather are required to retire and stand for re-election in accordance with the Company’s constitution and the ASX Listing Rules. Giovanni Catalano, Managing Director and Chief Executive Officer  Commencement Date: 11 October 2010 as Chief Executive Officer (CEO) and 19 June 2012 as Managing Director  Term of Agreement: Indefinite but terminable by either party on three month’s notice  Fixed service contract fee of €200,000 per annum plus accommodation costs and other non- monetary benefits  Annual performance based fee of up to 70% of his contracted service fee subject to the achievement of performance criteria including operating performance of the producing fields, operating profit, progress on asset development as agreed annually with the Board.  Payment of termination benefit on termination by the Company (other than for gross misconduct) equal to three months’ service fee 20 | A n n u a l R e p o r t 2 0 1 2  Directors’ Report (Continued) Executives: Lisa Jones, Company Secretary  Commencement Date: 21 October 2009  Term of Agreement: Indefinite but terminable by either party on one month’s notice  Paid a minimum monthly retainer (A$2,500 to the end of 31 December 2012) to provide company secretarial and corporate governance services plus an agreed hourly rate in respect of additional services  No termination benefit Sara Edmonson, Chief Financial Officer  Commencement Date: 26 July 2010 as Finance Manager and 1 September 2012 as Chief Financial Officer  Term of Agreement: Indefinite but terminable by either party on three month’s notice  Fixed salary of €120,000 per annum  Annual performance based fee of up to 40% of her 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 one year salary in accordance with the Italian National Collective Labour Agreement for executives Directors and executive officers’ remuneration – Consolidated The remuneration details of each Director and specified executives during the year is presented in the next page. There are no executive officers of the Group other than those listed. A n n u a l R e p o r t 2 0 1 2 | 21 - - - - - - - - - - - - - - - - - - - - - - - - - - 0 0 5 , 7 5 0 0 0 , 0 5 0 5 2 8 3 , 0 0 0 , 3 3 0 5 2 8 3 , 0 0 0 , 3 3 0 5 2 , 8 3 0 0 0 , 3 3 0 0 0 , 0 3 - 7 1 7 8 3 2 , % 9 2 0 6 7 0 2 3 , - - - 0 5 2 8 , 0 0 0 , 3 3 7 1 2 9 4 4 , 0 6 7 2 0 5 , - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 9 1 9 3 , - - - 1 9 1 9 3 , - - - - - - - - - - - - - - - - f o e u l a V s a s n o i t p o f o n o i t r o p o r p n o i t a r e n u m e r f o n o i t r o p o r P n o i t a r e n u m e r e c n a m r o f r e p d e t a l e r l a t o T s n o i t p O % % € € t r o h S m r e t e v i t n e c n i s u n o b s e r a h S € € € t a u n n a r e p u S s t i f e n e b n o i I T S h s a C l a t o T e s a B r e h t O r a C d e s a b - e r a h S s t n e m y a p - t s o P e m y o p m E l t n m r e t - t r o h S - - - - - - - - - - - 0 0 5 , 7 5 0 0 0 , 0 5 0 5 2 , 8 3 0 0 0 , 3 3 0 5 2 , 8 3 0 0 0 , 3 3 0 5 2 , 8 3 0 0 0 , 3 3 0 0 0 , 0 3 - € - - - - - - - - - - € - - - - - - - - - - - - - - - - - - - - - o m m o c c A n o i t a d y r a l a S s e e f & € € ) d e u n i t n o C ( 0 0 5 , 7 5 2 1 0 2 0 0 0 , 0 5 0 5 2 , 8 3 0 0 0 , 3 3 0 5 2 , 8 3 1 1 0 2 2 1 0 2 1 1 0 2 2 1 0 2 0 0 0 , 3 3 1 1 0 2 t r o p e R ’ s r o t c e r i D e v i t u c e x E - n o N , l a o r i P B e v i t u c e x E - n o N , t r o h S G e v i t u c e x E - n o N , n a m r i a h C s r o t c e r i D l y e d a r B G 0 5 2 , 8 3 2 1 0 2 e v i t u c e x E n o N n a m r e t s a M M 0 0 0 , 3 3 1 1 0 2 0 0 0 , 0 3 - 2 1 0 2 1 1 0 2 * 2 1 0 2 e n u J 9 1 i t d e n o p p A e v i t u c e x E - n o N l , y e E K 0 0 0 , 5 5 9 6 5 , 6 2 2 9 0 7 , 6 0 6 0 , 9 0 0 8 , 0 3 0 0 0 , 0 8 1 1 1 0 2 O E C / r o t c e r i i D g n g a n a M 2 1 0 2 e n u J 9 1 i t d e n o p p A 0 0 0 , 5 5 9 6 5 , 8 0 4 9 0 7 , 6 0 6 0 , 9 0 0 8 , 0 3 0 0 0 , 2 6 3 1 1 0 2 - - - 0 5 2 , 8 0 0 0 , 3 3 - - - - - - 0 5 2 , 8 2 1 0 2 0 0 0 , 3 3 1 1 0 2 e v i t u c e x E - n o N , y o v E c M D 2 1 0 2 y a M 8 2 d e r i t e R 7 1 2 , 9 4 4 0 5 8 , 4 0 8 2 , 6 8 3 3 , 9 2 9 4 7 , 8 0 4 2 1 0 2 s r o t c e r i D r o f l a t o T 2 1 0 2 t r o p e R l a u n n A | 2 2 7 1 7 , 8 3 2 0 5 8 , 4 0 8 2 , 6 8 3 3 , 9 2 9 4 2 , 8 9 1 2 1 0 2 l o n a a t a C G - - - - - - - - - 1 5 1 , 5 2 9 7 2 , 2 2 3 2 9 , 6 3 4 7 0 2 6 , 9 7 2 2 2 , 1 9 2 1 1 5 , 9 3 0 5 2 5 , - - - - - - - - - - - - - - - 1 9 1 9 3 , - - - - - - - - 3 2 | 2 1 0 2 t r o p e R l a u n n A f o e u l a V s a s n o i t p o f o n o i t r o p o r p n o i t a r e n u m e r f o n o i t r o p o r P n o i t a r e n u m e r e c n a m r o f r e p d e t a l e r l a t o T s n o i t p O % % € € t r o h S m r e t e v i t n e c n i s u n o b s e r a h S € € € € € € n o i t a u n n a r e p u S s t i f e n e b I T S h s a C l a t o T e s a B r e h t O r a C n o i t a d o m m o c c A & y r a l a S d e s a b - e r a h S s t n e m y a p - t s o P t n e m y o p m E l m r e t - t r o h S ) d e u n i t n o C ( d e t a d i l o s n o C - n o i t a r e n u m e r ’ s r e c i f f o e v i t u c e x e d n a s r o t c e r i D ) d e u n i t n o C ( t r o p e R ’ s r o t c e r i D - - - - - - - - 1 5 1 , 5 2 9 7 2 , 2 2 3 2 9 , 6 3 4 7 0 , 2 6 9 7 2 , 2 2 - - - - - - - - - - - - - - - - - - s e e f € 1 5 1 , 5 2 2 1 0 2 9 7 2 , 2 2 1 1 0 2 3 2 9 , 6 3 2 1 0 2 - 1 1 0 2 4 7 0 , 2 6 2 1 0 2 9 7 2 , 2 2 1 1 0 2 s e v i t u c e x E d e i f i c e p S t y r a e r c e S y n a p m o C s e n o J a s L i * * n o s n o m d E a r a S d e i f i c e p S r o f l t a o T s e v i t u c e x E r e c i f f O d n a s r o t c e r i D l t a o T s e v i t u c e x E l i a c n a n F i f i e h C 1 9 2 , 1 1 5 0 5 8 , 4 0 8 2 , 6 8 3 3 , 9 2 3 2 8 , 0 7 4 2 1 0 2 0 0 0 , 5 5 8 4 8 , 0 3 4 9 0 7 , 6 0 6 0 , 9 0 0 8 , 0 3 9 7 2 , 4 8 3 1 1 0 2 d o i r e p t a h t g n i r u d d e t a s n e p m o c s a w d n a r e v r e s b o n a s a s g n i t e e m r o i r p d e d n e t t a y e E l r M * i P M K a g n m o c e b f o e t a d m o r f d e d u c n l i n o i t a r e n u m e R * *  Directors’ Report (Continued) Notes in relation to the table of Directors’ and executive officers’ remuneration A. Short term incentive bonuses awarded as remuneration to specified executives is related to performance hurdles established by the Remuneration & Nominations 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. Bonuses paid by issue of shares and included in share based payments to each Director and specified executive. 