Po Valley Energy Limited
Annual Report 2021

Plain-text annual report

Annual Report 2021 PO VALLEY ENERGY LIMITED CONTENTS CHAIRMANS LETTER ..................................................................................................................................................... 1 CORPORATE DIRECTORY .............................................................................................................................................. 2 DIRECTORS’ REPORT .................................................................................................................................................... 3 REMUNERATION REPORT .......................................................................................................................................... 10 AUDITOR’S INDEPENDENCE DECLARATION ............................................................................................................... 19 STATEMENT OF FINANCIAL POSITION ....................................................................................................................... 20 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME ............................................................... 21 STATEMENT OF CHANGES IN EQUITY ........................................................................................................................ 22 STATEMENT OF CASH FLOWS .................................................................................................................................... 23 NOTES TO THE FINANCIAL STATEMENTS .................................................................................................................... 24 DIRECTORS’ DECLARATION ........................................................................................................................................ 63 INDEPENDENT AUDITOR’S REPORT ........................................................................................................................... 64 TECHNICAL SUMMARY .............................................................................................................................................. 68 ASX ADDITIONAL INFORMATION .............................................................................................................................. 73 PO VALLEY ENERGY LIMITED CHAIRMAN’S LETTER Dear fellow shareholders, We move into 2022 with great momentum following key approvals and preparatory progress in 2021. During 2021 we received environmental approval for both Selva and Teodorico and have focused our resources on the final approval step for both these licences which is full grant of a production concession. Priority focus has been on Selva given that it is onshore and can be put into production and low capital costs. In early 2022 the Ministry initiated the process for Selva to be issued an INTESA and we expect receipt in the June 2022 quarter followed by full grant of the production concession. Preparation for putting Selva into gas production is advanced with regulatory required monitoring systems in place and operational and an application to connect to the SNAM Italian Energy Grid submitted. Procurement of the required gas plant is also underway, drawing on the skills and experience of previous suppliers to Po Valley. The regulatory environment in Italy has substantially improved under the leadership of Mario Draghi but remains challenging. We expect a relatively smooth process for final grant of the Selva production concession. The Plan of Areas report issued subsequent to year end provided guidance on Po Valley portfolio management and we have taken immediate steps to align with the new guidelines. European and Italian gas prices are at record levels and gas supplies into Italy and the wider European market have been greatly constrained by the Ukraine Russia conflict. At the highest levels government there is a clear priority to get Italian natural gas fields such as Selva into production. During the year we received strong support from existing and new shareholders in July 2021 with a successful capital raising and rights issue of some A$10.1m. Po Valley shareholders have been exceptionally well served by the Company’s dedicated and expert team in Italy, led by Giorgio Bertuzzi, Daniele Marzorati, Gianluca De Rosa and Pierpaolo Poncia and supported by our dedicated Non-Executive Directors, Sara Edmonson and Kevin Bailey. We were very pleased to welcome Joseph Constable to the Po Valley Board and he has made a great contribution. I thank the team and the Directors for their guidance and direction in another challenging year. Michael Masterman Chairman Po Valley Energy 1 Directors Company Secretary Registered Office Rome Office Share Register Auditor Solicitors Bank PO VALLEY ENERGY LIMITED CORPORATE DIRECTORY Michael Masterman Kevin Bailey Sara Edmonson Joseph Constable Chairman Non-Executive Director Non-Executive Director Non-Executive Director Kevin Hart Suite 8, 7 The Esplanade, Mt. Pleasant WA 6153 Australia Tel: +61 8 9316 9100 Via Della Luce 58, Rome Italy Tel: +39 06 42014968 Link Market Services Limited Level 12, 250 St Georges Terrace, Perth WA 6000 Tel: +61 8 9211 6670 HLB Mann Judd (WA Partnership) Level 4, 130 Stirling Street, Perth WA 6000 Steinepreis Paganin Level 4, The Read Buildings, 16 Milligan Street, Perth WA 6000 Australia Bankwest 108 St Georges Terrace, Perth WA 6000, Australia Stock Exchange Listing Po Valley Energy Limited shares are listed on the Australian Securities Exchange (ASX) under the code PVE Website address www.povalley.com 2 PO VALLEY ENERGY LIMITED 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 (“the Group” or “Po Valley”), for the year ended 31 December 2021. 1. Directors The Directors of the Company at any time during or since the end of the financial year are: Michael Masterman — Chairman, BEcHons, Age 59 Director since 22 June 1999 Michael is a co-founder of PVE. Michael first took up the position of CEO of PVE in 2002 up to October 2010 when he took up an executive position at Fortescue Metal Group until June 2014. Prior to joining PVE, Michael was CFO and Executive Director of Anaconda Nickel (now Minara Resources), and he spent 8 years at McKinsey & Company serving major international resource 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. Michael was appointed as Chairman of PVE on 22 April 2016 and resumed the role of CEO on 1 November 2017. In the last three years, Michael has not been a director of any other listed company. Kevin Bailey AM — Non-Executive Director, DipFP, Age 61 Director since 3 May 2016 Kevin was appointed as a director on 22 April 2016. He has been a shareholder of PVE since April 2008 and brings significant business acumen and experience to the Board. Kevin is a highly successful businessman with a range of business interests, both local and overseas. He worked for 28 years as a Certified Financial Planner and was a founding director of Shadforth Financial Group Limited. He was a member of the Prime Minister’s Community Business Partnership and devotes considerable time to philanthropic interests. Kevin is currently Chairman of Parousia Media Pty Ltd and has served as director of various entities including the Investment Advisory Board of the Timor Leste Petroleum Fund, the $17bn Sovereign Wealth Fund of Timor Leste, Outward Looking International Pty Ltd, Halftime Australia Pty Ltd, Alpha Australia, Empart Inc, and Dads4Kids Fatherhood Foundation. In the last three years, Kevin has not been a director of any other listed company. Sara Edmonson — Non-Executive Director, BSBA, MBA, Age 42 Director since 23 December 2019 Sara was appointed as a director on 23 December 2019. Sara has extensive experience in natural gas, the critical transition fuel for a low carbon future, having led PVE as CEO from July 2010 to 2017. Until recently, Sara was the President at Associazione Energia Nazionale, an Italian association created to promote sustainable production, transportation and use of domestic energy and is fluent in Italian, having previously worked both in Italy and internationally for Ernst & Young Transaction Advisory Services. During her tenure at EY Sara advised numerous blue-chip corporate clients on transactions in Russia, Romania, Turkey and the US including the US$5 billion acquisition of DRS Technologies by Finmeccanica in 2008. She holds an MBA from St John’s University in New York City and is completing a Masters in Sustainability Sciences at Harvard University. Sara served on the board of Coro Energy Plc from November 2017 to October 2018 and as executive until March 2019. In the last three years, Sara has not been a director of any other listed company. 3 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT Joseph Constable — Non-Executive Director, BA(Hons) MPhil, Age 30 Appointed 30 November 2021 Joseph was appointed as a director on 30 November 2021. Joseph is an Executive Director of Hancock & Gore Limited (ASX: HNG), and portfolio manager at H&G Investment Management Limited and has been a long-time shareholder of PVE personally as well as professionally via the H&G High Conviction Fund (formerly The Supervised Fund). Joseph has a detailed understanding of the Company and its assets and his significant financial skills will be beneficial to PVE and the board of directors. In the last three years, Joseph has not been a director of any other listed company. 2. Company Secretary Kevin Hart – Company Secretary, B.Comm, FCA Appointed 17 April 2018 Kevin Hart is a Chartered Accountant and was appointed to the position of Company Secretary on 17 April 2018. He has over 25 years’ experience in accounting and the management and administration of public listed entities in the mining and exploration industry. He is currently a partner in an advisory firm, Endeavour Corporate, which specialises in the provision of company secretarial and accounting services to ASX listed entities. 3. Directors’ Meetings The number of meetings of the Board of Directors held during the financial year and the number of meetings attended by each director are provided below: Director Attended Held Michael Masterman Kevin Bailey Sara Edmonson Joseph Constable 24 24 23 2 24 24 24 2 Held: represents the number of meetings held during the time director held office. The roles and responsibilities normally undertaken by the Audit and Risk Committee and the Remunerations and Nominations Committee have been dealt with by the full board as part of its duly convened meetings rather than through separate committees. 4. Principal Activities The principal continuing activities of the Group in the course of the year were: • The exploration for gas and oil in the Po Valley region in Italy. • Appraisal and development of gas and oil fields. 5. Earnings per share The basic and diluted loss per share for the Company from continuing operations was (0.07) € cents (2020: (0.16) € cents) 4 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT 6. Operating and financial review The loss for the year from continuing operations was €595,733 (2020: €1,035,548). Cash and cash equivalents of the Group at 31 December 2021 amounted to €1,262,151 (2020: €44,107). PVE completed a A$10.1 million (€6.3 million) equity raise in 2021 by way of a placement of A$1 million and an Accelerated Non-Renounceable Rights Issue (“ANREO” or “Entitlement Offer”) of A$9.1 million at $0.028 per New Share. The ANREO comprised a non-renounceable entitlement offer to institutional shareholders (Institutional Offer) and to retail shareholders (Retail Offer). The Entitlement offer was fully underwritten by Henslow Pty Ltd. The Placement and Institutional Offer completed on 21 June 2021 raising approximately A$7.5 million (before costs) (€4.7 million). Approximately A$1 million was raised through the Placement and the Institutional offer raised approximately A$6.5 million, which included conversion of debt of approximately A$3.35 million (€2.4 million). The Retail Offer closed on 9 July with completion on 15 July 2021 raising approximately A$2.6 million (€1.6 million) (before costs), which included a conversion of debt of approximately A$0.6 million (€0.4 million). The capital raising will be used for the development of the Selva Malvezzi project and working capital; and has strengthened the financial position of the Group with the retirement of existing shareholder loans, interest on loans and convertible notes, and repayment of some convertible notes. Strategy Po Valley remains a northern Italy-focused energy development and exploration company with a streamlined focus on the following assets: • The onshore gas development at Selva Malvezzi; • Offshore Adriatic gas development at Teodorico; • The large-scale gas/oil condensate exploration licence at Torre del Moro; and • Canolo and Zini gas prospects in the Cadelbosco di Sopra exploration licence. Po Valley’s primary focus since completing the A$10.1 million capital raising in July 2021 has been to secure approvals and expedite development of the Selva Malvezzi gas field (Selva). Since the capital raising there have been some changes to the development plan for Selva which affected both estimated capital expenditure as well as time of execution. At the same time there have been changes in market conditions in the Italian and European Gas markets with an unprecedented increase in natural gas prices. Gas prices in Italy have surged from around €0.20 per standard cubic meter to above €0.90 per standard cubic meter (averaging €0.94 in January 2022). The increase in prices underpins strong economics for both Selva and Teodorico. Teodorico in particular is very leveraged to the strong market conditions and Po Valley continues to explore options to introduce joint venture partners or divest this large offshore gas field. Previous independent valuations of Selva and Teodorico have used a base input of around €0.20 per standard cubic meter. COVID-19 Impact The COVID-19 Pandemic continued to impact the operating environment. The team in Rome continue to work in accordance with COVID-19 health and safety rules and directives. Supply chain bottlenecks associated with the impact from COVID-19 have pushed up pipeline and equipment pricing which has caused delays in project execution, specifically the estimated time to execute the construction of the grind pipeline necessary to tie in the Selva Gas Field is now estimated to be significantly longer than previously forecast. 5 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT Impact of Italy’s Plan of Sustainable Energy Transition of Suitable Areas (“Pitesai”) The Italian government recently published its plan of sustainable energy transition of suitable areas (Pitesai or Plan). The Plan was finalised on 28 December 2021 and published on 11 February 2022 when it was adopted by the Ministry of Ecological Transition (MiTE). The Pitesai process started in 2019 along with a ban on new exploration and production activities. Only production concessions, including the Selva and Teodorico preliminary awarded concessions, were allowed to continue through the permitting process on the basis that they were projects which were well advanced. The Plan’s purpose is to define suitable areas, onshore and offshore, where exploration and production activities would be allowed without threatening Italy’s environmental, social and economic sustainability and was an additional step taken by the former coalition government to delineate its regulations to align with the overall decarbonisation goals set by the European Union. In addition to defining suitable areas, the Pitesai also imposed a ban on new oil activities. Po Valley has reviewed the documentation issued by MiTe and considered impacts on its assets. The main conclusions are as follows: 1. Selva Malvezzi / Podere Maiar – this onshore gas field is unaffected. Additional gas prospects in the concession such as Selva North, Selva South and Riccardina are unaffected. Po Valley has sought further clarification from the Ministry on East Selva. 2. Teodorico – the offshore gas field may be affected as the existing 12-mile no development zone has been extended due to the recent institution of environmental protected areas in proximity of the licence. Po Valley has initiated a discussion with the Ministry in order to better understand the impact on the basis that the concession was requested before the Pitesai process started in February 2019. It received environmental approval last year and the gas field reserves (2P 36.5bcf) are in excess of the 5.3bcf threshold for continuation mentioned in the Pitesai. 