Management report

Financial statements 

Consolidated income statement 

With reference to the sale of the final portion of the equity investment in ISAB, 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 comprehensive results, i.e. including those of the aforesaid businesses, are shown and commented in this Report on Operations.
 

(Eur million) Year 2013 Year 2012
     
Reclassified income statement    
Revenues from ordinary operations 7.051,8 8.264,8
Other revenues anche income 23,9 23,3
TOTAL REVENUES 7.075,7 8.288,1
     
Cost for purchases and changes in inventory  (6.099,0) (7.327,7)
Cost for services and other operating costs (596,8) (628,5)
EBITDA 379,8 331,8
     
Amortisation, deprecation and write-downs of fixed assets (210,1) (152,6)
Income (expenses) from sale of business unit - (1,6)
Net financial income (expenses) 72,8 52,5
Net income (loss) from equity investements 97,1 143,7
Profit before taxes 194,0 268,7
     
Income taxes (108,8) (68,8)
Profit fot the period  85,2 199,9
     
Minority interests (56,8) (48,7)
Group's net profit (loss) 28,4 151,2

Revenues from ordinary operations 

Revenues in 2013 were EUR 7,052 million, compared with EUR 8,265 million in 2012. The change is a result of the following factors:

  • the decrease in Refining & Marketing revenues, mainly tied to the decline in volumes sold as a result of the reduced share in the ISAB refinery;
  • the revenues of Thermoelectric Power Generation, substantially in line with the previous year;
  • increased revenues from Renewable Energy Sources, mainly because of the higher sale volumes as a consequence of increased production capacity deriving from the acquisition of ERG Wind.
Other reveneus and income

These consist mainly of rental income, insurance indemnification, gains on disposals, indemnities and expense recoveries.

Costs for purchase and changes in inventory 

Costs for purchases mainly refer to the purchase of crude oil and other semi-finished products and also include transport and transaction costs.

In 2013, they are lower than in 2012 by approximately EUR 1,224 million, mainly due to lower volumes purchased and lower purchase prices.
With respect to inventories, raw materials decreased by approximately EUR 103 million (-180 thousand tonnes compared with 31 December 2012) and decreased by approximately EUR 8 million for finished products (-23 thousand tonnes).
In 2012, raw materials had increased by approximately EUR 22 million and finished products had decreased by approximately EUR 137 million.
It should be noted that on the basis of the weighted average cost method, the inventory change is impacted not only by the exact level of inventories in stock at the end of the period, but also by the variation in raw material and finished product purchase prices.

Costs for services and other operating costs 

Costs for services include the processing costs of the ISAB Refinery, maintenance costs, commercial expenses (including product transport and electricity costs), costs for utilities, for consulting services (ordinary and connected with extraordinary transactions), insurance, marketing and for services rendered by third parties.
The other operating costs mainly relate to cost of labour, rent, provisions for risks and charges and to taxes other than income taxes.
The decrease from the matching periods of 2012 is mainly tied to lower processing costs, as a result of the reduction of the share in ISAB, commented above.
The item was affected by the increase in costs relating to ERG Wind (EUR 45 million in 2013), mainly represented by maintenance costs, rents paid and other services rendered by third parties.

Amortisation, deprecations and write-downs

The increase in amortisation and depreciation is mainly due to the new wind farms acquired.

Net financial income (expenses)

The net financial expenses of 2013 amounted to EUR 73 million, compared with EUR 53 million in 2012. The increase is mainly due to the change in the scope of consolidation as a result of the acquisitions and capital expenditures made in 2013, partly offset by lower interest rates.
In addition, income from cash management was higher.
In detail, the item includes short-term net financial income of approximately EUR 10 million (EUR 4 million in 2012), deriving mainly from cash management, and medium-long term financial expenses of approximately EUR 81 million (EUR 54 million in 2012) as a result of the aforementioned change in the scope of consolidation; the medium and long-term values also reflect the effects of the derivatives for hedging the interest rate fluctuation risk.