2012 2011 Directors and specified executives Cash Bonus Bonus paid by issue of shares % vested in year Cash Bonus Bonus paid by issue of shares % vested in year G Catalano S Edmonson € Nil Nil € Nil Nil € Nil Nil € € € 55,000 39,191 100% - - - 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. No bonuses vested during 2012. 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 (2011: Nil). No options vested during 2012. (2011: Nil) Modification of terms of equity-settled share-based payment transactions No terms of equity-settled share-based payment transactions (including options and rights granted as compensation to a key management person) have been altered or modified by the issuing entity during the reporting period or the prior period. Exercise and lapse of options granted as compensation No options granted as compensation were exercised during 2012. There were no options outstanding during 2012. 24 | A n n u a l R e p o r t 2 0 1 2  Directors’ Report (Continued) Analysis of options over equity instruments granted as compensation No options were exercised by directors or key management personnel. Analysis of movements in options No options over ordinary shares in the Company were held by any key management person or the specified executives during 2012. 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 B Pirola G Short G Catalano K Eley Ordinary Shares 1,373,880 32,845,302 7,112,782 200,000 528,141 800,000 13. Share Options Options granted to directors and executives of the Company The Company has not granted any options over unissued ordinary shares in the Company to any directors or specified executive during or since the end of the financial year. Unissued shares under option At the date of this report 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 A n n u a l R e p o r t 2 0 1 2 | 25  Directors’ Report (Continued) 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, did not perform other services in addition to their statutory duties. Refer to note 6 of the financial report for details of auditor’s remuneration. 17. Proceedings on behalf of the Company No person has applied for leave of Court, pursuant to section 237 of the Corporations Act 2001, to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. 18. Lead Auditor’s independence declaration The lead auditor’s independence declaration is set out on page 27 and forms part of the Directors’ report for the financial year ended 31 December 2012. This report has been made in accordance with a resolution of Directors. Graham Bradley Chairman Sydney, NSW Australia 15 March 2013 26 | A n n u a l R e p o r t 2 0 1 2 A n n u a l R e p o r t 2 0 1 2 | 27  Statement of Financial Position As at 31 December 2012 NOTES 2012 € 2011 € CONSOLIDATED Current Assets Cash and cash equivalents Trade and other receivables Inventory Total Current Assets Non-Current Assets Receivables Inventory Other assets Deferred tax assets Property, plant & equipment Resource property costs Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Interest bearing loans 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 10 (a) 12 11 12 11 15 13 14 16 18 17 17 18 19 19 1,226,348 2,581,026 - 3,807,374 1,285,372 701,187 43,657 2,228,095 5,636,768 22,017,610 31,912,689 1,889,879 3,332,495 701,187 5,923,561 1,622,980 - 39,282 - 6,548,101 23,306,114 31,516,477 35,720,063 37,440,038 1,718,168 3,984,896 113,825 5,816,889 3,608,421 - 3,608,421 5,613,516 - 91,305 5,704,821 2,747,922 5,771,830 8,519,752 9,425,310 14,224,573 26,294,753 23,215,465 45,460,097 1,192,269 (20,357,613) 44,753,650 1,192,269 (22,730,454) 26,294,753 23,215,465 The above consolidated statement of financial position should be read in conjunction with the accompanying notes to the financial statements. 28 | A n n u a l R e p o r t 2 0 1 2  Statement of Comprehensive Income For the year ended 31 December 2012 NOTES CONSOLIDATED 2012 € 2011 € Revenue 3 8,208,468 9,115,046 4 4 5 7 8 Operating costs Royalties Depreciation and amortisation expense Gross Profit Other income Employee benefit expenses Share based payments Depreciation expense Corporate overheads Impairment losses Results from operating activities Finance income Finance expenses Net finance expenses Profit / (loss) before income tax expense Income tax benefit / (expense) Profit / (loss) for the period Other comprehensive income Other comprehensive loss for the period Total comprehensive profit / (loss) for the period Profit / (loss) attributable to: Owners of the company Profit / (loss) for the period Total comprehensive profit / (loss) attributable to: Owners of the Company Total comprehensive profit / (loss) for the period (1,225,124) - (3,455,620) 3,527,724 700,226 (1,856,627) - (16,425) (1,353,928) (45,951) 955,019 38,071 (791,520) (753,449) 201,570 2,171,271 2,372,841 - - (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) - - 2,372,841 (5,070,764) 2,372,841 2,372,841 (5,070,764) (5,070,764) 2,372,841 (5,070,764) 2,372,841 (5,070,764) Basic and diluted earnings / (loss) per share 9 2.12 cents (4.57) cents The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes to the financial statements. A n n u a l R e p o r t 2 0 1 2 | 29  Statement of Changes in Equity As at 31 December 2012 Consolidated Attributable to equity holders of the Company Share Capital Translation Reserve Option Reserve Accumulated Losses € € € € Total € 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 Balance at 31 December 2011 Balance at 1 January 2012 Total comprehensive income for the period: Profit 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 Balance at 31 December 2012 - - - - (3,313) 97,333 - - - - - - 44,753,650 1,192,269 44,753,650 1,192,269 - - - 706,447 - - - - - - - - 45,460,097 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 (22,730,454) 23,215,465 2,372,841 2,372,841 - - 2,372,841 2,372,841 - - - 706,447 - - (20,357,613) (26,294,753) The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes to the financial statements 30 | A n n u a l R e p o r t 2 0 1 2  Statement of Cash Flow For the year ended 31 December 2012 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid NOTES CONSOLIDATED 2012 € 