Announcement PDF PO VALLEY ENERGY LIMITED A.B.N. 33 087 741 571 CONSOLIDATED FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2014 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, for the year ended 31 December 2014. 1. Directors The directors of the Company at any time during or since the end of the financial year are: Directors M Masterman B Pirola G Bradley G Short K Eley Date of Appointment 22 June 1999 (Managing Director) 11 October 2010 (Non-Executive Director) 10 May 2002 30 September 2004 5 July 2010 19 June 2012 Information on Directors The Board is composed of Non-Executive Directors, including the Chairman. The Chairman of the Board is elected by the Board and is an independent director. Graham Bradley — Chairman BA, LLB (Hons), LLM, FAICD, Age 66 Graham joined PVE as a director and Chairman in September 2004 and is based in Sydney. He is an experienced Chief Executive Officer and listed public company director. Graham previously served as Chief Executive Officer of one of Australia’s major listed funds management and financial services groups, Perpetual Limited. He was formerly Managing Partner of a national law firm, Blake Dawson Waldron and was a senior Partner of McKinsey & Company. Graham is currently Chairman of Stockland Corporation Limited, HSBC Bank Australia Limited, Energy Australia Holdings Limited and Infrastructure NSW and a director of GI Dynamics Inc. Graham is Chairman of the Remuneration and Nomination Committee and was a member of the Audit and Risk Committee until December 2010. Michael Masterman — Non Executive Director, BEcHons, Age 52 Michael is a co-founder of PVE. Michael took up the position of Executive Chairman and CEO of PVE and Northsun Italia S.p.A. in 2002 and resigned in October 2010 to take up an executive position at Fortescue Metal Group where he is currently CEO of FMG Iron Bridge iron ore company and recently completed the US$1.15bn sale of a 31% interest in the project to Formosa Plastics Group. 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 became a member of the Remuneration & Nomination Committee from 1 January 2011. Byron Pirola — Non Executive Director, BSc, PhD, Age 54 Byron is a co-founder of PVE and is based in Sydney. He is currently a Director of Port Jackson Partners Limited, a Sydney based strategic management consulting firm. Prior to joining Port Jackson Partners in 1992, Byron spent six years with McKinsey & Company working out of the Sydney, New York and London Offices and across the Asian Region. He has extensive experience in advising CEOs and boards of both large public and small developing companies across a wide range of industries and geographies. Byron is a member of the Audit and Risk Committee and member of the Remuneration and Nomination Committee. Gregory Short — Non Executive Director, BSc, Age 64 Greg Short was appointed Non-Executive Director in July 2010. Greg is a geologist who worked with Exxon in exploration, development and production geosciences and management for 33 years in Australia, Malaysia, USA, Europe and Angola. During his time in Europe, Greg was actively involved in Exxon's activities in the Netherlands and Germany. Greg was Geoscience Director of Exxon's successful development of its Angola offshore operations. Greg retired from Exxon in 2006 and is a Non-Executive director of ASX listed MEO Australia, Metgasco Limited and Pryme Oil and Gas Limited. Greg became a member of the Audit and Risk Committee from 1 January 2011. 2| PO VALLEY ENERGY LIMITED Kevin Eley — Non Executive Director, CA, F FIN, FAICD Age 65 Kevin Eley was appointed Non-Executive Director in June 2012. Kevin is based in Sydney and was the Chief Executive of HGL Limited for 25 years until his retirement in 2011. He has management and investment experience in a broad range of industries including, manufacturing, mining, retail and financial services with experience in the direction of early stage companies and public company governance. Kevin joined the PVE Audit & Risk Committee as Chairman and is currently a Non-Executive director of HGL Ltd, Milton Corporation Limited and Equity Trustees Limited. 2. Company Secretary Lisa Jones – Company Secretary, LLB Lisa was appointed to the position of Company Secretary in October 2009. She is a corporate lawyer with over 17 years experience in commercial law and corporate affairs, working with large public companies and emerging companies in Australia and in Europe. She was a senior associate in the corporate & commercial practice of Allen Allen & Hemsley and spent several years working in Italy, including as international legal counsel at Pirelli Cavi and as an associate in the Rome office of a national Italian firm. 3. Directors Meetings The number of formal meetings of the Board of Directors held during the financial year and the number of meetings attended by each director is provided below: G Bradley M Masterman B Pirola G Short K Eley No. of board meetings held 10 10 10 10 10 No. of board meetings attended 10 10 10 10 10 - - 2 2 2 2* 2* 2 2 2 No. of Remuneration & Nomination Committee meetings held 1 1 1 - - No. of Remuneration & Nomination Committee meetings attended 1 1 1 1* 1* No. of Audit & Risk Committee meetings held No. of Audit & Risk Committee meetings attended * attended meeting as an observer 3 PO VALLEY ENERGY LIMITED 4. Principal Activities The principal continuing activities of the Group in the course of the year were: • The exploration for gas and oil in the Po Valley region in Italy. • Appraisal and development of gas and oil fields. • Production and sale of gas from the Group’s production wells. 