Net income (loss) from equity investments 

In 2013, this item mainly comprised the net gain of EUR 173 million relating to the sale of the final 20% interest in ISAB S.r.l. on 30 December 2013 and the balance on the price for the sale of the 20% interest, carried out in 2012 (EUR 9 million). It should be recalled that in 2012 the item included the capital gain (EUR 227 million) realised from the disposal of 20% of the same equity investment.

The item also includes the results of the companies measured with the equity method of accounting (mainly the results of ISAB S.r.l. and of the TotalErg S.p.A. joint venture).
In 2013, the item included the write-down of the equity investment in TotalErg by EUR 58 million, reducing in particular the capital gains attributed in 2010 upon incorporating the joint venture.

Income taxes

In 2013, income taxes amounted to EUR 109 million (EUR 69 million in 2012) and they include current taxes of EUR 99 million and deferred taxes of EUR 10 million, including the derecognition of deferred tax assets on tax losses (EUR 21 million) relating to the "Robin Tax" applied to ERG S.p.A. and at present deemed no longer recoverable. The tax rate derived from the ratio between income taxes and pre-tax profit amounted to 56%.

The tax rate at adjusted replacement cost, derived from the ratio between income taxes and pre-tax profit net of inventory gains/losses and non-recurring items, amounted to 52%.

 

Consolidated statement of financial position

The financial position as at 31 December 2013 was affected by the consolidation of the ERG Wind group as a result of the aforementioned acquisition.
The contribution of ERG Wind in terms of net invested capital amounted to approximately EUR 800 million as at 1 January 2013, with a corresponding increase in net financial indebtedness.
 

(Eur million) 31/12/2013 31/12/2012
Reclassified statement of financial position    
Fixed assets 2.795,0 2.422,7
Net working capital 278,7 170,7
Employess'severance indemnities (5,0) (3,5)
Other assests 410,7 352,9
Other liabilities (658,4) (459,1)
Net invested capital 2.821,0 2.483,7
     
Group shareholder's equity 1.773,6 1.775, 7
Minority interests 240,0 195,4
Net financial indebtedness 807,5 512,6
Shareholder's equity and financial debt  2.821,0 2.483,7


At 31 December 2013, net invested capital amounted to EUR 2,821, markedly higher than at 31 December 2012 as a result of the acquisition of the wind farms of ERG Wind.
Financial leverage, which represents the ratio of total net financial indebtedness (including Project Financing) and net invested capital, was 29% (21% at 31 December 2012).

Fixed assets

Fixed assets include tangible, intangible and financial fixed assets. The increase compared to 31 December 2012 is mainly due to the acquisition of wind farms of ERG Wind.

Net working capital 

Net working capital includes inventory, trade receivables and payables, and excise duties payable.
The increase relative to 31 December 2012 is due mainly to the contribution of ERG Wind as well as to punctual phenomena linked to working capital dynamics.

Other assets 

These mostly comprise deferred tax assets, receivables from Tax Authorities for tax advances and advance payments made against current provision of services.

Other liabilities 

These mainly concern the deferred tax liabilities calculated on the differences between the carrying value of recognised assets and liabilities for financial reporting purposes and their corresponding tax basis (mainly fixed assets and inventories), the estimate of income taxes owed for the period, the provisions for liabilities and charges, VAT payables and the deferred income resulting from deferred recognition in the Income Statement of the CIP 6 price increase on sales of electricity by subsidiary ISAB Energy.

