Management report

Business outlook

The expected outlook for the main operating and performance indicators in 2014 is as follows:

Renewable Energy Sources

2013 was a particularly important year for ERG Renew as a result of the aforementioned acquisition of IP Maestrale (now ERG Wind) whereby ERG Renew has become the leading operator in the wind power business in Italy.
Abroad, through LUKERG Renew, the acquisition of two wind farms in Romania and Bulgaria was completed; their total installed power is 84 MW (of which ERG's share is 42 MW).
Moreover, since October 2013, through the acquisition of ERG Renew O&M, the company started to carry out the operations and maintenance activities of approximately half of the Italian wind farms internally, with the goal of extending this activity to the other parks in 2014 thus aiming to achieve major benefits in terms of operating efficiency, cost containment and technical availability.
At the end of 2013, construction work was completed on the new wind farm of Palazzo San Gervasio, with 34 MW of power, for which the company has obtained entitlement to the incentives as a result of participation in the auctions prescribed by the new regulations, and on a new wind farm in Romania, built through the LUKERG Renew, with total power of 82 MW (of which ERG's share is 41 MW). Both wind farms have been fully operational since January 2014, and they will contribute to ERG Renew's results throughout 2014.
Lastly, in 2014 activities aimed at further developing the company will continue, through the assessment of potential new investment opportunities, particularly abroad. 
The full contribution of the new wind farms to electricity generation, associated with the expected operating synergies, should entail further revenue and income growth is expected for 2014, compared with 2013.

Power & Gas

The year 2014 will be characterised by the significant discontinuity relating to the agreement, subject to the fulfilment of certain conditions precedent, which will lead to the early termination of the CIP 6 agreement and to the subsequent sale of the ISAB Energy plant. The plant should therefore be operated according to the current configuration only in the first half of the year, during which CIP 6 rates are expected to contract significantly compared to those of 2013 as a result of the changes in the regulations covering this matter.
Mostly as a result of the completion of this transaction, a significant contraction in the overall operating result of the business is expected for 2014, in view of a non-recurring income and an additional significant injection of cash consequent to the early extinction of the CIP 6 agreement.
With regard instead to the ERG Power plant, in spite of the persistently unfavourable conditions for gas-fuelled plants in the domestic market, whereby generation margins and utilisation factors are expected to remain at depressed levels, mostly because of the weak demand, satisfactory results - albeit lower than in 2013 - are expected for 2014 as well; the geographic position of the plant, its flexibility and the utility supply contracts will enable to maintain a higher profitability than the industry's average in Italy.

Refining & Marketing

 

Integrated Downstream

With regards to the Marketing business, in view of the weak economic environment, of the high prices of products on international markets and of the heavy weight of the tax component (VAT and excise duties), consumption is expected to remain at depressed levels in 2014 as well.
In this situation, the company's efforts will remain focused on achieving the best possible operating efficiency and on implementing the plan for the re-qualification of its own network, started in 2012 and aimed at making the network more competitive in terms of average quantities dispensed, and more sustainable over the long term.
With the definitive shutdown of Refining activities at the Raffineria di Roma and the consequent transformation of the industrial site into a logistical facility, exposure in the business was significantly reduced compared to 2012, whilst the strategic role of the Group's logistical assets will be enhanced. 

Coastal Refining

As a result of the sale of the final 20% equity investment in ISAB S.r.l., at the end of 2013, the Group has definitely exited the Coastal Refining business, which in recent years has been characterised by high volatility and severely negative results.
Trading in crude oils and products, instead, will continue in 2014 as well; through it, any profit opportunities which may arise on the market for these commodities will be sought, but within the scope of highly restrictive risk management policies.
For the business as a whole, significantly better results are expected in 2014, compared to 2013.
In light of the above, the EBITDA at replacement cost in 2014 is expected to be lower than in 2013; however, such a comparison must be considered in light of the marked discontinuities in the perimeter of interest, that can be expected in the course of the next year. 
 

Risks and uncertainties facing the business outlook 

With reference to the estimates and forecasts contained herein, it should be pointed out that actual results may differ even significantly from those announced in relation to a multiplicity of factors, such as: future price trends, the operating performance of plants, the impact of regulations for the energy and fuel distribution industry and for the environment, other changes in business conditions and in competitors' actions. 
 

Genoa, Italy, 11 March 2014

On behalf of the Board of Directors
The Chairman
Edoardo Garrone

 

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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