3. Torre del Moro - Po Valley has sought clarification on how the gas condensate exploration and targeted gas cap may be treated. 4. Cadelbosco & Grattasasso – Canolo and Zini gas prospects remain unaffected. Activity for Bagnolo and Ravizza oil discoveries will not proceed under the new plan and Po Valley has adjusted resource and reserve definitions accordingly. Expenditure to date on these oil discoveries has been negligible (€30,071). Not proceeding with the Bagnolo and Ravizza projects is not considered to be material to the Group. Selva Gas Field (63% PVO*) Podere Gallina Exploration Permit and Selva Malvezzi Preliminary Production concession In the Selva gas field, north - east of Bologna, preliminary development work has continued to prepare for maiden gas production within the first half of 2023. Po Valley was awarded the Selva Malvezzi preliminary gas Production Concession (80.68km²) in 2019 and had the final Environmental Impact Assessment (EIA) decree issued by Italy’s Ecological Transition Ministry (MiTE) effective date of 29 March 2021. The Selva development has a small footprint of less than half a hectare and will have negligible emissions. Under the first phase of the development plan, Po Valley will install a fully automated gas plant at the existing Selva/Podere Maiar 1dir well site and install a one-kilometre long pipeline to connect the well with the nearby Italian National Gas Grid. Based on dynamic reservoir studies, the field development is designed to produce at 6 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT a maximum rate of up to 150,000 cubic meters/day (5.3 mmscf/day) from successfully tested C1 and C2 production levels in the Medium-Upper Pliocene sands of the Porto Garibaldi Formation (refer ASX announcement 29 May 2018). Po Valley holds an economic interest of 63% in the Selva gas field together with joint venture partners United Oil & Gas Plc (United) 20% and Prospex Oil & Gas Plc (Prospex) 17%. The Ministry (MiTE) has officially requested the INTESA (local government production agreement) from the Emilia Romagna Region. This is the penultimate step necessary to receive the final Production Concession. The Pitesai does not affect the Selva gas field. Following a review of the project execution plan with particular reference to the timing of construction of the grid connection point by pipeline operator SNAM, the estimated time to first gas has been extended to the first half of 2023. During Q4 FY21, the team had been in close contact with the pipeline operator with the aim to secure a faster pipeline connection. There is no certainty that this will be achieved however SNAM have confirmed their commitment to make an effort to reduce the timetable. A deposit, as a form of bank guarantee, was issued to SNAM for €757k in December 2021 for tie-in works to be commenced and the funds to be returned to Po Valley on commencement of first gas. Guidance for the capital expenditure for the project has also been adjusted to reflect the new structure for the pipeline connection point which reduces tie-in costs with an overall increase of total capital cost due to materials prices increase and supply chain shortages in Europe. Overall, the estimated capital cost estimate is now in the range of €2.65M (up from €2.35M). Detailed design of the gas plant is in progress and anticipated to be completed in the first quarter of 2022. Works for seismic and subsidence monitoring have commenced and the installation of piezometers, settlement gauges and seismic stations completed. GPS monitoring for subsidence has been active since June 2020 and seismic and subsidence monitoring data recording started in February 2022. This environmental monitoring program is a requirement as set forth by the prescriptions tabled by the Technical Committee of the Italian Ministry of Ecological Transition and as a result are a legal obligation. Po Valley has proceeded with this activity on this basis. Teodorico Offshore Gas field development (100% PVO) The Teodorico gas field is located in shallow east coast waters (30m) of the northern Adriatic Sea – the primary source of domestic gas production for much of Italy – and in close proximity to existing east coast offshore gas production facilities. Teodorico has the largest gas-in-place of all of Po Valley’s gas fields and is at an advanced stage of assessment, ready for development. MiTE issued the final EIA decree for Teodorico with an effective date of 29 March 2021 which paves the way for the grant of full production concession. The Group was informed that some environmental groups and local municipalities have filed a law suit against the Ministry of Environment regarding the Teodorico Gas Field on the basis that they believe there was an error in the environmental impact assessment process. The Group has sought legal advice on this matter and may provide technical or procedural evidence in support of the Italian Ministry in its legal defence of this claim. The Group is not a party to these claims and there are no claims against the Group. Teodorico may be affected by the Pitesai as the existing 12-mile no development zone has been extended due to the recent institution of environmental protected areas in proximity of the license. Po Valley has initiated a discussion with the Ministry in order to better understand the impact on the basis that: - the concession was requested before the Pitesai process started in February 2019; 7 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT - - it received environmental approval last year; and the gas field reserves (2P 36.5bcf) are in excess of the threshold for continuation (5.3bcf) Torre del Moro Oil/Gas Condensate exploration (100% PVO) Following the publication of the Pitesai, Po Valley is seeking clarification on how the gas condensate exploration and targeted gas cap may be treated. Cadelbosco di Sopra and Grattasasso Permits Oil - Ravizza, Bagnolo in Piano, and Bagnolo SW Exploration (100% PVO) Activities on Bagnolo and Ravizza oil discoveries as detailed in the table below will not proceed under the Pitesai. Expenditure on these projects of €30,071 have been expensed. Table: Resources related to Bagnolo and Ravizza: Licence Project Contingent Resources Prospective Resources Oil MMbbl 1C 2C 3C Low Best High Cadelbosco1 Bagnolo in Piano 6.6 27.3 80.6 Bagnolo SW 22.1 54.5 112.0 Grattasasso1 Ravizza 2.8 16.1 41.6 1 Resource estimated are as reported and CPR reports dated 29 April 2019. Refer ASX announcement 29 April 2019 Gas - Canolo and Zini (100% PVO) Po Valley retains the gas prospects of Canolo and Zini in the Cadelbosco di Sopra permit. These are not affected by the Pitesai. Activities were halted during the Pitesai process but may now resume. Health and safety Paramount to Po Valley’s ability to pursue its strategic priorities is a safe workplace and a culture of safety first. The Group regards environmental awareness and sustainability as key strengths in planning and carrying out business activities. Po Valley’s daily operations are conducted in a way that adheres to these principles and management are committed to their continuous improvement. Whilst growing from exploration roots, the Group has strived to continually improve underlying safety performance. The Group has adopted an HSE Management System which provides for a series of procedures and routine checks (including periodical audits) to ensure compliance with all legal and regulatory requirements and best practices in this area. In 2021, the Group maintained its outstanding occupational health safety and environmental track record with no incidents or near misses to report. Principle risks and uncertainties Oil and gas exploration and appraisal involves significant risk. The future profitability of the Group and the value of its shares are directly related to the results of exploration and appraisal activities. There are inherent risks in these activities. No assurances can be given that funds spent on exploration and appraisal will result in discoveries that will be commercially viable. Future exploration and appraisal activities, including drilling and seismic acquisition may result in changes to current perceptions of individual prospects, leads and permits. The Group identifies and assesses the potential consequences of strategic, safety, environmental, operational, legal, reputational and financial risks in accordance with the Group’s risk management policy. PVE management continually monitors the effectiveness of the Group’s risk management, internal compliance and control systems which includes insurance coverage over major operational activities, and reports to the Board on areas where there is scope for improvement. The Board as a whole is responsible for oversight of the 8 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT Group’s risk management and control system. The principal risks and uncertainties that could materially affect PVE future performance are described below. External risks Exposure to gas pricing Changes to law, regulations or Government policy Volatile oil and gas prices make it difficult to predict future price movements with any certainty. Decline in oil or gas prices could have an adverse effect on PVE. The Group does not currently hedge its exposures to gas price movements long term. The profitability of the Group’s prospective gas assets will be determined by the future market for domestic gas. Gas prices can vary significantly depending on other European gas markets, oil and refined oil product prices, worldwide supply and the terms under which long term take or pay arrangements are agreed. Changes in law and regulations or government policy may adversely affect PVE’s business. Examples include changes to land access or the introduction of legislation that restricts or inhibits exploration and production. Similarly changes to direct or indirect tax legislation may have an adverse impact on the Group’s profitability, net assets and cash flow. Uncertainty of timing of regulatory approvals Delays in the regulatory process could hinder the Group’s ability to pursue operational activities in a timely manner including drilling exploration and development wells, to install infrastructure, and to produce oil or gas. In particular, oil and gas operations in Italy are subject to both Regional and Federal approvals. Operating risks Exploration, development and production Estimation of reserves Tenure security The future value of PVE will depend on its ability to find, develop, and produce oil and gas that is economically recoverable. The ultimate success or otherwise of such ventures requires successful exploration, establishment of commercial reserves, establishment and successful effective production and processing facilities, transport and marketing of the end product. Through this process, the business is exposed to a wide variety of risks, including failure to locate hydrocarbons, changes to reserve estimates or production volumes, variable quality of hydrocarbons, weather impacts, facility malfunctions, lack of access to appropriate skills or equipment and cost overruns. The estimation of oil and natural gas reserves involves subjective judgments and determinations based on geological, technical, contractual and economic information. It is not an exact calculation. The estimate may change because of new information from production or drilling activities. Exploration licences held by PVE are subject to the granting and approval by relevant government bodies. Government regulatory authorities generally require the holder of the licences to undertake certain proposed exploration commitments and failure to meet these obligations could result in forfeiture. Exploration licences are also subject to partial or full relinquishments after the stipulated period of tenure if no alternative licence application (e.g., production concession application) is made, resulting in a potential reduction in the Group’s overall tenure position. In 9 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT order for production to commence in relation to any successful oil or gas well, it is necessary for a production concession to be granted. Exploration, development and production of oil and gas involves risks which may impact the health and safety of personnel, the community and the environment. Industry operating risks include fire, explosions, blow outs, pipe failures, abnormally pressured formations and environmental hazards such as accidental spills or leakage of petroleum liquids, gas leaks, ruptures, or discharge of toxic gases. Failure to manage these risks could result in injury or loss of life, damage or destruction of property and damage to the environment. Losses or liabilities arising from such incidents could significantly impact the Group’s financial results. Health, safety and environmental matters Climate Change PVE recognises climate-related risks and the need for these to be managed effectively particularly across the energy industry. Key climate-related risks and opportunities relevant to the PVEs operations include: • The transition to a low carbon economy through technological improvements and innovations that support a lower carbon energy efficient system with decreased demand and changing community sentiment for fossil fuels. In addition, increased uncertainty, time and cost associated with regulatory bodies granting approvals or licences on fossil fuel intensive projects. Transition to lower carbon economy may also give rise to opportunity for PVE’s potential gas production assets. Natural gas is viewed as a key element to supporting a sustainable energy transition. Possibility to produce Blue H2 (with CCS/CCUS) and/or LNG from PVO gas fields (utilizing access and support via Next Generation EU research development funds) • Physical changes caused by climate change include increased severe weather events and chronic changes to weather patterns which may impact demand for energy and the PVE’s development and production assets and production capability. These events could have a financial impact on the Group through increased operating costs, maintenance costs, revenue generation and sustainability of production assets. • Policy changes by governments which may result in increasing regulation and costs which could have a material impact on the PVE’s operations. PVE is committed to continually improve climate change related disclosures as processes and understanding of climate change related matters improve alongside its activities and operations. In addition to the external and operating risks described above, the Group’s ability to successfully develop future projects including their infrastructure is contingent on the Group’s ability to fund those projects through operating cash flows and affordable debt and equity raisings. 7. Dividends No dividends have been paid or declared by the Company during the year ended 31 December 2021. 10 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT 8. Significant events after the balance date As detailed in the operations review above, the Group has considered the impact of Italy’s Plan of Sustainable Energy Transition of Suitable Areas (“Pitesai”) published in February 2022. The main conclusions are detailed in the review above and in Note 29. Other than the above, there were no events between the end of the financial year and the date of this report that, in the opinion of the Directors, will affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 9. Likely Developments The Group plans to continue to invest in its development of the Selva gas field and current exploration portfolio through geological and geophysical studies and, subject to available finances, in its planned drilling program for high potential gas prospects. The Group may seek a suitable farm-out partner for selected assets. 10. Environmental Regulation The Group’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. Group 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 Group. Remuneration Policy The Board is responsible for reviewing and recommending compensation arrangements for the Directors, the Chief Executive Officer and the senior executive team. The Board 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 Group 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 Group 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. 