Net financial indebtedness

(Eur million)  31/12/2013  31/12/2012
     
Summary of the Group's indebtedness    
Medium/long-term financial indebtedness 1.435,7 918,4
Short-term financial indebtedness (cash and cash equivalents) (628,2) (405,8)
     
TOTAL 807,5 512,6

The following table illustrates the medium/long-term financial debt of the ERG Group:

(Eur million)  31/12/2013 31/12/2012
     
Medium/long-term financial indebtedness    
Medium/long-term bank borrowings 120,8 289,1
Current portion of mortgages and loans (87,0) (168,6)
Medium/long-term financial payables 162,3 94,9
TOTAL 196,2 215,4
     
Medium/long-term Project Financing 1.361,9 789,2
Current portionh of Project Financing  (122,5) (86,2)
Totale Project Financing 1.239,5 703,0
     
TOTAL 1.435,7 918.4


Medium/long-term financial payables include liabilities deriving from the fair value measurement of the derivatives to hedge interest rates of EUR 141 million (EUR 76 million as at 31 December 2012) and, for the remainder, the interest-bearing loans granted to ISAB Energy S.r.l. by the IPM group which owns 49% of the company.

The payables for "medium/long-term Project Financing" are for:

  • loans of EUR 1,063 million granted to companies in the Renewable Energy Sources business for the construction of wind farms, of which EUR 656 million relating to the wind farms of ERG Wind, net of the positive fair value relative to the notional, i.e. approximately
    EUR 138 million;
  • EUR 177 million in loans granted to ERG Power S.r.l. for the construction of the CCGT plant.

On 13 December 2013, the residual debt for the Project Financing of ISAB Energy, amounting to approximately EUR 31 million, was repaid early.
The increase from 31 December 2012 is mainly due to the acquisition of ERG Wind, commented above.

In compliance with IAS 39, the accessory expenses incurred to obtain the loans are presented as a reduction of the payable to which they refer, according to the amortised cost method.
With regard to the ERG Wind acquisition, in accordance with IFRS 3 the financial liability relating to Project Financing is measured at fair value. Said fair value is lower than the nominal value, in consideration of the more advantageous contractual conditions than those proposed by the market at the time of the acquisition.


The breakdown of short-term financial indebtedness is shown below:

(Eur million) 31/12/2013 31/12/2012
     
Short-term financial indebtedness (cash and cash equivalents)    
Short-term bank borrowings  200,5 353,1
Current portion of mortgages and loans  87,0 168,6
Other short-term financial payables 12,4 19,9
Short-term financial liabilies 299,9 541,6
     
Cash and cash equivalents (816,6) (842,7)
securities and other short-term financial recevables (73,3) (34,2)
Short-term financial assets (889,9) (876,9)
     
Short-term Project Financing 122,5 86,2
Cash and cash equivalents (160,7) (156,6)
Project Financing  (38,2) (70,4)
     
TOTAL (628,2) (405,8)

Other short-term financial payables mainly comprise:

  • financial payables to unconsolidated Group companies;
  • short-term payables to companies controlled by IPM Eagle.

The amount of cash and cash equivalents consists mainly of the liquidity arising from the collection of the consideration for the disposal of 20% of ISAB S.r.l. in December 2013, and of the restricted bank accounts pursuant to the conditions set out in the Project Financing agreements.
"Short-term financial assets" also comprise short-term securities for use as liquidity. The change in "Securities and other short-term financial receivables" refers in particular to a different temporary utilisation of liquidity in the securities described above.

The change in net financial indebtedness is broken down as follows:
 

(Eur million) Year 2013 Year 2012
 
Cash flows from operating activities
Adjusted cash flow current operations (1) 327,4 207,9
Income tax paid  (81,4) (8,2)
Change in working capital (33,3) (5,5)
Change in other operating assets and liabilities 39,1 (30,6)
TOTAL 251,8 163,6
 
Cash flows from investing activities
Net capital expeditures on tangible and intagibles fixed assets (2) (73,0) (74,3)
Net capital expeditures in financial fixed assets (61,5) (16,0)
Colelction for the sale of ISAB shares 434,7 484,7
TOTAL 300,2 394,4
 
Cash flow from shareholder's equity
Distributed dividens (68,2) (62,7)
Other changes in equity (3) 25,4 (44,3)
TOTAL (42,8) (107,1)
 
Change in scope of consolidation(4) (804,1) -
 
Change in net financial indebtedness (294,9) 450,9
     
Initial net financial indebtedness 512,6 963,5
 
Change in the period 294,9 (450,9)
 
Final net financial indebtedness 807,5 512,6

(1)  item does not include inventory gains (losses), deferral of the CIP 6 tariff increase and current income tax for the period
(2)  item does not include capitalised costs for cyclical maintenance
(3)  in 2012, it includes the purchase of treasury shares for EUR 26 million
(4)  the change in the scope of consolidation refers to the acquisition of ERG Wind, ERG Renew Operations & Maintenance and to the sale of Eolo S.r.l.