2011 € 10,007,832 8,742,349 (5,372,274) (5,182,557) 38,071 5,504 (336,893) (300,451) Net cash inflow from operating activities 10 (b) 4,336,736 3,264,845 Cash flows from investing activities Payments for non-current assets Payments on security deposits Payments for resource property costs Net cash outflow from investing activities Cash flows from financing activities Proceeds from the issues of shares Payments for share issue costs Repayments of borrowings 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 (30,218) (4,375) (12,888) 379 (3,672,121) (2,328,496) (3,706,714) (2,341,005) 706,447 - - (3,313) (2,000,000) - (1,293,553) (663,531) 1,889,879 (3,313) 920,527 969,352 - Cash and cash equivalents at 31 December 10 (a) 1,226,348 1,889,879 w The above consolidated statement of cash flows should be read in conjunction with the accompanying notes to the financial statements A n n u a l R e p o r t 2 0 1 2 | 31  Notes to the Financial Statements For the year ended 31 December 2012 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 2012 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 and is a for profit entity. 1.2 (a) BASIS OF PREPARATION 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 15 March 2013. (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) GOING CONCERN The Directors have prepared the financial report on a going concern basis, which contemplates the continuity of normal business activities and the realisation of assets and the settlement of liabilities in the normal course of business and at the amounts stated in the financial report. As at 31 December 2012 the Group has a working capital deficit of €2,009,515 (2011: positive working capital of €218,740), has generated a profit before tax of €201,570 (2011: loss of €4,891,572) and generated net cash from operating activities of €4,336,736 (2011: €3,264,845). The working capital deficit is largely affected by the reclassification of borrowings (€3,984,896) from non-current to current due its repayment date of 15 November 2013. In this regard a refinancing of the existing borrowings is well underway to restore a longer term maturity date. The Directors believe this will occur, having regard to negotiations with a financier to date, including credit committee approval, although finalisation is subject to final due diligence and execution of final documentation. 32 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.2 BASIS OF PREPARATION (continued) In the unlikely event that the refinancing does not eventuate, the Company has measures in place to manage the financial position of the Group, including expected cashflow generation from existing projects, curtailment of discretionary expenditure and alternative debt financing or equity raisings. On this basis the Directors believe the financial report should be prepared on a going concern basis. (d) 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. (e) USE OF ESTIMATES AND JUDGEMENTS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Impairment of non-current assets The ultimate recoupment of the value of resource property costs and property plant and equipment is dependent on successful development and commercial exploitation, or alternatively, sale, of the underlying properties. The Group undertakes at least on an annual basis, a comprehensive review for indicators of impairment of these assets. Should an impairment indicator exist, the area of interest is tested for impairment. There is significant estimation and judgment in determining the inputs and assumptions used in determining the recoverability amounts. The key areas of estimation and judgement in determining recoverable amounts include:  Recent drilling results and reserves and resources estimates;  Environmental issues that may impact the underlying licences;  The estimated market value of assets at the review date;  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 future costs for operating sites are recognised in the balance sheet by adjusting both the restoration and rehabilitation asset and provision. A n n u a l R e p o r t 2 0 1 2 | 33  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.2 BASIS OF PREPARATION (contined) 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. Recognition of deferred tax assets Refer to note 15. 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. 34 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (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. A n n u a l R e p o r t 2 0 1 2 | 35  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) 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. 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% 2012 16.77% 10.51% 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. 36 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) The estimated useful lives of each class of asset fall within the following ranges: Office furniture & equipment 3 – 5 years 3 – 5 years 2011 2012 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 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. A n n u a l R e p o r t 2 0 1 2 | 37  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) 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 less 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. 38 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) 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. The amortisation rate incurred in the period for each project in production phase is as follows: 2011 Castello 0.72% Sillaro 12.34% 2012 16.77% 10.51% 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. A n n u a l R e p o r t 2 0 1 2 | 39  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) 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 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 40 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) 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 items receivable from or payables 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. (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. A n n u a l R e p o r t 2 0 1 2 | 41  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued) 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, the associated costs can be estimated reliably, there is no continuing management involved with the goods, and the amount of revenue can be measured reliably. Sale of gas Gas sales revenue is recognised when control of the gas passes at the delivery point. Proceeds received in advance of control passing are recognised as unearned revenue. (p) LEASED ASSETS Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised on the Group’s balance sheet. (q) NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED The following standards, amendments to standards and interpretations have been identified as those which may impact the entity in the period of initial application. They are available for early adoption at 31 December 2012, but have not been applied in preparing this financial report.  