11 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT 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 and previous financial years. Indices Production (scm’000) Average realised gas price (€ cents per cubic metre) 2021 2020 2019 2018 2017 2016 - - - - - - 2,799* 7,155 4,461 21* 19 21 Loss attributable to owners of the Company (€'000s) (596) (1,036) (1,504) 2,780 (1,087) (8,699) Loss per share (€ cents per share) (0.07) (0.16) (0.24) (0.43) (0.19) (2.06) Share price at year end - AU$ 0.025 0.030 0.052 0.038 0.041 0.025 * production and gas prices for 2018 relates to the period prior to restructuring of the Group and deconsolidation of Coro Energy Plc (formally Saffron Energy Plc). PVE currently does not have any producing assets. 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 gives 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 and Executive Directors The remuneration of PVE senior executives is based on a combination of fixed salary, short term incentive bonuses which are 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 Group’s asset base. The Board exercises its discretion when determining awards and exercises discretion having regard to the overall performance and achievements of the Group and of the relevant executive during the year. No remuneration consultants were used during the current or previous year. 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 €250,000 per annum. 12 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT Service contracts The major provisions of the service contracts held with the directors, in addition to any performance related bonuses and/or options are as follows: Michael Masterman, Chairman • Commencement Date: 22 June 1999 • Remuneration for Michael Masterman was suspended from 1 July 2020 (previously as CEO €140,000 p.a.) • No termination benefits Kevin Bailey, Non-Executive Director • Commencement Date: 3 May 2016 • Remuneration for Kevin Bailey was suspended from 1 July 2020 (previously A$24,000 p.a.) • No termination benefits Sara Edmonson, Non-Executive Director • Commencement Date: 23 December 2019 • Fixed remuneration for the year ended 31 December 2021: €15,682 (A$24,000) • No termination benefits Joseph Constable, Non-Executive Director • Commencement Date: 30 November 2021 • Fixed remuneration for the year ended 31 December 2021: €1,600 (A$2,500 or A$30,000 p.a.) • 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. Key Management Personnel remuneration outcomes (including link to performance) The remuneration details of each Key Management Personnel (KMP) (being the Directors) during the year is presented in the table below. M Masterman Chairman K Bailey Non-Executive S Edmonson Non-Executive J Constable Non-Executive (appointed 30 Nov 2021) B Pirola Non-Executive (resigned 3 Mar 2020) Total for Directors 2021 2020 2021 2020 2021 2020 2021 2020 2021 Salary & fees € Other € - - 70,002 30,000 - 7,541 15,682 15,082 1,601 2,610 17,283 - - - - - - - 2020 95,235 30,000 Termination payments € - - - - - - - - - - Total € - 100,002 - 7,541 15,682 15,082 1,601 2,610 17,283 125,235 13 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT Analysis of bonuses included in remuneration There was no short-term incentive bonus awarded in remuneration in the current year. Options over equity instruments granted as compensation No options were granted as compensation to KMP during the reporting period (2020: Nil). No options vested during 2021. (2020: 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 KMP) have been altered or modified during the reporting period or the prior period. Exercise and lapse of options granted as compensation No options over ordinary shares in the Company were held by any KMP during 2021 and no options were exercised or lapsed during 2021. Equity holdings and transactions The movement during the reporting period in the number of ordinary shares of the Company, held directly and indirectly by KMP, including their personally-related entities is as follows: Held at 31 Dec 2020 Acquired Issued for Settlement of loans and interest Held at Disposals 31 Dec 2021 Directors M Masterman 167,971,782 23,928,571 26,114,162 K Bailey S. Edmonson J Constable (i) 150,635,225 38,015,332 53,455,385 2,966,406 - 741,601 45,433 (i) - - 321,573,413 62,730,937 79,569,547 (i) (i)Holding at date of appointment 30 November 2021 (ii) - - - - - 218,014,515 242,105,942 3,708,007 45,433 463,873,897 Held at 31 Dec 2019 Acquired Share based payments Held at Disposals 31 Dec 2020 Directors M Masterman 167,971,782 - K Bailey S. Edmonson B Pirola (i) 150,265,152 370,073 2,966,406 62,784,178 - - 383,987,518 370,073 (i) (i)Holding at date of resignation 3 March 2020 - - - - - - - - - 167,971,782 150,635,225 2,966,406 62,784,178 384,357,591 14 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT Other transactions and balances with KMP and their related parties The Group obtained financing through unsecured loans provided by Directors of the Group. The loan agreements have been reached with entities associated with Michael Masterman and Kevin Bailey. During the year, the Group received additional funds of €286,340 (AU$450,000) from entities associated with Michael Masterman and Kevin Bailey. All loans and accumulated interest thereon were settled following related party participation in the Institutional Offer of the Accelerated Non-renounceable Entitlement Offer (“ANREO”) in June 2021. A summary of the principal loan amounts is as follows: KMP (or their related parties) Kevin Bailey Fuiloro Pty Ltd* K & G Bailey as trustee for The Bailey Family Trust* Loan Amount 31 Dec 2020 A$301,676 A$424,227 Loans advanced in year - - Loans settled by participation in ANREO A$301,676 A$424,227 A$287,404 A$225,000 A$512,404 Symmall Pty Ltd* A$396,759 A$225,000 A$621,759 Total €886,125 €286,340 €1,172,465 A$1,410,066 A$450,000 A$1,860,066 Loan Amount 31 Dec 2021 - No of shares issued 10,774,155 - - - - - 15,150,977 18,300,128 22,205,675 66,430,935 *Fuiloro Pty Ltd and K & G Bailey as trustee for The Bailey Family Trust are entities associated with Kevin Bailey, and Symmall Pty Ltd is an entity associated with Michael Masterman. A summary of the interest on loans is as follows: KMP (or their related parties) Kevin Bailey Interest accrued at 31 Dec 2020 A$9,938 Interest to 24 June 2021 A$14,464 Interest settled by participation in ANREO A$24,402 Interest accrued at 31 Dec 2021 - Fuiloro Pty Ltd A$14,179 A$20,340 A$34,519 K & G Bailey as trustee for The Bailey Family Trust A$8,151 A$19,382 A$27,533 Symmall Pty Ltd A$11,541 A$24,187 A$35,728 Total €27,531 €49,776 €77,601 A$43,809 A$78,373 A$122,182 - - - - - No of shares issued 871,491 1,232,833 983,335 1,276,002 4,363,661 The Company has on issue convertible notes with KMP and their related parties as follows: KMP (or their related parties) K & G Bailey as trustee for The Bailey Family Trust Symmall Pty Ltd Joseph Constable Convertible Notes at 31 Dec 2020 Movement for the year Convertible Notes at 31 Dec 2021 A$700,000 A$300,000 A$10,000 - - - A$700,000 A$300,000 A$10,000 15 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT The convertible notes are convertible into fully paid ordinary shares of the Company at a conversion price of A$0.042 per share. The notes are to be converted or otherwise redeemed on or before 29 April 2022 and interest payable on the principal amount at a rate of 8% per annum. (refer note 20) Interest paid on convertible notes with KMP and their related parties was as follows: Interest accrued at 31 Dec 2020 Interest for year Interest settled by participation in ANREO Interest paid in cash Interest accrued at 31 Dec 2021 No of shares issued KMP (or their related parties) K & G Bailey as trustee for The Bailey Family Trust A$144,219 A$55,770 A$171,989 A$28,000 Symmall Pty Ltd A$61,808 A$23,901 A$73,709 A$12,000 Joseph Constable A$875 A$797 A$1,272 A$400 Total A$206,902 A$80,468 A$246,970 A$40,400 €130,024 €51,308 €156,858 €25,860 - - - - 6,142,466 2,632,485 45,433 8,820,384 No KMP have entered into a material contract, other than disclosed above, with any company in the Group. Other balances owing to directors are as follows: Directors’ remuneration outstanding at 31 Dec 2020 € 227,329 62,034 15,371 - 304,734 Fees for the year € - - 15,682 1,600 17,283 Directors’ remuneration outstanding at 31 Dec 2021 € 206,079 Amount paid € (21,250) - - - 62,034 31,053 1,600 (21,250) 300,767 KMP (or their related parties) Michael Masterman Kevin Bailey Sara Edmonson Joseph Constable Total 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 are as follows: M Masterman K Bailey S Edmonson J Constable Ordinary Shares Convertible Notes 218,014,515 242,105,942 3,708,007 45,433 300,000 700,000 - 10,000 16 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT 13. Equity securities on issue 31 December 2021 31 December 2020 Ordinary fully paid shares 1,006,643,438 647,286,102 Options over unissued shares 5,000,000 - Unissued shares under option At the date of this report there are 5,000,000 unissued ordinary shares of the Company under option as follows: Date Granted Expiry Date Exercise Price Number of options at 31 December 2021 Number of options at date of report 21 July 2021 21 July 2023 A$0.05 5,000,000 5,000,000 During the year, 5,000,000 unlisted options were issued at A$0.05 expiring 21 July 2023 to a broker. Details relating to the valuation of these options are set out in Note 22 to the financial report. No options were cancelled during or subsequent to the financial year. 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. 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. 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 resource company. The Group has elected to publish its Statement of Corporate Governance Practices on its website www.povalley.com. In addition, each year the Key to Disclosures - Corporate Governance Council Principles and Recommendations will be available to shareholders at the same time that the Annual Report is released. 15. Indemnification and insurance of officers The Group 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 Group paid premiums to insure the Directors against certain liabilities arising out of the conduct while acting on behalf of the Group. Under the terms and conditions of the insurance contract, the nature of liabilities insured against and the premium paid cannot be disclosed. 17 PO VALLEY ENERGY LIMITED DIRECTORS’ REPORT 16. Indemnification of auditors To the extent permitted by law, the Group has agreed to indemnify its auditors, HLB Mann Judd, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify HLB Mann Judd during or since the financial year. 17. Non audit services During the year HLB Mann Judd, the Group’s auditor, did not provide non-audit services. Refer to note 6 of the financial report for details of the auditor’s remuneration. 18. Proceedings on behalf of the Group No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Group, or to intervene in any proceedings to which the Group is a party, for the purpose of taking responsibility on behalf of the Group for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Group with leave of the Court under section 237 of the Corporations Act 2001. 19. Lead Auditor’s independence declaration The lead auditor’s independence declaration is set out on page 19 and forms part of the Directors’ report for the financial year ended 31 December 2021. This report has been made in accordance with a resolution of Directors. Michael Masterman Chairman 31 March 2022 18 PO VALLEY ENERGY LIMITED AUDITOR’S INDEPENDENCE DECLARATION As lead auditor for the audit of the consolidated financial report of Po Valley Energy Limited for the year ended 31 December 2021, I declare that to the best of my knowledge and belief, there have been no contraventions of: a) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) any applicable code of professional conduct in relation to the audit. Perth, Western Australia 31 March 2022 L Di Giallonardo Partner 19 PO VALLEY ENERGY LIMITED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2021 CONSOLIDATED NOTES 2021 € 2020 € 10 11 12 15 13 14 16 18 17 19 20 21 21 1,262,151 185,369 1,447,520 759,078 1,108,276 7,021 8,146,546 10,020,921 44,107 86,617 130,724 78 947,181 11,199 7,990,040 8,948,498 11,468,441 9,079,222 642,552 - 3,719 - 1,120,170 1,766,441 1,226,182 3,091 2,797 2,067,175 1,571,070 4,870,315 1,766,441 4,870,315 9,702,000 4,208,907 52,719,884 1,202,956 (44,220,840) 46,641,745 1,192,269 (43,625,107) 9,702,000 4,208,907 Current Assets Cash and cash equivalents Trade and other receivables Total Current Assets Non-Current Assets Other assets Deferred tax assets Property, plant & equipment Resource property costs Total Non-Current Assets Total Assets Liability Current Liabilities Trade and other payables Lease liabilities Provisions Interest bearing loans Convertible notes Total Current Liabilities Total Liabilities Net Assets Equity Issued capital Reserves Accumulated losses Total Equity The above statement of financial position should be read in conjunction with the accompanying notes to the financial statements. 20 PO VALLEY ENERGY LIMITED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2021 Continuing Operations Other income Gain on agreement debt settlement Employee benefit expenses Depreciation expense Corporate overheads Exploration costs expensed Loss from operating activities Finance income Finance expenses Net finance expenses Loss before tax Income tax benefit Loss for the year CONSOLIDATED NOTES 2021 € 5 3 4 7 8 65,792 - (265,688) (4,808) (250,114) (30,071) (484,889) 157 (272,096) (271,939) (756,828) 161,095 (595,733) 2020 € 79,122 110,940 (510,569) (41,622) (344,686) (9,000) (715,815) 143 (319,876) (319,733) (1,035,548) - (1,035,548) Other comprehensive income - - Total comprehensive loss for the year (595,733) (1,035,548) Basic and diluted loss per share (€) from continuing operations 9 (0.07) (0.16) The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes to the financial statements. 21 PO VALLEY ENERGY LIMITED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2021 Consolidated Balance at 1 January 2020 Loss for the year Other comprehensive income Total comprehensive loss Balance at 31 December 2020 Balance at 1 January 2021 Loss for the year Other comprehensive income Total comprehensive loss Issued capital € 46,641,745 - - - - - - Issue of securities (net of costs) 6,078,139 Share based payments - Attributable to equity holders of the Company Accumulated Option Translation Losses Reserve Reserve € € € (42,589,559) 1,192,269 (1,035,548) - - Total € 5,244,455 (1,035,548) - - - - - - - - - - - - - - 10,687 (1,035,548) (1,035,548) (43,625,107) (43,625,107) (595,733) - (595,733) - - 4,208,907 4,208,907 (595,733) - (595,733) 6,078,139 10,687 46,641,745 46,641,745 1,192,269 1,192,269 Balance at 31 December 2021 52,719,884 1,192,269 10,687 (44,220,840) 9,702,000 The above statement of changes in equity should be read in conjunction with the accompanying notes to the financial statements. 22 PO VALLEY ENERGY LIMITED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTES CONSOLIDATED 2021 € 2020 € Operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Net cash used in operating activities Investing activities Receipts for resource property costs from joint operations partners Payments for resource property costs Payment of guarantee deposit for pipeline tie-in Payments for other assets Net cash used in investing activities Financing activities Proceeds from the issues of shares Payment of share issue costs Proceeds from borrowings Repayment of borrowings Repayment of convertible notes Payments of lease liabilities Net cash from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 January Exchange difference on cash and cash equivalents 10 18 18 19 17 Cash and cash equivalents at 31 December 10 - (832,955) 157 (68,900) (901,698) 15,910 (158,308) (757,000) (631) (900,029) 3,597,076 (288,233) 286,340 (81,812) (476,594) - 3,036,777 1,235,050 44,107 (17,006) 1,262,151 25,000 (515,402) 143 (257) (490,516) 166,667 (250,010) - (976) (84,319) - - 609,950 - - (33,173) 576,777 1,942 42,165 - 44,107 The above statement of cash flows should be read in conjunction with the accompanying notes to the financial statements. 23 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1.1 1.2 (a) 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 Suite 8, 7 The Esplanade Mt Pleasant WA 6153. The Consolidated Financial Statements for the year ended 31 December 2021 comprise the Company and its subsidiaries (together referred to as “the Group” and individually as “Group entities”) and the Group’s interest in associates and jointly controlled entities and operations. The financial statements were approved by the Board of Directors on 31 March 2022. The Group primarily is involved in the exploration, appraisal and development of gas properties in the Po Valley region in Italy and is a for profit entity. 