5. Earnings per share The basic and diluted loss per share for the Company was 1.03 € cents (2013: loss 4.76 € cents). 6. Operating and financial review The Italian gas market is dominated by gas imports. According to the 2014 Annual Report prepared by the Italian Ministry of Economic Development, the domestic exploration and production industry represents approximately 11% of total gas consumption in Italy the majority of which is produced by industry majors including Eni Spa and Edison Spa. Consequently, the Company has few comparable peers to contrast its operations. Strategy PVE strategy is to create value for shareholders and stakeholders using its existing and growing Italian oil and gas resource base. PVE’s strategy focuses on optimising near term production to maximise profitability and expanding the Company’s resources through exploration and development activities. The Company’s core portfolio includes 11 onshore assets and the first offshore asset – a game changer in the Company’s resource potential. The Company’s operations are located in Italy and are run by a local management team which PVE believe represents a significant competitive advantage not enjoyed by newer entrants seeking to find success in the Italian market. Italy remains an attractive market with gas and oil being of high quality, an accessible and low cost transportation network and a pricing environment that has been stable and higher than other comparable European countries. This year has been a continuation of a longer period of organisational change as the Company has sought to refocus the leadership team and strengthen its strategic position, having made substantial progress on multiple fronts. Operations During the year, the Company produced from both its Castello and Sillaro fields with a total combined production of 18.6 million cubic metres of gas (0.66 billion cubic feet). In October, the Company reported the reduction of Sillaro production from 50,000 to around 25,000 cubic metres per day. The production reduction was caused by depletion of several reservoirs and water arrival and associated sand production from some completions. Subsequently, PVE completed a re-evaluation of the residual potential of the field and a medium term plan is currently being developed to redrill Sillaro-1 and re-complete Sillaro-2 in order to maximize recovery of residual reserves and provide a new depletion point for the Pliocene reservoirs. Please refer to the ASX announcement “Sillaro Field Reserves Revision and Production Forecast” released on 9 January 2015 which contains further details. Total production for the period from the Sillaro field amounted to 17.6 million cubic metres of gas (0.62 billion cubic feet). The Castello gas field produced steadily at approximately 2,700 Scm/day throughout 2014. Total production for the period from the Castello field amounted to 0.98 million cubic metres of gas (0.03 billion cubic feet). Exploration The Company made further investments in 2014 in exploration and development assets that we believe are the most material value drivers. Namely, the production concession application for the offshore development named Teodorico (formerly Carola-Irma) was completed. An integral part of this application is the preliminary front-end engineering and design (FEED) study and the 3D seismic data which was reprocessed and interpreted in-house. Furthermore in February 2015, the Company was awarded the western block of the AR94PY license, specifically the residual 328.3 km² of offshore licenses which had been pending following the 12 nautical mile moratorium enacted by Environmental Decree 128 of June 2010. The Company now intends to file the production concession application with the Ministry of Economic Development with the aim to to fast-track the development of Teodorico. Following the successful drilling of the Gradizza-1 exploration well (La Prospera licence) in 2013 with Joint Venture (“JV”) partners AleAnna Resources LLC (10% equity) and Petrorep Italiana S.p.a. (15% equity) the Company applied for a Production Concession in February 2014. Please refer to the ASX announcement 4 PO VALLEY ENERGY LIMITED “Gradizza-1 Contingent Resource Assessment” released on 3 February 2014 which contains further details including information required by Chapter 5 of the ASX Listing Rules in relation to the reporting of Oil & Gas activities and contingent resources. In November 2014 