Management report

Alternative performance indicators

In order to enhance understandability of trends in the business segments, the financial results are also shown at adjusted replacement cost, excluding inventory gains (losses) and nonrecurring items, and including the contribution, for the portion attributable to ERG, of the results at replacement cost of the joint ventures TotalErg S.p.A and LUKERG Renew.
To assure the comparability and consistency of results compared with previous periods, adjusted Income Statement values also include the contribution, for the portion attributable to ERG, of the results at replacement cost of ISAB S.r.l. The results at replacement cost and the results at adjusted replacement cost are indicators that are not defined in International Financial Reporting Standards (IAS/IFRS). Management deems that these indicators are important parameters for measuring the ERG Group's operating performance, and are generally used by operators in the petroleum and energy industry in their financial reporting.
Since the composition of these indicators is not regulated by the applicable accounting standards, the method used by the Group to determine these measures may not be consistent with the method used by other operators and so these might not be fully comparable.
The components used to determine the calculation of results at adjusted replacement cost are described below.

Inventory gains (losses) are equal to the difference between the replacement cost of sold products in the period and the cost resulting from application of the weighted average cost. They represent the higher (lower) value, in the event of price increases (decreases), applied to the quantities corresponding to levels of inventories physically present at the beginning of the period and still present at the end of the period.

Non-recurring items include significant but unusual earnings.

The performance also includes the contribution of the TotalErg S.p.A. and LUKERG Renew GmbH joint ventures, and also of ISAB S.r.l. for the portion attributable to ERG.
To enhance understandability of the business' performance, the results of the business are also shown at adjusted replacement cost that takes into account, for the portion attributable to ERG, the results at replacement cost of TotalErg S.p.A., LUKERG Renew and ISAB S.r.l. whose contribution to the Income Statement not at adjusted replacement cost is reported in the value of the investment measured under the equity method of accounting.
Consistently with the above, net financial indebtedness is also shown at adjusted replacement cost that takes into account the portion attributable to ERG of the net financial position of the joint ventures TotalErg S.p.A. and LUKERG Renew, net of the relevant intragroup items.
As a result of the exercise of the put option, commented above, and of the consequent cessation of joint governance of ISAB S.r.l., from 1 September 2012 onwards the adjusted values of indebtedness and of investments no longer take into account the contribution of ISAB S.r.l.

Closing the exercise of the Put opzion on the final  20% equity investment in Isab S.r.l.

It should be recalled that 30 December 2013 was the closing date of the transaction related to the exercise of the put option for the final 20% of the share capital of ISAB S.r.l. The transaction entailed the provisional collection of EUR 426 million, which takes into account the value of inventories and of the definition of certain environmental issues pertaining to the refinery. As a result of the transaction, LUKOIL holds100% of the share capital of ISAB S.r.l.

The capital gain and the income components associated with the sale of the equity investment are deemed to be non-recurring items and therefore they are not reflected in "Group EBIT at replacement cost".
With reference to the aforesaid transaction, it should be pointed out that in the Consolidated Financial Statements the accounting results of the assets relating to the Coastal Refining Business (discontinued operations) are indicated separately in accordance with IFRS 5. For clearer disclosure, the results inclusive of the aforesaid business are shown and commented in this Report on Operations.

Reconciliation with operating results at adjusted replacement cost

EBITDA 

  Note Year 2013 Year 2012
       
EBITDA continuing operations*   554,3 440,7
Contribution of discontinued operations   (174,5) (108,8)
 
EBITDA   379,8 331,8
Exclusion of inventory gains /losses   6,3 0,8
Exclision of non - recurring items:      

 Corporate

     

 Ancillary charges - sale of 20% of isab s.r.l.

1

0,4

4,2

Ancillary charges - ERG Wind acquisition

2

2,9

-

 Ancillary charges - Other transcactionas

3

0,2

-

Charghes for company reorganization

4

4,3 -
 

  Renewable energy sources

     

 Ancillary charges - ERG Wind acquisition

2

10,2

-

       

 Downstream integrato

     

 Other charges on whlesale activities in Sicilyn Sicilia

5

7,2

-

 

  Coastal refining 

     

Estimated liabilities on balances from previus years

 

-

2,6

Liabilities for transactions on previous year

6

17,0

-

Liabilities for site dispites

7

80,0

-

Derecognition of deferred income due to exit from refining business

1

(7,7)

-

Balance on commercial relations from previous years

 

8

(3,4)

-

 

  Power & Gas

     

Estimated liabilities on balances from previous years 

 

-

6,3

Assets on "white certificates" from previous years 

 

-

(5,4)

Liabilities on "green certificates" from previous years 

 

-

5,3

Balance on commercial relations from previous years

8

(4,3)

-

       
EBITDA at replacement coast   492,9 345,7

ERG share of ISAB contibution at replacement cost(1)