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 also complies with International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board (IASB). (b) BASIS OF MEASUREMENT These consolidated financial statements have been prepared on the basis of historical cost. (c) GOING CONCERN The financial report has been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and the settlement of liabilities in the normal course of business. For the year ended 31 December 2021, PVE has recorded a loss after tax from continuing operations of €595,733 (2020: €1,035,548); at 31 December 2021 had a cash balance of €1,262,151 (2020: €44,107), net current liabilities of €318,921 (2020: €4,739,591) and had net cash outflows from operations of €901,698 (2020: €490,516). PVE completed a capital raising of A$10.1 million in 2021, by way of a placement of A$1 million and an Accelerated Non-Renounceable Rights Issue (“ANREO” or “Entitlement Offer”) of A$9.1million at $0.028 per New Share. The ANREO comprised a non-renounceable entitlement offer to institutional shareholders (Institutional Offer) and to retail shareholders (Retail Offer). The placement and Institutional Offer completed on 21 June 2021. The Institutional offer raised approximately A$6.5 million (€4.1 million), which included conversion of debt of approximately A$3.35 million (€2.4 million). The Retail Offer closed on 9 July with completion on 15 July 2021 raising the remaining approximately A$2.6 million (before costs) (€1.6 million) and included a conversion of debt of approximately A$0.6 million (€0.4 million), thereby further strengthening the financial position of the Group. 24 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 At 31 December 2021, PVE had €1,120,170 (A$1,750,000) of convertible notes outstanding. These convertible notes are to be redeemed on or before 29 April 2022. The current terms on the convertible notes’ conversion price is A$0.042 per share. Subject to shareholder approval at the upcoming AGM, the Company is undertaking to vary the conversion price to A$0.028 per share with intention from the note holders to redeem notes by conversion. This will increase the Group’s net equity by €1,120,170. The Group has prepared a cash flow forecast for the next twelve months from the date of signing the financial report which demonstrates that the Group will have sufficient cash to continue as a going concern, with the following assumptions: • The successful completion of development of the Selva Gas Field taking into account revised cost estimates and project execution timelines • Conversion of convertible notes to equity • JV Partners’ contribution to development costs of Selva and environmental monitoring costs on grant of final production concession for Selva The Directors recognise that the ability of PVE to continue as a going concern may become dependent on the Group’s ability to secure additional funding through either the issue of new equity, convertible debt, sale of operating or non-operating interests in assets or a combination of these and other funding instruments as required to fund ongoing planned activities and for working capital. The Directors are confident that the Group will be able to secure sufficient funding to continue as a going concern based on demonstrated past successes in raising equity. Should the Group not achieve the matters set out above, there is a material uncertainty that may cast significant doubt whether the Group would continue as a going concern and therefore whether it would realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. The financial report does not include adjustments relating to the recoverability or classification of the recorded asset amounts nor to the amounts or classification of liabilities that might be necessary should the Group not be able to continue as a going concern. (d) FUNCTIONAL AND PRESENTATION CURRENCY The consolidated financial statements are presented in Euro, which is the Company’s and each of the Group entities’ 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 are 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. 25 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 or CGU is tested for impairment. There is significant estimation involved in determining the inputs and assumptions used in determining the recoverability amounts. The key areas of estimation involved 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 The post-tax discount rate used for impairment purposes is 10%. Reserve estimates Estimation of reported recoverable quantities of Proven and Probable reserves include estimates 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. A change in any, or a combination of, the key assumptions used to determine the reserve estimates could have a material impact on the carrying value of the project via depreciation rates or impairment assessments. The reserve estimates are reviewed at each reporting date and any changes to the estimated reserves are recognised prospectively to depreciation and amortisation. Any impact of the change in the reserves is considered on asset carrying values, and impairment losses, if any, are immediately recognised in the profit or loss. Recognition of deferred tax assets The recoupment of deferred tax assets is dependent on the availability of profits in future years. The Group undertakes a forecasting exercise at each reporting date to assess its expected utilisation of these losses. The key areas of estimation involved in determining the forecasts include: • Future production rates • Economic factors such as the gas price and current and anticipated operating costs in the industry • Capital expenditure expected to be incurred in the future 26 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 A change in any, or a combination of, the key assumptions used to determine the estimates could have a material impact on the carrying value of the deferred tax asset. Changes to estimates are recognised in the period in which they arise. 1.3 SIGNIFICANT ACCOUNTING POLICIES The Group has consistently applied the accounting policies set out in notes 1.3 (a) to 1.3 (r) to all periods presented in the consolidated financial statements. (a) PRINCIPLES OF CONSOLIDATION Subsidiaries (i) Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. 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. Investments in subsidiaries are carried at cost less any impairment losses. In the Company’s separate financial statements, investments in subsidiaries are carried at cost less any impairment losses. Joint arrangements (ii) The Group classifies its interests in joint arrangements as either joint operations or joint ventures (see below) depending on the Group’s rights to the assets and obligation for the liabilities of the arrangements. When making this assessment, the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Joint operation - when the Group has rights to the assets, and obligations for the liabilities, relating to an arrangement, it accounts for each of its assets, liabilities and transactions, including its share of those held or incurred jointly, in relation to the joint operation. Joint venture – when the Group has rights only to the net assets of the arrangement, it accounts for its interest using the equity method adopted for associates. Transactions eliminated on consolidation (iii) 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. 27 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the 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 the Group is able to control the timing of the reversal of the temporary difference and it is probable that they will 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 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. Judgement is required to determine which arrangements are considered to be a tax on income as opposed to an operating cost. Judgement is also required to determine whether deferred tax assets are recognised in the statement of financial position. Deferred tax assets, including those arising from unutilised tax losses, require management to assess the likelihood that the Group will generate sufficient taxable earnings in future periods, in order to utilise recognised deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. These estimates of future taxable income are based on forecast cash flows from operations (which are impacted by production and sales volumes, oil and natural gas prices, reserves, operating costs, decommissioning costs, capital expenditure, dividends and other capital management transactions) and judgement about the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Group to realise the net deferred tax assets recorded at the reporting date could be impacted. In addition, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods. (c) IMPAIRMENT Non-financial assets The Group assesses at each reporting date whether there is an indication that an asset (or CGU) may be impaired. Management has assessed its CGUs as being an individual field, which is the lowest level for which cash inflows are largely independent of those of other assets. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s or CGU’s recoverable amount. The recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal (FVLCD) and value in use (VIU). The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the asset is tested as part of a larger CGU to which it 28 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 belongs. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset/CGU is considered impaired and is written down to its recoverable amount. In calculating VIU, the estimated future cash flows are discounted to their present value using an after-tax discount rate (10%) that reflects current market assessments of the time value of money and the risks specific to the asset/CGU. The Group bases its impairment calculation on detailed budgets and forecasts, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecasts generally cover the forecasted life of the CGUs. VIU does not reflect future cash flows associated with improving or enhancing an asset’s performance. Impairment losses of continuing operations, including impairment of inventories, are recognised in the statement of profit or loss and other comprehensive income in those expense categories consistent with the function of the impaired asset. For assets/CGUs, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s/CGU’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset/CGU does not exceed either its recoverable amount, or the carrying amount that would have been determined, net of depreciation/amortisation, had no impairment loss been recognised for the asset/CGU in prior years. Such a reversal is recognised in the statement of profit or loss and other comprehensive income. (d) PROPERTY, PLANT AND EQUIPMENT Recognition and measurement (i) 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. Subsequent expenditure (ii) Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with expenditure will flow to the Group. 29 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Depreciation (iii) Property, plant and equipment Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The depreciation will commence when the asset is installed ready for use. The estimated useful lives of each class of asset fall within the following ranges: Office furniture & equipment Right-of-use assets: buildings 2021 3 – 5 years 4 – 6 years 2020 3 – 5 years 4 – 6 years The residual value, the useful life and the depreciation method applied to an asset are reviewed at each reporting date. (e) FINANCIAL INSTRUMENTS Initial recognition and measurement Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions to the instrument. For financial assets, this is the date that the Group commits itself to either the purchase or sale of the asset (i.e. trade date accounting is adopted). Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with AASB 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable), except where the instrument is classified "at fair value through profit or loss", in which case transaction costs are expensed to profit or loss immediately. Where available, quoted prices in an active market are used to determine fair value. In other circumstances, valuation techniques are adopted. Trade receivables are initially measured at the transaction price if the trade receivables do not contain a significant financing component or if the practical expedient was applied as specified in AASB 15.63. Classification and subsequent measurement of financial assets Financial assets are subsequently measured at: • amortised cost; • • fair value through profit or loss. fair value through other comprehensive income; or Measurement is on the basis of two primary criteria: • • the contractual cash flow characteristics of the financial asset; and the business model for managing the financial assets. A financial asset that meets the following conditions is subsequently measured at amortised cost: • • the financial asset is managed solely to collect contractual cash flows; and the contractual terms within the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding on specified dates. 30 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 A financial asset that meets the following conditions is subsequently measured at fair value through other comprehensive income: • • the contractual terms within the financial asset give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding on specified dates; the business model for managing the financial assets comprises both contractual cash flows collection and the selling of the financial asset. By default, all other financial assets that do not meet the measurement conditions of amortised cost and fair value through other comprehensive income are subsequently measured at fair value through profit or loss. Classification and subsequent measurement of financial liabilities Financial liabilities are subsequently measured at: • amortised cost; or • fair value through profit or loss. A financial liability is measured at fair value through profit and loss if the financial liability is: • a contingent consideration of an acquirer in a business combination to which AASB 3: Business Combinations applies; • held for trading; or • initially designated as at fair value through profit or loss. All other financial liabilities are subsequently measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest expense in profit or loss over the relevant period. The effective interest rate is the internal rate of return of the financial asset or liability. That is, it is the rate that exactly discounts the estimated future cash flows through the expected life of the instrument to the net carrying amount at initial recognition. Derecognition Derecognition refers to the removal of a previously recognised financial asset or financial liability from the statement of financial position. Derecognition of financial liabilities A liability is derecognised when it is extinguished (i.e. when the obligation in the contract is discharged, cancelled or expires). An exchange of an existing financial liability for a new one with substantially modified terms, or a substantial modification to the terms of a financial liability is treated as an extinguishment of the existing liability and recognition of a new financial liability. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss. 31 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Derecognition of financial assets A financial asset is derecognised when the holder's contractual rights to its cash flows expires, or the asset is transferred in such a way that all the risks and rewards of ownership are substantially transferred. Compound financial instruments Compound instruments (convertible notes) issued by the Group are classified as either financial liabilities or equity in accordance with the substance of the arrangements. An option that is convertible and that will be settled by the exchange of a fixed amount of cash or another financial asset for a fixed number of the Group’s own equity instruments will be classified as equity. The fair value of the liability component is estimated on date of issue. This is done by using the prevailing market interest rate of the same kind of instrument. This amount is recognised using the effective interest method as a liability at amortised cost until conversion or the end of life of the instrument. The equity portion is calculated by deducting the liability amount from the fair value of the instrument as a whole. The equity portion is not remeasured after initial recognition. Equity will remain as such until the option is exercised. When the option is exercised a corresponding amount will be transferred to share capital. If the option lapses without the option being exercised the balance in equity will be recognised in profit or loss. Costs of the transaction of the issue of convertible instruments are proportionally allocated to the equity and liability. Transaction costs in regards to the liability are included in the carrying amount of the liability and are amortised over its life using the effective interest method. Transaction cost in equity is directly recognised in equity. Impairment The Group recognises a loss allowance for expected credit losses on financial assets that are measured at amortised cost or fair value through other comprehensive income. Expected credit losses are the probability-weighted estimate of credit losses over the expected life of a financial instrument. A credit loss is the difference between all contractual cash flows that are due and all cash flows expected to be received, all discounted at the original effective interest rate of the financial instrument. The Group uses the following approaches to impairment, as applicable under AASB 9: Financial Instruments: • the general approach • the simplified approach • the purchased or originated credit impaired approach; and • low credit risk operational simplification. Recognition of expected credit losses in financial statements At each reporting date, the Group recognises the movement in the loss allowance as an impairment gain or loss in the statement of profit or loss and other comprehensive income. 32 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 The carrying amount of financial assets measured at amortised cost includes the loss allowance relating to that asset. Assets measured at fair value through other comprehensive income are recognised at fair value, with changes in fair value recognised in other comprehensive income. Amounts in relation to change in credit risk are transferred from other comprehensive income to profit or loss at every reporting period. For financial assets that are unrecognised (e.g., loan commitments yet to be drawn, financial guarantees), a provision for loss allowance is created in the statement of financial position to recognise the loss allowance. (f) (g) 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. RESOURCE PROPERTIES Resource property costs related to drilling are accumulated in respect of each separate area of interest. Exploration properties Exploration properties are carried at balance date at cost less accumulated impairment losses. Exploration properties include the cost of acquiring resource properties, mineral rights and exploration, evaluation expenditure incurred subsequent to acquisition of 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 and active and significant operations in, or in relation to, the area of interest are continuing. Exploration and evaluation assets are assessed for impairment if sufficient data exists to determine technically feasibility and commercial viability or facts and circumstances suggest that the carrying value amount exceeds the recoverable amount. Exploration and evaluation assets are tested for impairment when any of the following facts and circumstances exist: • The term of the exploration license in the specific area of interest has expired during the reporting period or will expire in the near future, and is not expected to be renewed; • Substantive expenditure on further exploration for an evaluation of mineral resources in the specific area are not budgeted nor planned; • Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the decision was made to discontinue such activities in the specific area; or 33 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 • Sufficient data exists to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. 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 date at cost less accumulated impairment losses. Development properties represent the accumulation of all exploration, evaluation and acquisition costs in relation to areas where the technical feasibility and commercial viability of the extraction of gas resources in the area of interest are demonstrable and all key project permits, approvals and financing are in place. When there is low likelihood of the development property being exploited, or the value of the exploitable development property has diminished below cost, the asset is written down to its recoverable amount. Production properties Production properties are carried at balance 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. 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)). (h) PROVISIONS Restoration and 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 have occurred up to the date of the statement of financial position and abandonment of well sites and production fields. Increases due to additional environmental disturbances, relating to the development of an asset, are capitalised and recorded in resource 34 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 property costs, and amortised over the remaining useful lives of the areas of interest. The net present value is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the liability. Annual increases in the provision relating to the unwinding of the discount rate are accounted for in the statement of profit or loss and other comprehensive income as finance expense. The estimated costs of rehabilitation are reviewed annually and adjusted against the relevant rehabilitation asset, as appropriate for changes in legislation, technology or other circumstances including drilling activity and are accounted for on a prospective basis. Cost estimates are not reduced by potential proceeds from the sale of assets. (i) FINANCE INCOME AND EXPENSES Finance income comprises interest income on funds invested and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance expenses comprise interest expense on borrowings or other payables and unwinding of the discount of provisions and changes in the fair value of financial assets through profit and loss. Borrowing costs that are not directly attributable to the acquisition, construction or production of qualifying assets are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported as net amounts. (j) EMPLOYEE BENEFITS Long-term service benefits (i) 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 date which have maturity dates approximating to the terms of the Group’s obligations. Wages, salaries, annual leave, sick leave and non-monetary benefits (ii) 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. Superannuation (iii) The Group contributes to defined contribution superannuation plans. Contributions are recognised as an expense as they are due. 35 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 (k) FOREIGN CURRENCY Functional and presentation currency (i) 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 PVE’s functional and presentation currency (refer note 1.2 (d)). Foreign currency transactions (ii) Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss as finance income or expense. Non-monetary assets and liabilities denominated in foreign currencies are translated at the date of transaction or the date fair value was determined, if these assets and liabilities are measured at fair value. Foreign currency differences arising on retranslation are recognised in profit and loss, except for differences arising on the retranslation of available-for-sale equity instruments, a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, which are recognised directly in equity. Foreign operations (iii) 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 date of the statement of financial position. 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/loss per share (“EPS”) is calculated by dividing the net profit/loss 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 net profit attributable to members of the parent entity, 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 36 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 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 statement of financial position. 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 The Group determines and presents operating segments based on the information that internally is provided to the CEO, who is the Group’s chief operating decision maker. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s operating results are reviewed regularly by the CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and resource property costs. (o) REVENUE Revenue is measured at the 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. 37 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 (p) LEASES The Group as a lessee For any new contracts, the Group considers whether a contract is, or contains a lease. A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. To apply this definition the Group assesses whether the contract meets three key evaluations which are whether: • • • the contract contains an identified asset, which is either explicitly identified in the contract or implicitly specified by being identified at the time the asset is made available to the Group the Group has the right to obtain substantially all of the economic benefits from use of the identified asset throughout the period of use, considering its rights within the defined scope of the contract the Group has the right to direct the use of the identified asset throughout the period of use. The Group assess whether it has the right to direct ‘how and for what purpose’ the asset is used throughout the period of use. Measurement and recognition of leases as a lessee At lease commencement date, the Group recognises a right-of-use asset and a lease liability on the statement of financial position. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the Group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received). The Group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The Group also assesses the right-of-use asset for impairment when such indicators exist. At the commencement date, the Group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed), variable payments based on an index or rate, amounts expected to be payable under a residual value guarantee and payments arising from options reasonably certain to be exercised. Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments. When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero. The Group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in 38 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term. On the statement of financial position, right-of-use assets have been included in property, plant and equipment (except those meeting the definition of investment property) and lease liabilities have been disclosed separately under current and non-current liabilities. (q) CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (r) CHANGES IN ACCOUNTING POLICIES, DISCLOSURES, STANDARDS AND INTERPRETATIONS (i) New and revised Standards and Interpretations on issue not yet adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been early adopted by the Group for the annual reporting period ended 31 December 2021. The Directors do not believe that these new and revised Standards and Interpretations will have a material effect on the Group. (ii) New Standards and Interpretations applicable for the annual reporting period ended 31 December 2021 The Directors have reviewed all the new and revised Standards and Interpretations issued by the AASB that are relevant to the Group and effective for the current reporting period. As a result of this review, the Directors have determined that there is no material impact of the new and revised Standards and Interpretations on the Group and, therefore, no material change is necessary to the Group accounting policies. 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 Group's objectives of creating and maintaining shareholder value, and the successful execution of the Group'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. Management is responsible for establishing procedures which provide assurance that major business risks are identified, consistently assessed and appropriately addressed. 39 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Credit risk (i) The Group invests in short term deposits and trades with recognised, creditworthy third parties. Cash and short-term deposits are made with institutions that have a credit rating of at least A1 from Standard & Poor’s and A from Moody's. Management has a credit policy in place whereby credit evaluations are performed on all customers and parties the Group and its subsidiaries deal with. The group monitors receivable balances on an ongoing basis and as a result believes its exposure to bad debts is not significant. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. Market Risk (ii) Interest rate risk The Group is primarily exposed to interest rate risk arising from its cash and cash equivalents and borrowings. The Group does not hedge its exposure to movements in market interest rates. The Group adopts a policy of ensuring that as far as possible it maintains excess cash and cash equivalents in bank accounts earning interest. The Group’s exposure to interest rate risk and sensitivity analysis is disclosed in note 24. 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. The Group’s exposure to currency risk and sensitivity analysis is disclosed in note 24. Capital Management (iii) 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. Capital consists of issued share capital plus accumulated losses/earnings. The Board monitors accumulated losses/earnings. The Board seeks to encourage all employees of the Group to hold ordinary shares. 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 from shareholders. 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. 