the Company was awarded a preliminary production concession for the Gradizza development and an environmental impact study is underway. A revised Environmental Impact Assessment (“EIA”) for the Selva drilling application (Podere Maiar-1dir, identified within the Podere Gallina licence) was submitted to the Emilia-Romagna Region in April 2014 following minor variation requests. The Company purchased and reprocessed 70 km² of 2D seismic lines purchased in 2013 for the Selva prospect during the year and reinterpretation commenced in January 2015. Development Following, the award of the Bezzecca EIA Decree from the Lombardy Region in early 2014, the Ministry awarded the production concession through the enlargement of the existing Cascina Castello Production Concession in July. The formal Development Plan was granted by the Italian Ministry of Economic Development in 4Q 2014. The Ministry approved a joint venture with Petrorep in December 2014, for the Bezzecca Project. Petrorep will earn a 10% interest in the Cascina Castello production concession including the existing Vitalba plant but excluding the Vitalba-1 well. For its 10% interest, Petrorep will commit to a promoted share of future costs relating to the 7km pipeline installation, the Vitalba plant facilities upgrade to connect the Bezzecca-1 well, drilling expenditures for the development well Bezzecca-2 and reimbursement on past costs. PVE will retain the residual interest and operatorship. The Ministry of Economic Development awarded the preliminarily production concession for the Sant’Alberto gas field (north of Bologna) in June 2014 and subsequently the EIA (including the Santa Maddalena-1dir well) was submitted to the Italian Ministry of Environment for the final production concession in December 2014. The planned development for the Sant’Alberto field envisions a small modular plant and a simple connection to the national grid, circa 200 meters away. Financial performance Total revenue from the full year of gas production was €5,033,833, a year on year decline of €1,628,944 or 24%. This decrease in revenue is attributable to lower production volumes from the Sillaro field in 4Q2014. Earnings before interest, tax, impairment, depreciation and amortisation (EBITDA) for the year was €1,539,512 and decreased €215,624 if compared to the previous year. This decrease is mainly driven by the decrease in revenue of €1,628,944 which was partially offset by (i) a decrease in operating expenses of €257,148 and (ii) savings in employee expenses and corporate overheads of €1,156,172. As previously communicated to shareholders, the Company undertook a review of its cost structure and organisation with the aim to reduce fixed overhead costs which continued throughout 2014. In addition, the Company executed an off-take agreement with a global oil and gas major which secures the gas price until September 2015 with the option to extend to September 2016. Net loss before impairment expense is reconciled to comprehensive loss for the period as follows: Comprehensive profit reconciliation table ( in Euro ) Net loss before impairment expense (unaudited) 2014 2013 (1,242,182) (700,259) - (5,021,112) (20,180) (74,895) (1,262,362) (5,796,266) Impairment on resource property costs for the Castello field Exploration costs expensed Comprehensive loss for the year Earnings before interest, tax, impairment, depreciation and amortisation (EBITDA) amounted to €1,539,512 for the year. EBITDA (unaudited) is reconciled to statutory results from operating activities as follows: EBITDA reconciliation table ( in Euro ) EBITDA Depreciation and amortisation expense Depreciation expense Impairment losses Other miscellaneous income Results from operating activities 2014 1,539,512 (2,264,401) (13,791) (20,180) 251,380 (507,480) 2013 1,755,136 (2,325,656) (18,406) (5,096,007) 437,056 (5,247,877) Board believes EBITDA, however not reviewed or audited, is a good measure of the operating results of the Company. 5 PO VALLEY ENERGY LIMITED Financial position PVE currently has in place a €20 million Reserve Based Lending (RBL) facility with the London branch of Nedbank Group Limited, one of the four largest banking groups in South Africa. The maximum borrowing base ceiling limit is set by Nedbank six monthly. The Company’s drawings on the Nedbank facility amounted to €3,406,590 at 31 December 2014. One repayment totalling €93,410 was made during the year. No share issues were made during the 2014 year. Cash and cash equivalents at year end 2014 amounted to €1,579,585. Nedbank has not finalised a redetermination in December 2014 due to the ongoing discussions regarding financing options. Based on June 2014 borrowing base redetermination the borrowing limit would be €3,051,000 for the first half of 2015. The Company has hence transferred €355,590 from the cash balance to the Debt Service Reserve Account (”DSRA”) during January 2015. At the date of this report this amount remained in the DSRA account pending finalization of the borrowing base