AASB 9 Financial Instruments (December 2010) & 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 2015 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. 42 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1.3 SIGNIFICANT ACCOUNTING POLICIES (continued)  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.  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 & 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. A n n u a l R e p o r t 2 0 1 2 | 43  Notes to the Financial Statements (Continued) 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 & 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. 44 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) (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. The Group does not have a defined share buy-back plan and there were no changes in the Group’s approach to capital management during the year. There are no externally imposed restrictions on capital management. (iv) Liquidity Risk The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due. Management prepares monthly cash flow forecasts taking into consideration debt facility obligations. Capital expenditures are planned around cash flow availability. NOTE 3: REVENUE Gas sales NOTE 4: EMPLOYEE BENEFIT EXPENSES Wages and salaries Equity settled share-based payment transactions  Shares issued in lieu of salaries and bonus CONSOLIDATED 2012 € 2011 € 8,208,468 9,115,046 1,856,627 1,851,829 - 97,333 1,856,627 1,949,162 A n n u a l R e p o r t 2 0 1 2 | 45  Notes to the Financial Statements (Continued) NOTE 5: CORPORATE OVERHEADS Corporate overheads comprises: Company administration and compliance Professional fees Office costs Travel and entertainment Other expenses NOTE 6: AUDITORS’ REMUNERATION Auditors of the Company – KPMG Australia Audit and review of the Group Audit of subsidiary financial statements Tax services – KPMG Australia 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 Net finance income / (expense) 46 | A n n u a l R e p o r t 2 0 1 2 CONSOLIDATED 2012 € 2011 € 329,713 458,906 336,009 150,146 79,154 221,693 436,022 283,560 137,602 101,768 1,353,928 1,180,645 71,959 23,867 67,757 - - 15,000 95,826 82,757 38,071 - 38,071 5,504 - 5,504 325,794 327,952 213,066 184,111 68,549 252,482 227,695 2,384 791,520 810,513 (753,449) (805,009)  Notes to the Financial Statements (Continued) NOTE 8: INCOME TAX EXPENSE Current tax Current year Deferred tax CONSOLIDATED 2012 € 2011 € 56,824 179,192 Origination and reversal of temporary differences (124,427) (327,076) Changes in previously unrecognised deductible temporary differences (141,133) 327,076 Recognition of previously unrecognised tax losses Deferred tax benefit Total income tax (benefit) / expense Numerical reconciliation between tax expense and pre-tax accounting profit / (loss) Profit / (loss) for the year before tax Income tax (benefit) / expense using the Company’s domestic tax rate of 30 per cent (2011: 30%) Non-deductible expenses: Share based payments Impairment losses Other Effect of tax rates in foreign jurisdictions Current year losses for which no deferred tax asset was recognised Tax losses utilised in current year Changes in temporary differences Changes in previously unrecognised temporary differences Recognition of previously unrecognised tax losses Tax effect of regional taxes in Italy – current Income tax (benefit) / expense (1,962,535) (2,228,095) - - (2,171,271) 179,192 201,570 (4,891,572) 60,471 (1,467,472) - - 29,201 1,748,975 5,583 180,048 (23,958) (41,074) 345,864 329,192 (263,533) (451,794) (124,427) (327,076) (265,560) (1,962,535) - - 56,824 179,192 (2,171,271) 179,192 A n n u a l R e p o r t 2 0 1 2 | 47  Notes to the Financial Statements (Continued) CONSOLIDATED 2012 € 2011 € NOTE 9: EARNINGS PER SHARE Basic earnings / (loss) per share (€ cents) 2. 12 (4.57) The calculation of earnings per share was based on the profit attributable to shareholders of €2,372,841 (2011: loss €5,070,764) and a weighted average number of ordinary shares outstanding during the year of 111,675,707 (2011: 110,953,152). Diluted earnings per share is the same as basic earnings per share. The number of weighted average shares is calculated as follows: Number of shares on issue at beginning of the year 7,416,667 issued on 6 December 2012 338,604 issued on 14 March 2011 259,886 issued on 29 June 2011 No. of days 365 26 293 186 2011 2012 Weighted Weighted average no. average no. 111,147,396 110,548,906 528,311 - - 271,811 132,435 111,675,707 110,953,152 NOTE 10: (a) CASH AND CASH EQUIVALENTS (a) Cash and cash equivalents 1,226,348 1,889,879 The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in note 22. Reconciliation of cash flows from operating activities Profit / loss for the period 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 Increase (decrease) in trade and other payables Increase in provisions Increase in deferred tax assets Net cash inflow from operating activities 48 | A n n u a l R e p o r t 2 0 1 2 2,372,841 (5,070,764) 68,549 - 3,472,045 45,951 - - 184,111 213,067 2,384 97,333 2,560,508 5,863,464 68,097 9,678 227,695 252,482 1,089,078 (903,331) 22,520 (2,228,095) 4,336,736 (1,032,701) 271,358 15,311 - 3,264,845  Notes to the Financial Statements (Continued) NOTE 11: INVENTORY Current Well equipment – at cost Non – Current Well equipment – at cost NOTE 12: TRADE AND OTHER RECEIVABLES Current Trade receivables Accrued gas sales revenue Sundry debtors Accrued gas sales revenue from related party (note 24) Indirect taxes receivable (a) CONSOLIDATED 2012 € 2011 € - 701,187 701,187 - 33,484 - 182,248 1,140,968 1,224,326 1,474,397 535,170 50,409 - 1,272,519 