40 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 Liquidity Risk (iv) 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 regular cash flow forecasts taking into consideration debt facility obligations. Capital expenditures are planned around cash flow availability. The Group’s contractual maturities of financial liabilities, including estimated interest payments are disclosed in Note 24. Climate change risk (v) Key climate-related risks and opportunities relevant to the Group’s operations include: • The transition to a low carbon economy through technological improvements and innovations that support a lower carbon energy efficient system with decreased demand and changing community sentiment for fossil fuels, increased uncertainty time and cost associated with regulatory bodies granting approvals or licences on fossil fuel intensive projects. Transition to lower carbon economy also gives rise to opportunity for the Group’s gas production assets. Natural gas is viewed as a key element to supporting a sustainable energy transition. • Physical changes caused by climate change include increased severe weather events and chronic changes to weather patterns which may impact demand for energy and the Group’s production assets and production capability. These events could have a financial impact on the Group through increased operating costs, maintenance costs, revenue generation and sustainability of its production assets. • Policy changes by governments which may result in increasing regulation and costs which could have a material impact on the Group’s operations. Due to the nature of the uncertainties relating to the above risks, the financial impact has not been quantified for the financial year. The Group is committed to continually improve climate change related disclosures as processes and understanding of climate change related matters improve alongside the Group's activities and operations. NOTE 3: EMPLOYEE BENEFIT EXPENSES Wages and salaries Contributions to defined contribution plans Less: allocation to projects CONSOLIDATED 2021 € 2020 € 311,605 62,949 (108,866) 265,688 429,114 81,455 - 510,569 41 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 4: CORPORATE OVERHEADS Corporate overheads comprise: Company administration and compliance Professional fees Office costs Travel and entertainment Other expenses CONSOLIDATED 2021 € 2020 € 84,597 117,698 60,070 3,833 (16,084) 250,114 69,382 164,290 54,349 24,261 32,404 344,686 NOTE 5: GAIN ON AGREEMENT DEBT SETTLMENT In the prior year, the Group reached an agreement with Apennine Energy S.p.A (formerly Northsun Italia S.p.A (NSI)) to settle a disputed amount in relation to charges made to Po Valley Operations Pty Ltd (PVO) for costs in relation to intercompany costs incurred in 2017/2018 prior to restructuring of the group. The final agreed amount to settle all claims between the companies was €120,000. This has resulted in a net gain to PVO of €110,940 for the financial year to 31 December 2020. AUDITOR’S REMUNERATION NOTE 6: Audit and review of the Group financial statements Auditors of the Company: HLB Mann Judd Auditors of the Company: Bentleys NSW Audit Pty Ltd NOTE 7: FINANCE INCOME AND EXPENSE Recognised in profit and loss: Interest income Finance income Interest expense Foreign exchange (gains) / losses (net) Finance expense Net finance expense 29,808 - 23,461 4,804 157 157 226,626 45,470 272,096 143 143 283,208 36,668 319,876 (271,939) (319,733) 42 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 INCOME TAX (BENEFIT) / EXPENSE NOTE 8: Current tax Current year Deferred tax Deferred tax benefit Total income tax benefit CONSOLIDATED 2021 € 2020 € - (161,095) (161,095) - - - Numerical reconciliation between tax expense and pre-tax accounting profit loss Loss for the year before tax from continuing operations (756,828) (1,035,548) Income tax benefit expense using the Company’s domestic tax rate of 26% (2020: 27.5%) Permanent differences Effect of tax rates in foreign jurisdictions Current year losses and temporary differences for which no deferred tax asset was recognised Prior year losses for which deferred tax asset was recognised Changes in temporary differences Income tax benefit NOTE 9: EARNINGS PER SHARE Basic and diluted loss per share (€ cents) (196,775) 5,308 6,342 216,276 (139,082) (53,164) (161,095) (284,775) (26,468) 21,023 241,130 - 49,090 - (0.07) (0.16) The calculation of basic and diluted loss per share from continuing operations was based on the loss attributable to shareholders of €595,733 (2020: €1,035,548) and a weighted average number of ordinary shares outstanding during the year of 829,960,780 (2020: 647,286,102). Diluted loss per share is the same as basic loss per share. The number of weighted average shares is calculated as follows: Number of shares on issue at beginning of the year Placement Institutional offer of ANREO Retail offer of ANREO Shortfall on retail offer of ANREO No. of days 365 191 191 170 169 Weighted average no. 647,286,102 18,688,846 121,228,871 29,091,873 13,665,088 829,960,780 Weighted average no. 647,286,102 - - - - 647,286,102 43 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 CONSOLIDATED 2021 € 2020 € NOTE 10: CASH AND CASH EQUIVALENTS (a) Cash and cash equivalents 1,262,151 44,107 Reconciliation of cash flows from operating activities (b) Loss for the year Adjustment for non-cash items: Depreciation and amortisation Unrealised foreign exchange losses related to financing activities Employee benefit costs capitalised Exploration costs written off Interest expense settled by equity Interest capitalised to loans / borrowings Interest on lease liabilities Gain on agreement debt settlement Change in operating assets and liabilities: Decrease/(increase) in receivables (Decrease)/Increase in trade and other payables (Decrease) / Increase in interest accrual net of settlement by equity Increase in provisions Increase in deferred tax assets (595,733) (1,035,548) 4,808 64,948 (108,866) 30,071 166,138 - - - (39,935) (254,543) (8,413) 922 (161,095) 41,622 29,220 - - - 161,695 664 (110,940) (39,595) 462,366 - - - Net cash outflow from operating activities (901,698) (490,516) (c) Reconciliation of financing cash flows to liabilities Proceeds from loans advanced (refer Note 19) Loans repaid in cash (refer Note 19) Repayment of convertible notes in cash (refer Note 20) 286,340 (81,812) (476,594) 609,950 - - (d) Non-cash financing activities Loans settled by issue of shares (refer Note 19) Interest on loans settled by issue of shares (refer Note 19) Interest on convertible notes by issue of shares (refer Note 20) 2,291,215 168,178 320,591 129,025,096 shares were issued in settlement of Loans and 9,456,939 shares for interest on loans. 70,794,596 of the loan and interest shares were issued to related parties (refer Note 26). 18,027,398 shares were issued in settlement of interest on convertible notes of which 8,820,384 were issued to related parties (refer Note 26). - - - 44 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 11: TRADE AND OTHER RECEIVABLES Current Trade receivables Sundry debtors Indirect taxes receivable Other deposits receivable CONSOLIDATED 2021 € 2020 € 86,042 53,199 3,039 43,089 30,821 10,302 27,994 17,500 185,369 86,617 The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in Note 24. OTHER NON-CURRENT ASSETS NOTE 12: Bank Guarantee deposit (i) Other - 78 78 (i)A bank guarantee deposit of €757,000 has been issued to Snam Rete Gas S.p.A (“SNAM”) for the construction of the tie-in point to the Italian National Gas Grid for the Selva gas plant and pipeline construction. The deposit is refundable upon commencement of first gas. 757,000 2,078 759,078 NOTE 13: PROPERTY PLANT & EQUIPMENT Office Furniture & Equipment: At cost Accumulated depreciation Right-of-use asset: Building (Note 17) At Cost Accumulated depreciation Total property plant & equipment Reconciliations: Reconciliation of the carrying amounts for each class of property, plant & equipment are set out below: Carrying amount at beginning of year Additions Adjustment of right-of-use assets Depreciation expense 23,108 (16,087) 7,021 83,317 (83,317) - 7,021 11,199 630 - (4,808) 22,478 (14,703) 7,775 83,317 (79,893) 3,424 11,199 105,145 975 (53,299) (41,622) Carrying amount at end of year 7,021 11,199 45 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 14: RESOURCE PROPERTY COSTS Resource Property costs Exploration and Evaluation Reconciliation of carrying amount of resource properties Exploration and Evaluation Phase Carrying amount at beginning of period Exploration expenditure Exploration written off Carrying amount at end of period CONSOLIDATED 2021 € 2020 € 8,146,546 7,990,040 7,990,040 7,876,926 186,577 (30,071) 113,114 - 8,146,546 7,990,040 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. Where exploration permits have expired or not renewed, the costs previously capitalised are expensed to the statement of profit and loss. The Group reviewed the carrying value of its assets and cash generating units using a Value in Use CGU valuation, in particular a valuation on Selva and Teodorico projects was calculated to determine the recoverable amount of each of these fields. The recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal (FVLCD) and value in use (VIU). In calculating VIU, the estimated future cash flows are discounted to their present value using an after-tax discount rate (10%) that reflects current market assessments of the time value of money and the risks specific to the assets. The Group bases its calculation on detailed budgets and forecasts, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecasts generally cover the forecasted life of the CGUs. VIU does not reflect future cash flows associated with improving or enhancing an asset’s performance. Furthermore, independent valuations were performed for the purposes of estimating the reserves of these projects by CGG Services (UK) Limited (“CGG”). The recoverable amount determined by the CGG report of Selva and Teodorico was €18.2 million and €17.8 million respectively. Valuations performed by CGG were done at a gas price of €0.20 per standard cubic meter. With the prices in Italy have surging from around €0.20 per standard cubic meter to above €0.90 per standard cubic meter, the Group has performed an internal valuation in comparison to the above independent valuations taking into account conservative change in price and updated costs and project execution timeline. The Group’s internal valuations are €24 million (Selva) and €46.3 million (Teodorico). 46 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 14: RESOURCE PROPERTY COSTS (continued) Key inputs for the internal valuations include a starting gas price of €0.25 per standard cubic meter, escalating by 2% each year, and an after-tax discount rate of 10%. The carrying value of these assets are €4.4 million and €2.9 million respectively. As a result of this assessment, with the recoverable amount exceeding the carrying value of these assets, no impairment was required on Selva and Teodorico. DEFERRED TAX ASSETS AND LIABILITIES NOTE 15: 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 CONSOLIDATED 2021 € 1,041,718 66,558 1,108,276 2020 € 848,694 98,487 947,181 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. Unrecognised deferred tax assets Deferred tax assets have not been recognised in respect of the following items: Tax losses Deductible temporary differences Unrecognised deferred tax assets Deferred tax benefit will only be obtained if: 3,005,368 1,104,444 63,891 1,897,340 3,069,259 3,001,784 (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. 47 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 15: DEFERRED TAX ASSETS AND LIABILITIES (continued) Movement in recognised temporary differences during the year Balance 1 January 2020 € 848,694 98,487 947,181 Consolidated Tax losses Accrued expenses and liabilities Total recognised deferred tax asset Profit and loss € Equity € Balance 31 December 2020 € Profit and loss € Equity € - - - - - - 848,694 193,024 98,487 (31,929) 947,181 161,095 Balance 31 December 2021 € 1,041,718 66,558 1,108,276 - - - NOTE 16: TRADE AND OTHER PAYABLES Trade payables and accruals Other payables CONSOLIDATED 2021 € 622,756 19,796 2020 € 1,185,894 40,288 642,552 1,226,182 The Group’s exposure to currency and liquidity risks related to trade and other payables are disclosed in note 24. PROVISIONS NOTE 17: Current: Employee leave entitlements NOTE 18: LEASES 3,719 2,797 The Group leased office facilities in Rome. The lease was for a period of six years from the start of the lease in June 2016, but reduced by mutual agreement to terminate early in January 2021. The Group leases office equipment under short term contracts for low-value items and as such the Group has elected not to recognise right-of use assets and lease liabilities for these leases. Payments made under such leases are expensed on a straight-line basis. Information about leases for which the Group is a lessee is presented below. 48 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 18: LEASES (continued) Right-of-use assets Right-of-use assets related to leased properties that do not meet the definition of investment property and are presented as property, plant and equipment (see Note 13). Buildings Balance at 1 January (on adoption of AASB16) Reduction in term lease Depreciation Total NOTE 19: INTEREST BEARING LOANS CONSOLIDATED 2021 € 2020 € 3,424 - (3,424) - 96,631 (53,299) (39,908) 3,424 This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 24. Current liabilities CONSOLIDATED 2020 € 2021 € Loans Loans were repaid during the year. Lenders who participated in the capital raising through ANREO in June 2021 had loans and interest settled by the issue of shares (refer note 26). Lenders that did not participate in the capital raising had loans repaid in cash. 2,067,175 - The Group’s exposure to currency, interest and liquidity risk related to interest bearing loans are disclosed in note 24. A reconciliation of the movement in loans for the year is as follows: Loans Balance at beginning of the year Loans advanced Loans settled by issue of shares Loans repaid in cash Interest capitalised to loans Effect of exchange rate Balance at end of the year 2,067,175 1,272,676 286,340 609,950 (2,291,215) (81,812) - 19,512 - - 161,695 22,854 - 2,067,175 49 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 19: INTEREST BEARING LOANS (continued) A reconciliation of the movement in interest accrued on loans for the year is as follows: Accrued Interest Balance at beginning of the year Interest for the year Interest settled by issue of shares Interest paid in cash Interest capitalised to loans Effect of exchange rate Balance at end of the year CONSOLIDATED 2021 € 77,001 110,256 (168,178) (20,172) 2020 € 76,484 161,549 - - - (161,695) 1,093 - 663 77,001 129,025,096 ordinary shares were issued under the ANREO in settlement of these loans and 9,456,939 shares were issued in settlement of interest on these loans at repayment date. NOTE 20: CONVERTIBLE NOTES The Company issued convertible notes equivalent to A$2,500,000 in 2018. During the year, A$750,000 was repaid with a balance A$1,750,000 outstanding at 31 December 2021 (2020: A$2,500,000) The Euro value of these convertible notes at 31 December 2021 is €1,120,170 (2020: €1,571,070). A reconciliation of the movement in convertible notes for the year is as follows: Loans Balance at beginning of the year Convertible notes repaid in cash Effect of exchange rate Balance at end of the year 1,571,070 (476,594) 25,694 1,563,183 - 7,887 1,120,170 1,571,070 A reconciliation of the movement in interest accrued on convertible notes for the year is as follows: Accrued Interest Balance at beginning of the year 254,883 128,206 Interest for the year Interest settled by issue of shares Interest paid in cash Effect of exchange rate Balance at end of the year 107,797 (320,591) (44,806) 2,717 - 120,740 - - 5,937 254,883 18,027,398 ordinary shares were issued under the ANREO in settlement of interest on convertible notes to 30 June 2021. 50 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 20: CONVERTIBLE NOTES (continued) The convertible notes are convertible into fully paid ordinary shares of the Company at a conversion price of A$0.042 per share. The notes have a maturity date of 29 April 2022 (repayment date) and interest payable on the principal amount at a rate of 8% per annum. Subject to shareholder approval, the company has undertaken to vary the conversion price to A$0.028 per share. Subject to shareholder approval, if required, the noteholder may, before the maturity date, convert the convertible note into shares by providing the Company with written notice of the conversion. The Company has the right to elect to redeem any unconverted convertible notes by giving 30-day notice to the noteholder. Redemption of the notes occurs on: a) The repayment date; b) Within 10 business days on the occurrence of an event of default which has not been remedied within the prescribed period; or c) On a change in control of the Company (including a takeover) or the sale of the Company’s main undertaking unless the noteholder elects to convert the Convertible Notes into shares. The redemption amount is the outstanding facility amount with respect to each note plus any unpaid interest. NOTE 21: CAPITAL AND RESERVES Share Capital Opening balance - 1 January Ordinary Shares 2021 Number 2020 Number 2021 € 2020 € 647,286,103 647,286,103 46,641,745 46,641,745 Shares issued during the reporting period: Placement Institutional offer of ANREO Retail offer of ANREO Shortfall on retail offer of ANREO Share issue costs 35,714,285 231,667,735 62,461,961 29,513,354 - - - - - - 635,126 4,119,684 1,101,689 520,560 (298,920) - - - - - Closing balance – 31 December 1,006,643,438 647,286,103 52,719,884 46,641,745 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. 51 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 21: CAPITAL AND RESERVES (continued) Reserves Translation Reserve Options Reserve CONSOLIDATED 2020 € 2021 € 1,192,269 1,192,269 10,687 - 1,202,956 1,192,269 Translation Reserve The translation reserve of €1,192,269 comprises all foreign currency differences arising from the translation of the financial statements of foreign operations. The historical balance comprises of translation differences prior to change in functional currency of a foreign operation. Options Reserve The options reserve of €10,687 comprises the fair value of vested options issued as consideration (refer Note 22). Dividends No dividends were paid or declared during the current year (2020: Nil). NOTE 22: SHARE BASED PAYMENTS Options granted during the year: During the year, the Group granted 5,000,000 options (2020: nil) as consideration for services provided by broker. The options have been valued as follows using the Black-Scholes valuation model and included in the financial statements as share issue costs. Grant date Options issued 21 Jul 2021 5,000,000 Exercise price Expiry date Volatility1 Interest rate Value € AU$0.05 (€0.031) 21 Jul 2023 53% 0.13% 10,687 1 Historical volatility has been used as the basis for determining expected share price volatility. Options exercised during the year: During the year the Company issued no shares (2020: nil) on the exercise of unlisted options. Options cancelled during the year: During the year no unlisted options (2020: nil) were cancelled upon termination of employment, or on the expiry of the exercise period. 