redetermination. Health and safety Paramount to PVE’s ability to pursue its strategic priorities is a safe workplace and a culture of safety first. The Company regards Environmental awareness and Sustainability as key strengths in planning and carrying out business activities. PVE’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 Company has strived to continually improve underlying safety performance. The Company 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 2014, PVE maintained its outstanding occupational health safety and environmental track record with no incidents or near misses to report during the 33,998 man-hours worked at the well sites and in the administrative offices. In addition to health and safety, Management and the Board use a number of operating and financial indicators to measure performance overtime against our overall strategy. Refer to note 11 of the Directors report for details of selected performance indicators. Information required by ASX Listing Rule 5.43 The Company confirms that it is not aware of any new information or data that materially affects the information included in the two market announcements referred to above (“Gradizza-1 Contingent Resource Assessment” lodged with the ASX on 3 February 2014 and “Sillaro Field Reserves Revision and Production Forecast” lodged with the ASX on 9 January 2015) and that all material assumptions and technical parameters underpinning the estimates in the those announcements continue to apply and have not materially changed. Principle risks and uncertainties Oil and gas exploration and appraisal involves significant risk. The future profitability of the Company 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 Company identifies and assesses the potential consequences of strategic, safety, environmental, operational, legal, reputational and financial risks in accordance with the Company’s risk management policy. PVE management continually monitors the effectiveness of the Company’s risk management, internal compliance and control systems which includes insurance coverage over major operational activities, and reports to the Audit and Risk Committee on areas where there is scope for improvement. The Charter for the Audit and Risk Committee is available on the Company’s website. The principal risks and uncertainties that could materially affect PVE future performance are described below. 6 PO VALLEY ENERGY LIMITED External risks Exposure to gas pricing 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 Company does not currently hedge its exposures to gas price movements long term. The profitability of the Company’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 to law, regulations or Government policy 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 Company’s profitability, net assets and cash flow. Uncertainty of timing of regulatory approvals Delays in the regulatory process could hinder the Company’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 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. Estimation of reserves 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. Tenure security 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 Company’s overall tenure position. In order for production to commence in relation to any successful oil or gas well, it is necessary for a production concession to be granted. Health, safety and environmental matters 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 Company’s financial results. In addition to the external and operating risks described above, the Company’s ability to successfully develop future projects including their infrastructure is contingent on the Company’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 2014. 7 PO VALLEY ENERGY LIMITED 8. Significant events after the balance date Other than matters already disclosed in this report, there were no other events between the end of the financial year and the date of this report that, in the opinion of the Directors, affect significantly the operations of the Group, the results of those operations, or the state of affairs of the Group. 9. Likely Developments The Company plans to seek a suitable farm-out partner for selected assets. The Company also plans to continue to invest in its current exploration portfolio through geological and geophysical studies and, subject to available finances, in its planned drilling program for high potential gas prospects. 10. Environmental Regulation The Company’s operations are subject to environmental regulations under both national and local municipality legislation in relation to its mining exploration and development activities in Italy. Company management monitor compliance with the relevant environmental legislation. The Directors are not aware of any breaches of legislation during the period covered by this report. 