2,581,026 3,332,495 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 1,093,577 1,197,810 1,285,372 1,622,980 The indirect taxes relate to Italian Value Added Tax (“VAT”), which is typically 21% 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%. A n n u a l R e p o r t 2 0 1 2 | 49  Notes to the Financial Statements (Continued) NOTE 13: PROPERTY PLANT & EQUIPMENT Office Furniture & Equipment: At cost Accumulated depreciation Gas producing plant and equipment At cost Accumulated depreciation Reconciliations: Reconciliation of the carrying amounts for each class of Plant & equipment are set out below: Office Furniture & Equipment: Carrying amount at beginning of year Additions Disposals Depreciation expense Carrying amount at end of year Gas Producing assets: Carrying amount at beginning of period Additions Depreciation expense Carrying amount at end of period CONSOLIDATED 2012 € 2011 € 194,212 (138,628) 163,994 (122,203) 55,584 41,791 7,668,967 (2,087,783) 5,581,184 5,636,768 7,668,967 (1,162,657) 6,506,310 6,548,101 41,791 30,218 - (16,425) 64,290 12,888 (9,678) (25,709) 55,584 41,791 6,506,310 - (925,126) 6,951,615 111,591 (556,896) 5,581,184 6,506,310 5,636,768 6,548,101 50 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 14: RESOURCE PROPERTY COSTS Resource Property costs Exploration Phase Development Phase Production Phase CONSOLIDATED 2012 € 2011 € 7,272,641 6,814,557 - - 14,744,969 16,491,557 22,017,610 23,306,114 Reconciliation of carrying amount of resource properties Exploration Phase Carrying amount at beginning of period 6,814,557 5,923,127 Exploration expenditure Change in estimate of rehabilitation assets Impairment losses Carrying amount at end of period 243,886 1,156,991 260,149 (232,013) (45,951) (33,548) 7,272,641 6,814,557 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 & Equipment Transfer to production assets Carrying amount at end of period - - - - - - - - - - A n n u a l R e p o r t 2 0 1 2 | 51  Notes to the Financial Statements (Continued) NOTE 14: RESOURCE PROPERTY COSTS (continued) CONSOLIDATED 2012 € 2011 € Production Phase Carrying amount at beginning of period 16,491,557 20,071,921 Additions 367,668 4,321,399 Change in estimate of rehabilitation assets 416,238 (93,945) Amortisation of producing assets (2,530,494) (1,977,903) Impairment loss - (5,829,915) Carrying amount at end of period 14,744,969 16,491,557 Subsequent to the drilling of the deviated well in December 2011, an impairment trigger was identified with regard to Castello 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 at year-end 2011. The recoverable amount was 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. No impairment expense in relation to Castello was recorded in 2012 (2011: €5,829,915). Impairment losses are reconciled as follows: Impairment expense Castello gas field Exploration costs Inventory Total impairment loss 2012 € 2011 € - (45,951) - (5,829,915) (33,549) (68,097) (45,951) (5,931,561) 52 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 15: DEFERRED TAX ASSETS AND LIABILITIES Recognised deferred tax assets Deferred tax assets have been recognised in respect of the following items: Tax losses Accrued expenses and liabilities Recognised deferred tax assets Unrecognised deferred tax assets CONSOLIDATED 2012 € 2011 € 1,962,535 265,560 2,228,095 - - - Deferred tax assets have not been recognised in respect of the following items: Tax losses Share issue expenses Capitalised borrowing costs Accrued expenses and liabilities Unrecognised deferred tax assets Deferred tax benefit will only be obtained if: 2,051,128 3,897,320 31,034 80,895 62,379 93,427 654,511 665,206 2,817,568 4,718,332 (i) (ii) (iii) 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; the relevant company continues to comply with the conditions for deductibility imposed by tax legislation; and No changes in tax legislation adversely affect the relevant company in realising the benefit from the deductions for the losses. The tax losses in both Italy and Australia do not expire. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have been recognised in respect of these items because it is probable that future taxable profit will be available against which the Group can utilise the benefits therefrom. In 2012, €2,228,095 of previously unrecognised tax losses and deductible temporary differences relating to the Italian subsidiaries were recognised as management considered it probable that future taxable profits would be available against which they can be utilised. Management revised its estimates following a further year of taxable profits being generated in Italy and the stabilisation of income for both producing fields. A n n u a l R e p o r t 2 0 1 2 | 53  Notes to the Financial Statements (Continued) NOTE 15: DEFERRED TAX ASSETS AND LIABILITIES (continued) Movement in recognised temporary differences during the year Balance 1 Jan 2011 Profit and loss Equity Balance 31 December 2011 Profit and loss Equity Consolidated - - Tax losses Accrued expenses and liabilities Total recognised deferred tax - asset *2011 movements were previously unrecognised - - - - - - - - - 1,962,535 265,560 2,228,095 - - - Balance 31 Dec 2012 1,962,535 265,560 2,228,095 Movement in unrecognised temporary differences during the year Balance 1 Jan 2011 Profit and loss Equity Balance 31 December 2011 Profit and loss Equity Balance 31 Dec 2012 Consolidated Tax losses Share issue expenses Capitalised borrowing costs Accrued expenses and liabilities Total unrecognised deferred tax asset 3,795,145 62,070 40,105 3,897,320 (1,846,192) - 2,051,128 101,821 - (39,442) 62,379 - (31,345) 31,034 117,389 (23,962) 22,230 642,976 - - 93,427 (12,532) 80,895 665,206 (10,695) 654,511 4,036,585 681,084 663 4,718,332 (1,869,419) (31,345) 2,817,568 NOTE 16: TRADE AND OTHER PAYABLES Trade payables and accruals Other payables CONSOLIDATED 2012 € 2011 € 1,566,376 5,292,381 151,792 321,135 1,718,168 5,613,516 The Group’s exposure to currency and liquidity risks related to trade and other payables are disclosed in note 22. 54 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) 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 2012 € 2011 € 113,825 91,305 3,608,421 2,747,922 2,747,922 676,388 184,111 2,846,186 (325,958) 227,694 3,608,421 2,747,922 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. 