The increase in debt by EUR 295 million compared to 31 December 2012 is mostly the result of the acquisition of ERG Wind and of the payment of the dividends, partly offset by the collection for the sale of the final 20% equity investment in ISAB and by the cash flow of the period.
A detailed analysis of capital expenditures effected may be found in the specific section.

ERG Wind consilidation

On 13 February 2013, ERG, through the subsidiary ERG Renew, closed with International Power Consolidated Holdings Ltd. (100% GDF SUEZ) the acquisition of 80% of the capital of IP Maestrale Investments Ltd. On the same date, the Shareholders' Meeting of IP Maestrale resolved to change the name of the company to ERG Wind Investments Ltd.
The total provisional price of the acquisition was EUR 35 million. In particular, the enterprise value of the acquisition was EUR 859 million, i.e. approximately EUR 1.35 million per installed MW. ERG recognised to the seller a provisional consideration for the equity of EUR 28.2 million for 80% of the share capital of IP Maestrale. The agreements prescribe a put and call option on the remaining 20% of the capital, which may be exercised no earlier than three years after the date of closing. In consideration of the terms of the option and of the method for calculating its exercise price, the acquisition of the minority shares was assumed to be certain, with the consequent inclusion of minority shares in the Group's equity and the recognition of the corresponding fixed financial liability (EUR 7 million).
In July 2013, the parties agreed on the amount of the total final price, i.e. EUR 23 million, thus determining a positive balance of EUR 12 million in ERG's favour.
In relation to the above, a purchase price allocation exercise was carried out on the basis of available information, in accordance with IFRS 3. For the purposes of this exercise, due consideration was also given to any contractually mandated price adjustments relating to guarantee clauses for the protection of the ERG Group.
For additional details, please see the chapter entitled "Acquisition of IP Maestrale (now called ERG Wind)" of the Notes to these Consolidated Financial Statements.

The method used for the first consolidation of the acquired companies, as required by reference accounting standards, is described below.
The acquisition was measured according to the provisions of IFRS 3 on business combinations; based on this standard, for the transaction to be properly accounted for, the following is necessary:

  • determining the total acquisition cost;
  • determining the fair value of the acquired assets and liabilities;
  • allocating, at the date of acquisition, the cost of the business combination to the acquired assets and the liabilities assumed, including those not recognised before the acquisition;
  • recognising any goodwill acquired in the business combination.

In the determination of the fair value of the acquired assets and liabilities, the main differences identified refer to the evaluation:

  • of fixed assets, and in particular the contracts and authorisations for the generation of electricity at feed-in tariffs for wind farms in operation. These assets were provisionally evaluated with the support of models set up when assessing the validity of the investment;
  • of financial liabilities related to the derivative to hedge interest rates and to the loan, originally entered into under more advantageous conditions than those proposed by the market at the time of the acquisition.

The difference between the total acquisition cost and the net value of the acquired assets and liabilities was recognised residually as goodwill.
In the period between the date of first consolidation (1 January 2013) and 31 December 2013, the ERG Wind Group contributed approximately EUR 121 million to the ERG Group's EBITDA.

At 1 January 2013, the impact of the transaction on the Group's net financial indebtedness is estimated to be EUR 800 million and it refers to the price paid (EUR 23 million) and to the net financial position of the acquired companies, inclusive of the fair value of the derivatives and of the positive effect deriving from the fair value measurement of the loan, as commented above.

 

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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