Consolidated financial statement
ERG Power s.r.l.'s ccgt plant impairment test
In April 2010, ERG Power's new CCGT plant, with approximately 480 MW of installed power, started full commercial operations; the plant supplies utilities and electrical energy to the industrial customers of the Priolo site, placing the remainder of the generated electricity on the market.
As a result of the impairment tests carried out in the 2011 financial statements, the productive assets were written down by EUR 95 million before the tax effect. Therefore, goodwill was entirely written off (EUR 1.5 million) in the 2011 financial statements and the residual writedown (EUR 94 million) reduced the value of the tangible fixed assets referred to the CCGT plant.
The carrying amount of the plant at 31 December 2013, net of the aforesaid write-downs and depreciations, amounts to approximately EUR 328 million.
In preparing these Financial Statements, the recoverability of the carrying value of the aforesaid plant was verified, in view of the persistence, for 2013 as well, of uncertainties and variability (or volatility) of the scenario which characterises the domestic electric market.
For impairment test purposes, the CGU comprises the tangible fixed assets attributable to the CCGT plant of ERG Power and the cash flows generated by the ERG Power & Gas segment which operates the plant through a tolling agreement and sells the energy produced on the free market.
The analysis was carried out identifying the recoverable value, i.e. the value in use, of the Cash- Generating Unit. The basis for the calculation was the projection of the operating cash flows associated to the CGU for its useful life, contained in the financial forecast prepared by Group Management and pertaining to a twenty-year time span; additionally, a residual value (or "terminal value") was assumed, calculated as a perpetuity with zero growth rate (g). The expected changes in sale prices and direct costs during the period assumed for the calculation are determined on the basis of past experience, corrected by future market expectations.
Projected cash flows were discounted using a conservative estimate of the discount rate (WACC after tax) applied to projected cash flows, i.e. 7.1%.
The impairment test was set up by updating the assumptions used for the test performed for the 2012 financial statements; in particular, the estimates of the electricity market scenario, of the zone bonus in Sicily, of the profitability of the plant in the Dispatching Services Market and of the modulation activities were updated.
Group management deems the assumptions used to identify the recoverable value of the CCGT plant of ERG Power to be reasonable and, on the basis of the aforementioned assumptions, no impairment has emerged.
The value in use resulting from the impairment test shows a positive difference relative to the carrying amount: taking into account that said difference is mainly due to temporary phenomena that will exhaust the positive effects after 2015, the Management did not reverse previous write-downs.
The result of the impairment test derives from information available to date and from reasonable estimates of the evolution of external variables such as the price of energy and interest rates, as well as the development of certain activities and the attainment of cost saving targets.
The Group took into account the aforesaid uncertainties in processing and defining the basic assumptions used to determine the recoverable value of the CCGT plant and it also carried out a sensitivity analysis on the recoverable value of the CGU: the analysis showed that, if the profitability of site agreements, expiring after 2021, dropped by approximately 50%, recoverable value would decrease by approximately EUR 38 million, not entailing any writedown of the carrying value.
Lastly, with a 0.5% increase in the discount rate, recoverable value would decrease by approximately EUR 17 million, not entailing any write-down of the carrying value.
The above analyses confirm the sensitivity of the assessments of the recoverability of noncurrent assets to changes in the aforesaid variables; in this context, the Directors will continue systematically to monitor the evolution of the aforesaid external, uncontrollable variables for any necessary adjustments of the estimates of the recoverability of the carrying values of noncurrent assets in the Consolidated Financial Statements.