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. Current liabilities Lloyds finance facility Non-current liabilities Lloyds finance facility CONSOLIDATED 2012 € 2011 € 3,984,896 - - 5,771,830 The Group’s exposure to currency, interest rate and liquidity risks related to loans are disclosed in note 22. A n n u a l R e p o r t 2 0 1 2 | 55  Notes to the Financial Statements (Continued) NOTE 18: INTEREST BEARING LOANS (continued) Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: Currency Nominal Interest rate Year of Maturity 31 December 2012 Carrying Face Amount Value $ $ 31 December 2011 Carrying Face Amount Value $ $ Euro Euribor + 1.8% 2013 4,000,000 3,984,896 6,000,000 5,771,830 Current liabilities Secured bank loan The amount presented is disclosed net of borrowing costs of €15,104 (2011: €228,170). 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 2013 is set to €4,000,000 (the amount currently drawn) which is based on the semi annual borrowing base review performed during December 2012. Interest is currently payable at Euribor plus 180 basis points. The Company repaid €2,000,000 of the senior facility (2011: €Nil). The facility is secured over the assets of Northsun Italia SpA and Po Valley Operations Pty Ltd. NOTE 19: CAPITAL AND RESERVES Share Capital Opening balance - 1 January Shares issued during the year: Shares issued at €0.095 ($0.12) each on 6 December 2012 Shares issued at €0.18 ($0.25) each on 14 March 2011 Shares issued at €0.14 ($0.19) each on 29 June 2011 Ordinary Shares 2012 Number 2011 Number 111,147,396 110,548,906 7,416,667 - - - 338,604 259,886 Closing balance – 31 December 118,564,063 111,147,396 56 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 19: CAPITAL AND RESERVES (continued) 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. No shares were issued to employees pursuant to the employees share purchase plan (2011: 598,490) 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 (2011: Nil). 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. A n n u a l R e p o r t 2 0 1 2 | 57  Notes to the Financial Statements (Continued) NOTE 20: SHARE BASED PAYMENTS (continued) 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: 2012 2011 Number of options Balance at beginning of year Granted Exercised Lapsed Balance at end of year Exercisable at end of year - - - - - - Weighted average exercise price $ - - - - - Number of options 3,100,000 - - (3,100,000) - - Weighted average exercise price $ 1.00 - - 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. 58 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 21: FINANCIAL REPORTING BY SEGMENTS The Group reportable segments as described below are the Group’s strategic business units. The strategic business units are classified according to field licence areas which are managed separately. All strategic business units are in Italy. For each strategic business unit, the CEO reviews internal management reports on a monthly basis. Exploration, Development and Production gas and oil are the operating segments identified for the Group. The individual exploration, development and production operations have been aggregated. In euro Exploration Development and Production Total External revenues Segment (loss) / profit before tax Depreciation and amortisation Impairment on resource property costs Reportable segment assets: Resource property costs Plant & Equipment Receivables Inventory Capital expenditure Movement in rehabilitation assets Reportable segment liabilities 2012 € 2011 € - - 2012 € 8,208,468 2011 € 9,115,046 2012 € 8,208,468 2011 € 9,115,046 (45,951) (33,548) 3,527,724 (952,225) 3,481,773 (985,773) - - (3,455,620) (2,534,799) (3,455,620) (2,534,799) (45,951) (33,548) - (5,829,915) (45,951) (5,863,463) 7,272,641 6,814,557 14,744,969 16,491,557 22,017,610 23,306,114 - - - - - - 5,581,184 6,506,310 5,581,184 6,506,310 1,170,575 2,009,567 1,170,575 2,009,567 701,187 701,187 701,187 701,187 299,433 1,156,991 367,668 4,432,990 667,101 5,589,981 260,149 (232,013) 416,238 (93,945) 676,387 (325,958) (1,314,262) (1,093,441) (2,788,064) (6,250,267) (4,102,326) (7,343,708) A n n u a l R e p o r t 2 0 1 2 | 59  Notes to the Financial Statements (Continued) NOTE 21: FINANCIAL REPORTING BY SEGMENTS (continued) Reconciliation of reportable segment profit or loss, assets and liabilities Profit or loss: 2012 € 2011 € Total profit / (loss) for reportable segments 3,481,773 (985,773) Unallocated amounts: Net finance expense Other corporate expenses Consolidated profit / (loss) before income tax Assets: Total assets for reportable segments Other assets Consolidated total assets Liabilities: Total liabilities for reportable segments Other liabilities Consolidated total liabilities Other Segment Information (753,449) (805,009) (2,526,754) (3,100,790) 201,570 (4,891,572) 29,470,556 32,523,178 6,249,507 4,916,860 35,720,063 37,440,038 (4,102,326) (7,343,708) (5,322,984) (6,880,865) (9,425,310) (14,224,573) All of the Group’s revenue is currently attributed to gas sales in Italy on the spot market. Until 1 October 2012, the Group’s revenue was attributed to gas sales in Italy to one customer. 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: CONSOLIDATED 2012 € 2011 € 1,226,348 (3,984,896) (2,758,548) 1,889,879 (5,771,830) (3,881,951) Variable rate instruments Financial assets Financial liabilities 60 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 22: FINANCIAL INSTRUMENTS (continued) 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 strengthening 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 2011. Effect in €’s 31 December Profit or loss Equity 2012 2011 2012 2011 Variable rate instruments (27,737) (41,101) (27,737) (41,101) 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 in relation to its gas sales in that all sales transactions on the spot market are managed by the national transmission system operator SNAM Rete Gas Spa, a partially state owned Italian entity with an investment grade credit rating. Specifically, SNAM Rete Gas Spa has been mandated by the Italian Energy Trading Authorities to perform the role of financial and physical clearing house for all spot market transactions. Consequently, the Group invoices SNAM for all gas sales through a related