52 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 22: SHARE BASED PAYMENTS (continued) Options on issue under the plan at balance date The number of options issued under the Plan and outstanding over unissued ordinary shares at 31 December 2021 is 5,000,000 as follows. Grant date Exercise price Expiry date Balance at 31 December 2021 Vested and Exercisable at 31 December 2021 21 Jul 2021 AU$0.05 (€0.031) 21 Jul 2023 5,000,000 5,000,000 Subsequent to balance date Subsequent to balance date no unlisted options were issued, exercised or cancelled. Reconciliation of movement of options Set out below is a summary of options granted: Options outstanding at the start of the year Options granted during the year Options outstanding at the end of the year 2021 2020 No. WAEP (€ cents) No. WAEP (€ cents) - - 5,000,000 5,000,000 0.031 0.031 (AU$0.05) - - - - - - Weighted average contractual life The weighted average contractual life for un-exercised options is 24 months. NOTE 23: 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. Currently the Group only has exploration and evaluation operating segment. 53 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 24: FINANCIAL INSTRUMENTS (a) Interest Rate Risk Exposures Profile At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments was: Variable rate instruments Financial assets Financial liabilities Fixed rate instruments Financial assets Financial liabilities CONSOLIDATED 2021 € 2020 € 1,262,151 - 1,262,151 44,107 - 44,107 - (1,120,170) (1,120,170) - (3,638,245) (3,638,245) Cash flow sensitivity analysis for variable rate instruments: A strengthening of 50 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 2020. Effect in €’s 31 December Variable rate instruments Profit or loss Equity 2021 2020 2021 2020 6,311 221 - - (b) Credit Risk Exposure to credit risk The Group is not exposed to significant credit risk. Credit risk with respect to cash is held with recognised financial intermediaries with acceptable credit ratings. The Group has limited its credit risk in relation to its receivables. Receivables from joint operations partners fall under the Joint Operations Agreement for the development of the Selva project. Other receivables from Government agencies have limited credit risk as these are either offset against other indirect taxes or payroll taxes payable first with any remainder receivable within a 12-month period. 54 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 24: FINANCIAL INSTRUMENTS (continued) 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. Cash and cash equivalents Receivables – Current Other assets Note 10 11 CONSOLIDATED Carrying Amount 2021 € 1,262,151 185,369 759,078 2,206,598 2020 € 44,107 86,617 78 130,802 (c) Liquidity risk The following are the contractual maturities of financial liabilities, including estimated interest payments: Consolidated 31 December 2021 In € Trade and other payables Lease liabilities Interest bearing loans Convertible notes 31 December 2020 In € Trade and other payables Carrying amount Contractual cash flows 6 months or less 6 to 12 months 1 – 2 Years 2 – 5 Years (642,552) (642,552) (642,552) - - - - - - (1,120,170) (1,120,170) (1,120,170) (1,762,722) (1,762,722) (1,762,722) Carrying amount Contractual cash flows 6 months or less 6 to 12 months (1,226,182) (1,226,182) (1,161,837) - - - - - - - - - - - - - - - - - - 1 – 2 Years 2 – 5 Years (64,345) - (2,273,893) Lease liabilities (3,091) (3,525) (3,525) Interest bearing loans (2,067,175) (2,273,893) - Convertible notes (1,571,070) (1,633,913) (490,174) (163,391) (980,348) (4,867,518) (5,137,513) (1,655,536) (163,391) (3,318,586) - - - - - 55 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 24: FINANCIAL INSTRUMENTS (continued) (d) Net Fair Values of financial assets and liabilities The carrying amounts of financial assets and liabilities as disclosed in the statement of financial position equate to their estimated net fair value. Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three levels of a fair value hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (derived from prices); and • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Current receivables, current payables and cash & cash equivalents are not measured at fair value. Due to their short- term nature, the carrying amount of current receivables, current payables and cash and cash equivalents is assumed to approximate their fair value. The table below summarises financial assets and liabilities at fair value at each level of measurement: At 31 December 2021 Level 1 $ Level 2 $ Level 3 $ Total $ Convertible Notes (refer note 20) - 1,120,170 - 1,120,170 (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 currencies giving rise to this risk is primarily Australian Dollars. Amounts receivable/(payable) in foreign currency other than functional currency: Cash Current – Payables Current – Interest bearing loans Current – Convertible notes Net Exposure CONSOLIDATED 2021 € 1,195,116 (28,866) - (1,120,170) 46,080 2020 € 5,340 (110,346) (2,067,175) (1,571,070) (3,743,251) 56 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 24: FINANCIAL INSTRUMENTS (continued) The following significant exchange rates applied during the year: Australian Dollar ($) Sensitivity Analysis Average rate Reporting date spot rate 2021 0.635 2020 0.605 2021 0.640 2020 0.628 A 5 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 for 2019 was prepared using the same basis. 31 December 2021 Australian Dollar to Euro (€) 31 December 2020 Australian Dollar to Euro (€) CONSOLIDATED Profit or loss € 2,304 Equity € (184,926) - - A 5 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 25: COMMITMENTS AND CONTINGENCIES Contractual Commitments and contingencies The Group has considered its obligations for restoration and rehabilitation of the well development planned for the Selva field. The Group estimates that the cost of restoration of the well development will be €2,065,119 to be incurred once production ceases at the end of estimated production life estimated to be 15 years. A provision for these restoration costs will be recognised once the final production concession is granted and development has commenced as anticipated in the first half of 2022. Other than the above, there are no other material commitments or contingent liabilities not provided for in the financial statements of the Group as at 31 December 2021. 57 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 26: RELATED PARTIES KEY MANAGEMENT PERSONNEL COMPENSATION The key management personnel compensation included in employee benefit expenses (see note 3) is as follows: Short-term employee benefits Termination benefits Other long term benefits Post-employment benefits INTEREST BEARING LOANS CONSOLIDATED 2021 € 17,283 - - - 2020 € 125,235 - - - 17,283 125,235 The Group obtained financing through unsecured loans provided by Directors of the Group. The loan agreements have been reached with entities associated with Michael Masterman and Kevin Bailey. During the year, the Group received additional funds of €286,340 (AU$450,000) from entities associated with Michael Masterman and Kevin Bailey. All loans and accumulated interest thereon were settled following related party participation in the Institutional Offer of the ANREO in June 2021. A summary of the principal loan amounts is as follows: Related Party Kevin Bailey Loan Amount 31 Dec 2020 A$301,676 Fuiloro Pty Ltd* A$424,227 Loans advanced in year - - Loans settled by participation in ANREO A$301,676 A$424,227 K & G Bailey as trustee for The Bailey Family Trust* A$287,404 A$225,000 A$512,404 Symmall Pty Ltd* A$396,759 A$225,000 A$621,759 A$1,410,066 A$450,000 A$1,860,066 Loan Amount 31 Dec 2021 - - - - No of shares issued 10,774,155 15,150,977 18,300,128 22,205,675 Total €886,125 €286,340 €1,172,465 - 66,460,935 *Fuiloro Pty Ltd and K & G Bailey as trustee for The Bailey Family Trust are entities associated with Kevin Bailey, and Symmall Pty Ltd is an entity associated with Michael Masterman. 58 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 26: A summary of the interest on loans is as follows: RELATED PARTIES (continued) Related Party Kevin Bailey Fuiloro Pty Ltd K & G Bailey as trustee for The Bailey Family Trust Symmall Pty Ltd Total Interest accrued at 31 Dec 2020 Interest to 24 June 2021 Interest settled by participation in ANREO Interest accrued at 31 Dec 2021 A$9,938 A$14,464 A$24,402 A$14,179 A$20,340 A$34,519 A$8,151 A$19,382 A$27,533 A$11,541 A$43,809 €27,531 A$24,187 A$78,373 €49,776 A$35,728 A$122,182 €77,601 - - - - - No of shares issued 871,491 1,232,833 983,335 1,276,002 4,363,661 CONVERTIBLE NOTES The table below summarises the Convertible notes held by related parties at 31 December 2021. The convertible notes are held by directors Michael Masterman, Kevin Bailey and Joseph Constable or their associated entities. Refer note 20 for details on the terms of the convertible notes. Symmall Pty Ltd K & G Bailey as trustee for The Bailey Family Trust Joseph Constable* Ida Constable ** *Related party from date of appointment as director on 30 November 2021 ** A Related party by virtue of being a parent of Joseph Constable CONSOLIDATED 2021 € A$300,000 A$700,000 A$10,000* A$240,000** 2020 € A$300,000 A$700,000 A$10,000* A$490,000** A$1,250,000 A$1,500,000 Related Party K & G Bailey as trustee for The Bailey Family Trust Symmall Pty Ltd Joseph Constable* Ida Constable** Convertible Notes at 31 Dec 2020 Repaid during the year Convertible Notes at 31 Dec 2021 A$700,000 A$300,000 A$10,000 A$490,000 A$1,500,000 €942,642 - - - A$250,000 A$250,000 €158,865 A$700,000 A$300,000 A$10,000 A$240,000 A$1,250,000 €800,121 *Related party from date of appointment as director on 30 November 2021 ** A Related party by virtue of being a parent of Joseph Constable 59 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 26: RELATED PARTIES (continued) A summary of the interest on convertible notes is as follows: Related Party K & G Bailey as trustee for The Bailey Family Trust Symmall Pty Ltd Joseph Constable* Ida Constable** Total Interest accrued at 31 Dec 2020 Interest for year Interest settled by participation in ANREO Interest paid in cash Interest accrued at 31 Dec 2021 No of shares issued A$144,219 A$55,770 A$171,989 A$28,000 A$61,808 A$23,901 A$73,709 A$12,000 A$875 A$797 A$1,272 A$400 A$65,645 A$272,547 A$29,039 A$109,507 A$85,054 A$246,970 A$9,600 A$40,400 €171,277 €69,799 €210,896 €32,005 - - - - - 6,142,466 2,632,485 45,433 3,038,716 11,859,100 *Related party from date of appointment as director on 30 November 2021 ** A Related party by virtue of being a parent of Joseph Constable OTHER Other balances owing to directors are as follows: Related Party Michael Masterman Kevin Bailey Sara Edmonson Joseph Constable Total Directors’ remuneration outstanding at 31 Dec 2020 € 227,329 62,034 15,371 - 304,734 Fees for the year € - - 15,682 1,600 17,283 Directors’ remuneration outstanding at 31 Dec 2021 € 206,079 Amount paid € (21,250) - - - 62,034 31,053 1,600 (21,250) 300,767 60 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 27: PARENT ENTITY DISCLOSURES Financial Position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net Assets Equity Issued capital Reserves Accumulated losses Total equity Financial Performance Loss Other comprehensive loss Total Comprehensive loss COMPANY 2021 € 2020 € 1,245,438 9,976,252 11,221,690 14,773 7,887,829 7,902,602 1,405,888 - 1,405,888 3,735,896 - 3,735,896 9,815,802 4,166,706 52,719,884 10,687 (42,914,769) 9,815,802 46,641,745 - (42,475,039) 4,166,706 (439,444) - (439,444) (444,083) - (444,083) NOTE 28: INTERESTS IN OTHER ENTITIES AND JOINT OPERATIONS The Group’s interest in joint arrangements at 31 December 2021 are as follows: Joint Operation Manager Company’s Interest Principal Activity (Exploration) Selva Malvezzi Field Po Valley Operations 63%* Gas The Group has a farm-out agreement and Joint Operations Agreement (“JOA”) with United Oil and Gas Plc (“United”) (20% economic interest) and Prospex Oil and Gas Plc (“Prospex”) (17% economic interest). In exchange for their respective interests United and Prospex covered 74% of the completed Podere Maiar-1 well cost. The Group received preliminary award of the Selva Production concession in January 2019. Development of the production well and field connection pipework will be undertaken under the terms of the JOA with United and Prospex. *The Group holds 63% quota on the Podere Galina Exploration licence and the quota for 100% of Selva Production Concession Licences. United and Prospex have 20% and 17% economic interests in the production concession and formal transfer of their quota in the production concession will be requested on the granting of the final concession. 61 PO VALLEY ENERGY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021 NOTE 28: INTERESTS IN OTHER ENTITIES AND JOINT OPERATIONS (continued) Subsidiaries 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 less any impairment losses. Set out below is a list of the significant subsidiaries of the Group. Name: Po Valley Operations Pty Limited (“PVO”) Country of Incorporat ion Class of Shares 2021 Investment € 2020 Investment € Holding % Australia Ordinary 3,843,419 2,544,225 100 NOTE 29: SUBSEQUENT EVENTS As detailed in the Operating and financial review in the Directors’ Report, the Group has considered the impact of Italy’s Plan of Sustainable Energy Transition of Suitable Areas (“Pitesai”) published in February 2022. The main conclusions from the review are summarised below: 1. Selva Malvezzi / Podere Maiar – this onshore gas field is unaffected. Additional gas prospects in the concession such as Selva North, Selva South and Riccardina are unaffected. Po Valley has sought further clarification from the Ministry on East Selva. 2. Teodorico – the offshore gas field may be affected as the existing 12-mile no development zone has been extended due to the recent institution of environmental protected areas in proximity of the licence. Po Valley has initiated a discussion with the Ministry in order to better understand the impact on the basis that the concession was requested before the Pitesai process started in February 2019. It received environmental approval last year and the gas field reserves (2P 36.5bcf) are in excess of the 5.3bcf threshold for continuation mentioned in the Pitesai. 3. Torre del Moro - Po Valley has sought clarification on how the gas condensate exploration and targeted gas cap may be treated. 4. Cadelbosco & Grattasasso – Canolo and Zini gas prospects remain unaffected. Activity for Bagnolo and Ravizza oil discoveries will not proceed under the new plan and Po Valley has adjusted resource and reserve definitions accordingly. Expenditure to date on these oil discoveries has been negligible (€30,071). Not proceeding with the Bagnolo and Ravizza projects is not considered to be material to the Group. Other than the above, there were no events between the end of the financial year and the date of this report that, in the opinion of the Directors, will affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group, in future financial years. 62 PO VALLEY ENERGY LIMITED DIRECTORS’ DECLARATION 1. In the opinion of the directors of PVE (“the Company”): i) the financial statements and notes, as set out on pages 20 to 62, and the remuneration disclosures that are contained in the Remuneration report in the Directors’ report, are in accordance with the Corporations Act 2001, including: a. b. giving a true and fair view of the Group’s financial position as at 31 December 2021 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) subject to the matters disclosed in Note 1.2(c), 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 for the financial year ended 31 December 2021. 