11. Remuneration Report - audited The Remuneration Report outlines the remuneration arrangements which were in place during the year, and remain in place as at the date of this report, for the Directors and executives of the Company. Remuneration Policy The Remuneration & Nomination Committee (Committee) is responsible for reviewing and recommending compensation arrangements for the Directors, the Chief Executive Officer and the senior executive team. The Committee assesses the appropriateness of the size and structure of remuneration of those officers on a periodic basis, with reference to relevant employment market conditions, with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. The Company aims to ensure that the level and composition of remuneration of its directors and executives is sufficient and reasonable in the context of the internationally competitive industry in which the Company operates. All senior executives except the company secretary are based in Rome and when setting their remuneration the Board must have regard to remuneration levels and benefit arrangements that prevail in the European oil and gas industry which remains highly competitive. Consequences of performance on shareholder wealth In considering the Group’s performance and benefits for shareholders wealth the Board has regard to the following indices in respect of the current financial year and the previous financial periods. Indices 2014 2013 2012 2011 2010 2009 Production (scm’000) 18,560 23,983 24,673 28,995 26,793 638 Average realised gas price (€ cents per cubic metre) 27 28 33 31 27 n/a EBITDA (€'000s) 1,540 1,755 4,473 4,411 2,219 (6,935) Profit / (loss) attributable to owners of the Company (€'000s) (1,262) (5,796) 2,373 (5,071) (2,324) (7,203) Earnings / (loss) per share (€ cents per share) (1.03) (4.76) 2.12 (4.57) (2.11) (6.99) Share Price at year end - AU$ 0.10 0.12 0.12 0.16 0.21 1.68 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. 8 PO VALLEY ENERGY LIMITED Senior Executives and Executive Directors The remuneration of PVE senior executives is based on a combination of fixed salary, a short term incentive bonus which is based on performance and in some cases a long term incentive payable in cash or shares. Other benefits include employment insurances, accommodation and other benefits, and superannuation contributions. In relation to the payment of annual bonuses, the board assesses the performance and contribution of executives against a series of objectives defined at the beginning of the year. These objectives are a combination of strategic and operational company targets which are considered critical to shareholder value creation and objectives which are specific to the individual executive. More specifically, objectives mainly refer to operating performance from both a financial and technical standpoint and growth and development of the Company’s asset base. The Board exercises its discretion when determining awards and exercises discretion having regard to the overall performance and achievements of the Company and of the relevant executive during the year. No remuneration consultants were used during the current or previous year. The table below represents the target remuneration mix for Key Management Personnel in the current year. The short-term incentive is provided at target levels. At risk Fixed remuneration Short-term incentive Long-term incentive Acting Chief Executive Officer 79% 21% - Non-Executive Directors The remuneration of PVE Non-Executive Directors comprises cash fees. There is no current scheme to provide performance based bonuses or retirement benefits to Non-Executive Directors. The Board of Directors and shareholders approved the maximum agreed remuneration pool for Non-Executive Directors at the annual general meeting in May 2011 at €250,000 per annum. The total fees paid in 2014 to Non-Executive Directors was €220,000 (2013: €220,000). No increase in board fees was made in 2014 and none are proposed in 2015. Service contracts The major provisions of the service contracts held with the specified directors and executives, in addition to any performance related bonuses and/or options are as follows: Directors: Graham Bradley, Chairman • Commencement Date: 30 September 2004 (re-elected 28 May 2014) • Fixed remuneration for the year ended 31 December 2014: €60,000 • No termination benefits Byron Pirola, Non-Executive Director • Commencement Date: 10 May 2002 (re-elected 24 May 2013) • Fixed remuneration for the year ended 31 December 2014: €40,000 • No termination benefits Gregory Short, Non-Executive Director • Commencement Date: 5 July 2010 (re-elected 24 May 2013) • Fixed remuneration for the year ended 31 December 2014: €40,000 • No termination benefits Michael Masterman, Non-Executive Director • Commencement Date: 22 June 1999 (re-elected 28 May 2014) • Fixed remuneration for the year ended 31 December 2014: €40,000 • No termination benefits 9 PO VALLEY ENERGY LIMITED Kevin Eley, Non-Executive Director • Commencement Date: 19 June 2012 (re-elected 24 May 2013) • Fixed remuneration for the year ended 31 December 2014: €40,000 • No termination benefits The Non-Executive directors are not appointed for a