party Intrading. The Group has a concentration of credit risk exposure to the Italian Government for VAT receivable (see note 12). The carrying amount of the Group’s financial assets represents the maximum credit exposure and is shown in the table below. No receivables are considered past due nor were any impairment losses recognised during the period. A n n u a l R e p o r t 2 0 1 2 | 61  Notes to the Financial Statements (Continued) NOTE 22: FINANCIAL INSTRUMENTS (continued) Cash and cash equivalents Receivables – Current Receivables – Non-current Other assets Note 10 12 12 CONSOLIDATED Carrying Amount 2012 € 1,226,348 2,581,026 1,285,372 43,657 2011 € 1,889,879 3,332,495 1,622,980 39,282 5,136,403 6,884,636 (c) Liquidity risk The following are the contractual maturities of financial liabilities, including estimated interest payments: Consolidated 31 December 2012 In € Carrying amount Contractual cash flows 6 months or less 6 to 12 months 1 – 2 Years 2 – 5 Years Trade and other payables Secured bank loan (1,718,168) (1,718,168) (1,718,168) - (3,984,896) (5,703,064) (4,076,626) (5,794,794) (43,786) (1,761,954) (4,032,840) (4,032,840) - - - - - - 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 Secured bank loan (5,613,516) (5,613,516) (5,613,516) - - (5,771,830) (11,385,346) (6,389,965) (12,003,481) (101,730) (5,715,246) (101,730) (101,730) (6,186,505) (6,186,505) - - - (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. 62 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 22: FINANCIAL INSTRUMENTS (continued) Amounts receivable/(payable) in foreign currency other than functional currency: Cash Current – Payables Net Exposure The following significant exchange rates applied during the year: CONSOLIDATED 2012 € 352,903 (5,509) 347,394 2011 € 49,508 (8,654) 40,854 Australian Dollar ($) Sensitivity Analysis Average rate 2012 0.8055 2011 0.7414 Reporting date spot rate 2012 0.7846 2011 0.7856 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 2011. 31 December 2012 Australian Dollar to Euro (€) 31 December 2011 Australian Dollar to Euro (€) CONSOLIDATED Profit or loss € 33,927 Equity € 33,927 4,388 4,388 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 2012. A n n u a l R e p o r t 2 0 1 2 | 63  Notes to the Financial Statements (Continued) 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 2012 € 511,291 - - - 511,291 2011 € 485,848 - - 39,191 525,039 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 There were no options held or granted during the year by any key management person. The movement during 2011 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 Executives G Catalano Held at 31 Dec 2010 600,000 1,000,000 600,000 600,000 2,800,000 - - Granted Exercised Expired Held at 31 Dec 2011 - - - - - - - - - - - - - - (600,000) (1,000,000) (600,000) (600,000) (2,800,000) - - - - - - - - - 64 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) NOTE 24: RELATED PARTIES (continued) 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 2011 Purchased Share based payments Options Exercised Sold Directors G Bradley M Masterman (i) B Pirola (ii) G Short K Eley(v) G Catalano (iv) D McEvoy (iii) Executives S. Edmonson 1,123,880 26,722,569 7,112,782 - - 528,141 314,270 35,801,642 28,064 28,064 - 3,422,733 - - 400,000 - - 3,822,733 - - - - - - - - - - - - - - - - - - - - - - - (300,000) - - - - - (300,000) Held at 31 Dec 2012 (iii) 1,123,880 29,845,302 7,112,782 - 400,000 528,141 314,270 39,324,375 - - 28,064 28,064 Directors G Bradley M Masterman (i) D McEvoy B Pirola (ii) G Short Executives G. Catalano Held at 31 Dec 2010 Purchased Share based payments Options Exercised Sold Held at 31 Dec 2011 (iii) 1,123,880 26,222,569 314,270 7,112,782 - 34,773,501 - 1,000,000 - - - 1,000,000 - - - - - - 268,255 268,255 - - 259,886 259,886 - - - - - - - - - (500,000) - - - (500,000) 1,123,880 26,722,569 314,270 7,112,782 - 35,273,501 - - 528,141 528,141 (i) (ii) Does not include shares held by related parties which amount to 1,040,000 shares Included above are shares held by related parties (iii) Or the date ceasing to be a KMP (iv) (v) Appointed as Managing Director on 19 June 2012 Appointed as Non Executive Director on 19 June 2012 A n n u a l R e p o r t 2 0 1 2 | 65  Notes to the Financial Statements (Continued) 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. In prior years, these loans have historically been interest free, unsecured and repayable at call. In 2012, interest of €287,092 (2011: €296,553) was charged to Northsun Italia. As at 31 December 2012, loans to controlled entities amounted to €22,356,111 (2011: €36,639,908) b) Expenses incurred by the Company are on-charged to controlled entities at cost. c) Beginning 1 October 2012, the Company started to sell its gas via its related party Intrading Srl. Intrading Srl (“Intrading”) was incorporated in August 2012. Northsun Italia SpA retains 50% of the shareholding of Intrading while the remaining 50% is owned by Italtrading SpA a former customer. Northsun Italia stipulated a gas sales contract with Intrading and currently sells 100% of its gas on the spot market via this entity while Italtrading executed a service agreement with the entity and provides logistics and administrative support for the gas sales. The following transactions occurred with Intrading: Gas Sales (€) (excluding VAT) Amount receivable at 31 December (€) 2012 1,674,950 1,140,968 d) Northsun Italia SpA (‘NSI’) is a fully owned subsidiary of Po Valley Energy. A director of NSI, Roberto Fazioli, also served on the board as Chairman of a customer, Elettrogas SpA. NSI entered into the following transactions, in the ordinary course of business, with this related party. 2012 2011 Gas Sales (€) (excluding VAT) 336,320 4,475,406 Other income (€) Amount receivable at 31 December (€) 315,000 - - 952,405 66 | A n n u a l R e p o r t 2 0 1 2  Notes to the Financial Statements (Continued) 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 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. 