3. The Directors draw attention to Note 1.2(a) to the Financial Statements which includes a statement of compliance with International Financial Reporting Standards. This declaration is made in accordance with a resolution of directors. Michael Masterman Chairman 31 March 2022 Kevin Bailey Non-Executive Director 31 March 2022 63 PO VALLEY ENERGY LIMITED INDEPENDENT AUDITOR’S REPORT To the members of Po Valley Energy Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Po Valley Energy Limited (“the Company”) and its controlled entities (“the Group”), which comprises the consolidated statement of financial position as at 31 December 2021, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the Group’s financial position as at 31 December 2021 and of its financial performance for the year then ended; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (“the Code”) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material uncertainty related to going concern We draw attention to Note 1.2(c) in the financial report, which indicates that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Emphasis of matter We draw attention to Note 29 in the financial report, which describes the Group’s consideration of the impact of Italy’s Plan of Sustainable Energy Transition of Suitable Areas (“Pitesai”) published in February 2022. Our opinion is not modified in respect of this matter. 64 PO VALLEY ENERGY LIMITED Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated in our report. Key Audit Matter How our audit addressed the key audit matter Carrying value of resource property costs Refer to Note 13. exploration In accordance with AASB 6 Exploration for and Evaluation of Mineral Resources, the Group capitalises evaluation expenditure and as at 31 December 2021 had a deferred exploration and evaluation expenditure costs”) balance of (“resource property €8,146,546. and Exploration and evaluation expenditure was determined to be a key audit matter as it is the most significant asset of the Group and was an area which involved the most audit effort and communication with those charged with governance. We planned our work to address the audit risk that the capitalised expenditure may no longer meet the recognition criteria of the standard. In addition, we considered it necessary to assess whether facts and circumstances existed to suggest the exploration and evaluation expenditure asset may exceed its recoverable amount. the carrying amount of that Our procedures included but were not limited to the following: processes - We obtained an understanding of the associated with key management’s review of the carrying value of exploration and evaluation expenditure; - We considered the Directors’ assessment of potential indicators of impairment in addition to making our own assessment; - We obtained evidence that the Group has current rights to tenure of its areas of interest; - We considered the nature and extent of planned ongoing activities; - We enquired with management, reviewed ASX announcements and reviewed minutes of Directors’ meetings to ensure that the Group had not resolved to discontinue exploration and evaluation at any of its areas of interest; - We substantiated a sample of expenditure by agreeing to supporting documentation; and - We examined the disclosures made in the financial report. Information other than the financial report and auditor’s report thereon The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 31 December 2021, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report, or our knowledge obtained in the audit or otherwise appears to be materially misstated. 65 PO VALLEY ENERGY LIMITED If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: - Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - - - Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. - We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. 66 PO VALLEY ENERGY LIMITED We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included within the directors’ report for the year ended 31 December 2021. In our opinion, the Remuneration Report of Po Valley Energy Limited for the year ended 31 December 2021 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards HLB Mann Judd Chartered Accountants Perth, Western Australia 31 March 2022 L Di Giallonardo Partner 67 PO VALLEY ENERGY LIMITED TECHNICAL SUMMARY The following information is provided in order to comply with Chapter 5 of the ASX Listing Rules and include general requirements applicable to the public reporting of petroleum resources and specific information to be included in the oil and gas exploration: 1) TENEMENTS Po Valley Energy Limited (the “Company”, “Po Valley Energy” or “PVE”) holds 100% of Po Valley Operations Pty Ltd (“PVO”) together the Group. PVO holds the titles to all exploration permits and preliminary awarded production concessions and its operations are located entirely in the north of Italy. As at 31 December 2021, the Group’s core portfolio includes a total of 4 onshore Exploration Permits and 1 offshore Exploration Permit and two preliminary awarded production concessions with environmental approval granted. Total acreage position of the Group at 31 December 2021 is 1,690 km2. For an illustration of each asset’s location please refer to the map in Figure 1 and Table 1. Figure 1: Licences map at 31 December 2021 68 PREL. AWARDED (EIA GRANTED) PREL. AWARDED (EIA GRANTED) PRODUCTION CONCESSIONS EXPLORATION PERMITS GRANTED PO VALLEY ENERGY LIMITED TECHNICAL SUMMARY Tenement Location Interest held Teodorico (d.40.AC-PY) Italy, Adriatic Offshore 100% Po Valley Selva Malvezzi (1) Italy, Emilia Romagna 100% Po Valley AR94PY Italy, Adriatic Offshore 100% Po Valley Cadelbosco di Sopra Italy, Emilia Romagna 100% Po Valley Grattasasso Italy, Emilia Romagna 100% Po Valley Podere Gallina Italy, Emilia Romagna 63% Po Valley Torre del Moro Italy, Emilia Romagna 100% Po Valley Table 1: Tenements at 31 December 2021 Notes: 1. Transfer approval for United (20%) and PROSPEX (7%) quotas in Selva Malvezzi to be formally requested as soon as Concession is awarded. As at 31 December 2021 all tenements are 100% owned with exception of the Podere Gallina Licence at 63% with joint venture partners United Oil & Gas Plc (United) 20% and Prospex Oil & Gas Plc (Prospex) 17%. PVO holds 100% of the quota in the Selva Malvezzi preliminary awarded production concession but holds a 63% economic interest together with joint venture partners United Oil & Gas Plc (United) 20% and Prospex Oil & Gas Plc (Prospex) 17%. United and Prospex continue to hold their respective economic interests in the Selva Malvezzi preliminary production concession and transfer of these quota’s will be formally requested to be transferred once final Production Concession is awarded. 2) RESERVES AND RESOURCES STATEMENT The following tables summarise the status of the Group’s Reserves & Resources as at 31 December 2021. Group Reserves Reserves as at Reserves as at Gas, Italy (bcf) Developed Undeveloped Teodorico 31 December 2021 31 December 2020 1P 2P 1P 2P - - - - 26.70 36.50 26.70 36.50 Selva Malvezzi (Podere Maiar) [net] 2.60 8.40 2.60 8.40 Total Reserves 29.30 44.90 29.30 44.90 Table 2: Total Group Reserves 69 PO VALLEY ENERGY LIMITED TECHNICAL SUMMARY The Group does not have unconventional petroleum Resources in its portfolio. The Group does not have any material concentration of Undeveloped Reserves in Oil & Gas projects that remained undeveloped for more than 5 years from the date they were initially reported. Group Contingent Resources Contingent Resources as at Contingent Resources as at Gas (bcf) Oil (MMbbls) Table 3: Total Group Contingent Resources 31 December 2021 31 December 2020 1C 2C 1C 2C 13.1 - 26.9 - 12.8 9.4 25.8 43.4 1C 2C Gas (bcf) Contingent resources at 1 January 2021 No changes in the year Contingent resources at 31 December 2021 Oil (MMbbls) Contingent resources at 1 January 2021 Reduced due to impact of Pitesai Contingent resources at 31 December 2021 Table 4: Reconciliation of changes in Contingent Resources 13.1 - 13.1 9.4 (9.4) - 26.9 - 26.9 43.4 (43.4) - The tables on the following page of the Technical Summary shows the detailed estimate for each field. Following the Italian Government’s recently published the plan of sustainable energy transition of suitable areas (“Pitesai”) the Group has concluded that activity for oil discoveries at Bagnolo and Ravizza will no longer proceed, and therefore has reduced its contingent oil reserves relating to these two fields as indicated in Table 4 above. There have been no material changes to any other Reserves and Resource estimates since the prior year. In reference to the Reserves and Resources estimation process, the Group commits to an independent audit in order to obtain a certified update of its Reserves & Resources portfolio. The last review took place in April 2019. The reserves and resources estimates of the gas fields Teodorico and Selva were independently evaluated by the geological and petroleum reservoir consultancy firm CGG (UK) Services Ltd in 2018 and 2019. The two oil discoveries (Bagnolo in Piano and Ravizza) were initially evaluated by CGG (UK) Services Ltd in 2013 and reviewed in 2019. All figures have been determined using a deterministic method except Teodorico which was estimated using a probabilistic method. 70 PO VALLEY ENERGY LIMITED TECHNICAL SUMMARY Estimates of the recoverable volumes for each field and a detailed explanation of how this review was carried out as required under the Chapter 5 ASX Listing Rules are provided in the ASX media releases entitled “Po Valley Upgrades Selva Resources” and “Po Valley Oil Resource Update” dated 26 April 2019 together with a Competent Persons Report issued by CGG(UK) Services Ltd covering all Po Valley assets dated 24 April 2019. All estimates are based on independent evaluations in accordance with SPE/WPC/AAPG/SPEE Petroleum Resource Management System (2007/2011). Licence Project Reserves Contingent Resources Gas Bcf Prospective Resources 1P 2P 3P 1C 2C 3C Low Best High Teodorico inside 12 miles* 26.7 36.5 47.5 AR94PY Teodorico Inside 12 miles PL3-C 7.4 10.6 14.0 7.9 15.9 25.0 Selva (Podere Maiar1) 2.6 8.4 18.8 Selva level A South Podere Gallina Selva level B North [Net] Selva level B South Cembalina Fondo Perino East Selva Riccardina Zini (Qu-B) Cadelbosco Canolo (Qu-A) di Sopra Canolo (Plioc) Zini (Qu-A) 0.7 2.2 0.6 1.1 5.6 2.2 2.3 11.2 5.9 1.1 0.7 0.4 2.7 1.1 3.6 4.6 1.7 10.5 1.3 6.4 18.3 8.2 2.1 9.2 21.9 24.4 3.0 12.9 25.6 81.2 0.6 1.4 2.4 Table 4: Gas Reserves and Resources by Field at 31 December 2021 (As Per CPR Dated 24 April 2019) *the Reserves and Resources for Teodorico lie within extended 12 mile development zone under the Pitesai, treatment of this is currently under discussion with the Ministry. Licence Project Reserves Contingent Resources Oil /Condensate MMbbl Prospective Resources Torre del Moro Torre del Moro 65.0 106.0 240.0 Table 5: Oil Reserves and Resources by Field at 31 December 2021 (As Per CPR Dated 24 April 2019) 1P 2P 3P 1C 2C 3C Low Best High Qualified Petroleum Reserves and Resources Evaluator: Statements in this Annual Report regarding estimates of petroleum Reserves and Contingent and Prospective Resources are based on the technical work carried out by Po Valley Technical Team validated/certified by the geological and petroleum reservoir consultancy firm CGG (UK) Services Ltd. CGG (UK) Services Ltd has approved the Reserves statement as a whole and has consented to: (a) the inclusion of the estimated petroleum Reserves and Contingent and Prospective Resources and supporting information in this Annual Report in the form and context in which they are presented; and (b) the inclusion of the Reserves statement in this Annual Report in the form and context in which it appears. 71 PO VALLEY ENERGY LIMITED TECHNICAL SUMMARY The Company confirms that it is not aware of any new information or data that materially affects the information included in the original market announcement and, in the case of estimates of oil and gas reserves that all material assumptions and technical parameters underpinning the estimates in the relevant market announcement continue to apply and have not materially changed. The Reserves and Resources Statement is based on, and fairly represents, information and supporting documentation prepared by or under the supervision of Andrew Webb, Manager of Petroleum Reservoir and Economics of CGG Services (UK) Limited (“CGG”) Reference no. 8P512. CGG compiled these estimates to confirm with the definitions or the Petroleum Resources Management Systems (2007 and 2011) as published by the Society of Petroleum Engineers (SPE). These estimates were prepared as part of a CPR dated 24 April 2019 which was lodged with the ASX on 26 April 2019. Mr. Webb is qualified in accordance with the requirements of ASX Listing Rule 5.41 and consents to the inclusion of the information in this report of the matters in the form and context in which it appears. 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 that may potentially be recovered by the application of a future development project(s) relate to undiscovered accumulations. These estimates have both an associated risk of discovery and a risk of development. Further exploration appraisal and evaluation is required to determine the existence of a significant quantity of potentially moveable hydrocarbons. 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. 72 PO VALLEY ENERGY LIMITED ASX ADDITIONAL INFORMATION Additional information required by the Australian Securities Exchange Limited Listing Requirements and not disclosed elsewhere in this report is set out below. Information regarding share holdings is current as at 25 March 2022. ORDINARY SHAREHOLDERS 1. TOP TWENTY SHAREHOLDERS Details of the 20 largest shareholders of quoted fully paid ordinary shares by registered shareholding are: Name J P Morgan Nominees Australia Pty Limited CS Third Nominees Pty Limited Fuiloro Pty Ltd Beronia Investments Pty Ltd Beronia Investments Pty Ltd 1 Mr Kevin Bailey & Mrs Grace Bailey 2 Symmall Pty Ltd 3 Michael Masterman 4 5 6 7 8 9 Quo Vadis Pty Ltd 10 Mr Laurie Mark Macri 11 Beronia Investments Pty Ltd 12 HSBC Custody Nominees (Australia) Limited 13 P & N Dairies Pty Ltd 14 Mr Kevin Christopher Bailey 15 Mr Laurie Mark Macri 16 Beronia Investments Pty Ltd 17 Lambert Blue Chip Investments Pty Ltd 18 Donus Australia Foundation Limited 19 Brispot Nominees Pty Ltd 20 Mr Paul Kenneth Lambert and Mrs Nadine Alison Lambert Total Number 135,879,916 128,488,783 86,234,079 69,044,569 48,230,467 48,009,015 46,006,164 31,077,326 30,799,806 30,466,011 29,802,620 25,032,630 24,042,460 19,645,646 14,674,624 12,104,667 12,012,720 11,500,000 11,117,246 10,850,921 825,019,670 % 13.50 12.76 8.57 6.86 4.79 4.77 4.57 3.09 3.06 3.03 2.96 2.49 2.39 1.95 1.46 1.20 1.19 1.14 1.10 1.08 81.96 2. SUBSTANTIAL SHAREHOLDERS The following table shows holdings of 5% or more of voting rights as disclosed in substantial holding notices given to the Company or, in the case of directors, information available to the Company and disclosed to ASX in Directors Interest Notices: Fully paid Ordinary Shares Name Kevin Bailey Michael Masterman Beronia Investments Pty Ltd Number 242,105,942 218,014,515 118,990,777 % 24.05 21.66 11.82 73 PO VALLEY ENERGY LIMITED ASX ADDITIONAL INFORMATION 3. NUMBER OF SECURITY HOLDERS AND SECURITIES ON ISSUE Total number of fully paid ordinary shares on issue is 1,006,643,438 held by 414 shareholders. 4. VOTING RIGHTS The voting rights attached to ordinary shares are that on a show of hand, every member present, in person or proxy, has one vote and upon a poll, each share shall have one vote. 5. DISTRIBUTION OS SECURITY HOLDERS Quoted Securities Category 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,000 and over Total Holders 92 18 12 150 142 % 22.22 4.35 2.90 36.23 34.30 Fully paid Ordinary Shares % 10,536 49,041 91,745 6,740,015 999,752,101 0.00 0.00 0.01 0.67 99.32 414 100.00 1,006,643,438 100.00 6. UNMARKETABLE PARCEL OF SHARES The number of shareholders holding less than a marketable parcel of ordinary shares is 148 based on the Po Valley Energy Limited closing share price of AU$0.028 on 25 March 2022. 7. ON MARKET BUY-BACK There is no current on market buy-back. UNQUOTED SECURITIES Po Valley Energy Limited has the following unquoted securities on issue: Category Convertible Notes Unlisted Options exercise price AU$0.05 expiry 21 Jul 2023 Number 1,750,000 5,000,000 Number of holders 5 1 Convertible notes on issue have a maturity date of 29 April 2022 and interest payable of 8% p.a. Convertible notes are convertible into 41,666,667 ordinary fully paid shares based on the conversion price of AU$0.042 per fully paid ordinary share. 74  

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