9

30,6

68,2

TotalErg 51% contribution at replacement cost(1)

10

39,0

43,0

LUKERG Renew 50% contribution at replacement cost

11

6,6

1,3

EDITDA at adjusted replacement cost   569,1 458,1

Amortisation, decprecation and write-downs

  Note Year 2013 Year 2012
       
Amortisation/deprecation continuing operations*   (210,1) (152,6)
Contribution of discontinued operations   - -
       
Amortisation/deprecations and write-downs   (210,1) (152,6)
Exclusion of non -recurring items:      

 Renewable energy sources

     

 Write-downs in the renewable energy sources segment

  - 3,5
 
Amortisation and deprecation at replacement cost    (210,1) (149,1)

ERG share of ISAB contibution at replacement cost(1)

9

(22,0)

(36,7)

TotalErg 51% contribution at replacement cost(1)

10

(55,7)

(54,7)

LUKERG Renew 50% contribution at replacement cost

11

(3,6)

(1,3)

Amortisantion and deprecation at adjusted replacement cost    (291,4) (241,8)

(*)  does not take into account the results of the Coastal Refining business, which in the Consolidated Financial Statements are indicated separately in accordance with IFRS 5.
(1)  net of inventory gains (losses) and of any non-recurring items

EBIT

  Note Year 2013 Year 2012
 
EBIT at replacement cost   282,8 196,6

ERG share of ISAB contibution at replacement cost(1)

9

8,5

31,5

TotalErg 51% contribution at replacement cost(1)

10

(16,7)

(11,8)

LUKERG Renew 50% contribution at replacement cost

11

3,1

0,0

EBIT at adjusted replacement cost   277,7 216,3


(1)   net of inventory gains (losses) and of any non-recurring items

Group's net profit (loss)

  Note Year 2013 Year 2012
 
Group's net profit (loss)   28,4 151,2

Exclusion of inventory gains/losses

 

8,4

(6,2)

Exclusion of non-recurring items:

Exclusion of capital gain from sale of 20% of ISAB in 2012 

1

(9,0)

(214,1)

Exclusion of capital gain and ancillary charhes from sale of 20%  of ISAB (2013)

1

(176,5)

-

Exclusion of liabilities for transactions on previous years

6

12,3

-

Exclusion of liabilities for site disputesm

7

70,6

-

Exclusion of TotalErg non-recurring items

12

6,2

71,5

Exclusion of other charges on wholesale activities in Sicily

5

4,2

-

Exclusion of ancillary charges - ERG Wind acquisition

2

11,8

-

Exclusion of fair value difference for derivatives on oil inventories

13

1,9

2,7

Exclusion of reversal of tax assets from previous years

14

21,3

-

Exclusion of ancillary charges - other transactions

3

0,1

-

Exclusion of charges for company reorganisation

4

3,1

-

Exclusion of costs for "green certificates" from previous years

15

1,0

-

Exclusion of balance on commercial relations from previous years

8

(3,7)

-

Exclusion of non-recurring items "totalerg write-downs"

16

58,4

-

Exclusion of costs relating to sale of equity investment in Rivara storage 

 

-

6,1

Exclusion of IRAP benefit from preious years

 

-

(5,2)

Exclusion of non recurring items "write-downs" in the renewable energy sources sector

 

-

2,1

Exclusion of assets on "white certificates" from previous year

 

-

(3,6)

Exclusion of liabilities on "green certificates" form previous year

 

-

1,6

Esclusione of estimated liabilities on balances form previous years

 

-

3,6

Exclusion of minor non-recurring items

 

-

2,5

       
Group net profit (loss) at replacement cost (1)   38,5 12,3


(1)  also corresponds to Group net profit (loss) at adjusted replacement cost

Notes
1. non-recurring items tied to the sale of the final 20% of ISAB S.r.l.
   a. Capital gain for the sale of 20% of the equity investments, amounting to EUR 177 million net of the related tax effects and of other ancillary components;
   b. Balance on the sale of 20% of ISAB, completed in 2012, amounting to EUR 9 million;
2. Ancillary charges connected with the acquisition of the companies of the ERG Wind Group (please refer to the paragraph "ERG Wind Consolidation");
3. Ancillary charges on other transactions;
4. Costs incurred and expected in reference to the change to the Group's organisation, started at the end of 2013 and to be completed in 2014;
5. Other charges associated with the exit from the wholesale business in Sicily by EOS as a result of the progressive conversion of the ISAB S.r.l. equity investments to LUKOIL;
6. Costs of EUR 17 million relating to the dispute with Versalis S.p.A. (please see the paragraph "Significant events during the year");
7. Liabilities tied to the activities at the Priolo site and deriving mainly from the definitive exit from the Coastal Refining business;
8. Positive effect deriving from the definition of the 2008 CEC, which generated a positive effect of approximately EUR 4 million in ISAB Energy and of approximately EUR 3 million in ERG S.p.A.;
9. ERG share of the results of ISAB S.r.l. at replacement cost net of inventory gains/losses;
10.ERG share of the results at replacement cost of TotalErg net of inventory gains (losses) and non-recurring items;
11.ERG share of the results of LUKERG Renew at replacement cost;
12.Exclusion of TotalErg non-recurring items that refer to the expenses incurred in the period by the TotalErg investee for network rationalisation;
13.Negative impact of transactions on commodities, hedging part of the oil inventories at the ISAB refinery and carried out in relation to the exercise of the put option on the share of the equity investment in ISAB S.r.l.;
14.Negative impact deriving from the derecognition of deferred tax assets on tax losses relating to the Robin Tax and deemed no longer recoverable;
15.Costs for "green certificates" from previous years relating to ISAB S.r.l.;
16.Write-down of the equity investment in TotalErg by EUR 58 million as a result of the impairment tests carried out when preparing these financial statements.