2012 € 2011 € 1,110,293 39,998,138 41,108,431 386,301 47,897,861 48,284,162 4,178,438 - 4,178,438 225,473 5,771,830 5,997,303 36,929,993 42,286,859 45,460,097 (8,530,104) 36,929,993 44,753,650 (2,466,791) 42,286,859 (6,063,313) - (6,063,313) (988,808) - (988,808) 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 2012 and 2011 and are as follows: Name: Country of Incorporation Class of Shares 2012 Investment € 2011 Investment € Holding % Northsun Italia S.p.A (“NSI”) Po Valley Operations Pty Limited (“PVO”) PVE USA Inc. Italy Ordinary 21,083,268 9,603,268 100 Australia United States of America Ordinary 631,056 631,056 100 Ordinary 806 21,715,130 806 10,235,130 100 A n n u a l R e p o r t 2 0 1 2 | 67  Notes to the Financial Statements (Continued) NOTE 27: SUBSEQUENT EVENT The Company completed a capital raising of A$ 1.35 million through a private placement in December 2012. The participation of the company's Non Executive Directors in the placement was subject to shareholder approval and as a result the Company held an extraordinary general meeting (EGM) of shareholders on 15 February 2013. Shareholder approval was obtained and subsequently the second tranche of 3,850,000 shares was issued. There were no other 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. 68 | A n n u a l R e p o r t 2 0 1 2  Directors’ Declaration 1. In the opinion of the Directors of Po Valley Energy Ltd (“the Company”): i) the financial statements and notes, as set out on pages 28 to 68, 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. b. giving a true and fair view of the Group’s financial position as at 31 December 2012 and of its performance, for the financial year ended on that date; and 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 chief financial officer for the financial year ended 31 December 2012. 3. The Directors draw attention to Note 1.2 to the Financial Statements which include a statement of compliance with International Financial Reporting Standards. Dated at Sydney this 15th day of March 2013. Signed in accordance with a resolution of the Directors: Graham Bradley Chairman Byron Pirola Non-Executive Director A n n u a l R e p o r t 2 0 1 2 | 69 70 | A n n u a l R e p o r t 2 0 1 2 A n n u a l R e p o r t 2 0 1 2 | 71  Shareholders Information 2012-2013 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 the share registry information processed up to 31 March 2013. SHAREHOLDING SUBSTANTIAL SHAREHOLDERS Name Number of Percentage of Ordinary Shares Held Capital Held % Michael Masterman 32,845,302 Hunter Hall Investment Management Pty Ltd 21,365,804 Beronia Investments Pty Ltd* 7,112,782 26.83 17.45 5.8 * Interestes associated with Non Executive Director Byron Pirola DISTRIBUTION OF SHARES Size of Holdings Number of Holders Number of Shares Percentage of Capital Held % 1 - 1000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - over Unmarketable Parcels 183 225 127 343 105 983 366 52,875 682,436 1,019,148 11,496,812 109,162,792 122,414,063 525,561 0.04 0.56 0.83 9.39 89.18 100 0.43 VOTING RIGHTS OF SHARES AND OPTION Refer to Note 19 and Note 20 ON-MARKET BUY-BACK There is no current market buy-back 72 | A n n u a l R e p o r t 2 0 1 2  Shareholder Information 2012-2013 TWENTY LARGEST SHAREHOLDERS Name Number of Ordinary Percentage of Share Held Capital Held % 1 Michael Masterman 24,163,632 19.74 2 J P Morgan Nominees Australia Limited 22,365,804 18.27 3 Mr Michael George Masterman 4 Joan Masterman 5 Mr Laurie Mark Macri 6,322,733 4,788,444 5.17 3.91 4,000,000 3.27 6 Beronia Investments Pty Ltd 2,776,202 2.27 7 Kevin Bailey Corporation Pty Ltd 2,690,000 2.20 8 Greenvale Asia Limited 9 Symmall Pty Ltd 10 Beronia FS Pty Ltd 11 Beronia FS Pty Ltd 1,600,240 1.31 12 Mr Ming Lov & Mrs Chiu Lov 1,550,000 1.27 13 Mr John Fyfe & Mrs Evelyn Fyfe 14 Tucabia Investments Pty Ltd 15 Tangar Boring & Excavations Pty Ltd 1,299,893 1.06 1,288,653 1.05 1,171,721 0.96 1,000,000 0.82 978,592 0.80 19 Equitas Nominee Pty Ltd 873,880 0.71 20 Mr Stephen Lloyd Jones 850,000 0.69 85,572,708 69.90% A n n u a l R e p o r t 2 0 1 2 | 73  Reserves & Resources Statement The following table summarises the status of the Company’s Reserves & Resources, independently evaluated by the geological and petroleum reservoir consultancy UK firm Robertson CGG during 2012-2013. These figures are based upon independent evaluations in accordance with 2007 SPE/WPC/AAPG/SPEE Petroleum Resource Management System. Prospective Resources Gas, BCF Best Low High 1.4 1.6 2.2 2.4 3.1 3.2 7.9 15.9 25.0 1.4 2.1 10.2 29.1 4.5 7.1 5.5 3.3 4.7 14.6 20.5 34.8 40.6 9.0 16.0 12.6 20.8 9.3 14.4 10.6 16.6 24.7 7.0 8.8 11.3 13.8 18.3 24.4 3.3 5.0 7.3 29.0 47.0 73.0 Licence Project Reserves Contingent Resources Gas, BCF 1P 5.8 0.8 0.7 Sillaro Sillaro Cascina Castello Castello Bezzecca Up West Vitalba West Vitalba 2P 3P 1C 2C 3C 6.5 1.6 1.8 4.2 5.8 Crocetta Fantuzza 1.8 5.7 8.3 San Vincenzo Sant’Alberto AR94PY Cadelbosco Podere Gallina Carola/Irma PL3-C Zini (Qu-A) Zini (Qu-B) Canolo (Qu-A) Canolo (Plioc) Selva Stratigr Cembalina Fondo Perino East Selva Gradizza La Prospera Pioppette Capitello Ariano La Risorta Corcrevà Opera D delle Anime Barona Lead Opera Lead Licence Project Cadelbosco Bagnolo in Piano Grattasasso Ravizza 74 | A n n u a l R e p o r t 2 0 1 2 1.8 2.1 2.8 34.6 47.3 62.2 1.1 0.7 0.4 2.7 1.1 3.6 4.6 1.7 10.5 11.4 17.0 23.0 Contingent Resources Oil, MMbbls 1C 3.7 2.2 2C 4.3 5.7 3C 5.1 10.7  Reserves & Resources Statement The total acreage position of the Company is circa 2,000 km2. For an illustration of each asset’s location please refer to the map “Licences in Italy” which can be found on the inside cover of this Annual Report. As at 15 April 2013 all PVE assets are 100% owned except for the shallow gas prospects in the exploration permit Cadelbosco di Sopra which has been farmed out to Petrorep Italia Spa for a 15% working interest. Information in this report that relates to Hydrocarbon Reserves and or Resources is based on information compiled by Mr. Giovanni Catalano, CEO and MD 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 masters 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. A n n u a l R e p o r t 2 0 1 2 | 75  Notes: ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… ………………………………………………………………………… 76 | A n n u a l R e p o r t 2 0 1 2 Po Valley energy limited aBn 33 087 741 571 registered office level 28, 140 St. georges terrace Perth Wa 6000 tel: (08) 9278 2533 2 1 0 2 t r o P e r l a u n n a - d e t i i m l y g r e n e y e l l a V o P 2012 Annual Report 

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