For comments on the non-recurring items of 2012, please refer to the corresponding notes of the related Financial Statements.

Reconciliation with adjusted net financial indebtedness

  31/12/2013 31/12/2012
 
Net financial indebtedness 807,5 512,6

Net financial position of TotalErg

146,6

190,5

Net financial position of LUKERG Ren

135,2

34,2

Elimination of intra.group items

(74,2)

(15,6)

Adjusted net financial indebtedness 1.015,1 721,7

The adjusted figures for net financial indebtedness take into consideration the portion attributable to ERG of the net financial position of the joint ventures, net of the related intragroupì items.
The increase in indebtedness of LUKERG Renew (EUR +101 million compared to 31 December 2012) refers mainly to the previously commented acquisition of the Gebeleisis and Hrabrovo wind farms, as well as to the capital expenditures in the period.

Reconciliation with the values indicated in the notes to the consolidated financial statements

The reconciliation between the reclassified statements posted and commented in this Report on Operations and the values indicated in the Notes to the Consolidated Financial Statements is provided below.

(million Eur) Values in the consolidated financial statements Reversal of IFRS 5 reclassifications Values in the report on operations
       
Reclassified income statement FY 2013      
Revenues from ordinary operations 5.331,2 1.720,6 7.051,8
Other revenues and income 6,7 17,2 23,9
TOTAL REVENUES 5.337,9 1.737,8 7.075,7
Costs for purchases and changes in inventory  (4.383,7) (1.715,4) (6.099,0)
Costs for services and other operating costs (400,0) (196,9) (596,8)
EBITDA from continuing operations 554,3 (174,5) 379,8
Amortisation, depreciation and write-downs of fixed assets (210,1) - (210,1)
Income (expenses) form sale of business unit - - -
Net financial income (expenses) (72,8) - (72,8)
Net income (loss) form equity investments (87,6) 184,7 97,1
Profit before taxes 183,8 10,2 194,0
Income taxes (125,5) 16,8 (108,8)
Net profit (loss) from continuing operations 58,3 26,9 85,2
Risultato netto discontinued operations  26,9 (26,9) -
Profit for the period  85,2 - 85,2
Minority interests (56,8) - (56,8)
Group's net profit (loss)  28,4 - 28,4
 
(million Eur) Values in the consolidated financial statements Reversal of IFRS 5 reclassifications Values in the report on operations
       
Reclassified income statement FY 2012      
Revenues from ordinary operations 5.229,4 3.035,4 8.264,8
Other revenues and income 14,9 8,3 23,3
TOTAL REVENUES 5.244,4 3.043,7 8.288,1
Costs for purchases and changes in inventory (4.388,3) (2.939,4) (7.327,7)
Costs for services and other operating costs (415,4) (213,2) (628,5)
EBITDA from continuing operations 440,7 (108,8) 331,8
Amortisation, depreciation and write-downs of fixed assets (152,6) - (152,6)
Income (expenses) form sale of business unit (1,6) - (1,6)
Net financial income (expenses) (52,5) - (52,5)
Net income (loss) form equity investments (100,8) 244,5 143,7
Profit before taxes 133,1 135,6 268,7
Income taxes (99,5) 30,6 (68,8)
Net profit (loss) from continuing operations 33,6 166,3 199,9
Net profit (loss) from discontinued operations   166,3 (166,3)                          -  
Profit for the period  199,9            -   199,9
Minority interests (48,7) - (48,7)
Group's net profit (loss)  151,2            - 151,2

The column "Reversal of IFRS 5 reclassifications" indicates the results of the Coastal Refining business and of the sale of the equity investment in ISAB and the related capital gain net of ancillary components.

ERG S.p.A. - Genova

Paolo Merli

Head of Corporate Finance & Investor Relations

0039 010 2401376

ERG S.p.A. - Genova

Matteo Bagnara

Investor Relations

0039 010 2401423

ir@erg.it


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