Separate financial statements

Impairment test on equity investments

ERG Renew S.p.A.

Note that the carrying value of the equity investment at the end of the year was EUR 615 million, net of write-downs totalling EUR 73 million. These valuations were conducted in 2009 and 2010 mainly as a result of the worsening of the economic scenario and the delayed launch of several wind farms under construction.

For the 2013 Separate Financial Statements, as in previous years, the carrying amount of the equity investment in ERG Renew S.p.A. was tested.
With regard to the equity investment in ERG Renew, on 19 December 2013 ERG signed an agreement with UniCredit for the bank to enter the shareholding structure of ERG Renew by purchasing a minority share of 7.14% of share capital, through a reserved capital increase, for a total value of EUR 50 million. On 16 January 2014, the Shareholders' Meeting of ERG Renew thus approved a reserved capital increase for a total value of EUR 50 million, which was concurrently subscribed and paid in by UniCredit, equal to a minority share of in ERG Renew of 7.14% of the share capital. As a result, the corresponding pre-money value is EUR 650 million.

For the purpose of testing the value of the equity investment, the value deriving from the Unicredit transaction was used, as, for all intents and purposes, it is equivalent to a fair value: this value represents the meeting point between ERG's ask and Unicredit's bid and thus, the result of a trade and a transaction with a third party.
This value is also corroborated by broker consensus valuations and internal valuations developed using the Discounted Cash Flow method on approval of the abovementioned transaction.
On the basis of the above considerations, therefore, it is clear that the recoverable value, taken as the fair value, is greater than the carrying value at which the equity investment in ERG Renew is reported in the financial statements of ERG S.p.A., subject to previous write-downs.
The recovery of value from EUR 615 million to EUR 650 million (EUR +35 million) was recognised as an increase in value of the equity investment and an increase in income from equity investments in the income statement.

TotalErg S.p.A.

ERG S.p.A. holds a 51% investment in the TotalErg S.p.A. joint venture, incorporated in 2010 through the merger of Total Italia S.p.A in ERG Petroli S.p.A. 
The transaction had entailed loss of control over ERG Petroli S.p.A. (previously, a wholly owned subsidiary) and the acquisition of an equity investment in the aforesaid Joint Venture recognised in the Financial Statements with the cost method, determined according to the method described below.
IAS 27 prescribes that as a result of the disposal of controlling shares, any residual interest held in the entity subjected to disposal is measured at fair value.
The fair value of the new equity investment was determined, at the time of the loss of control, according to the values mutually exchanged by the parties and used for the definition of the share swap for the purposes of reaching the 51/49 interests prescribed by the agreements. Therefore, said fair value represented the initial carrying value of the new company, amounting to EUR 432 million, with the consequent recognition of a capital gain of EUR 346 million in the 2010 income statement. In view of the capital gain in question, the shareholders' meeting to approve the 2010 Financial Statements had made a portion of the equity reserves of the same amount unavailable.
Note that in 2012 TotalErg launched a project for the transformation of the Raffineria di Roma into a logistical facility and a plan to rationalise the sales network. Moreover, in 2012 critical elements were noted, caused by significant volatility, particularly accentuated since the second quarter of 2012, of the Oil scenario and of the reference market in which the same CGU operates. This scenario volatility had negative effects, specifically both on the final results of the investee and on the expected profitability forecasts.
On the occasion of the 2012 Financial Statements, the value of the equity investment was tested in consideration of the critical issues commented above. The impairment test conducted as a result reported an impairment of EUR 148 million, recognised as impairment of the equity investment.

Also for the purposes of the 2013 Financial Statements, critical elements were noted, caused by the volatility of the oil scenario and by the performance of the reference market where TotalErg operates. These elements of uncertainty had a negative impact on the results of 2013.
Considering the persistence of these critical elements, also for these Financial Statements, the value of the equity investment was tested.
To conduct this test, an independent expert was appointed in January 2014, who conducted the analysis using the draft Plan already prepared by the TotalErg management for the shareholder ERG S.p.A.
The assumptions contained in such documents, although still in draft form and not yet approved by the Board of Directors of TotalErg, are deemed by the Group Management to be reasonable and usable for the purposes of the impairment test. For the purposes of the test, the Cash Generating Unit consists of TotalErg S.p.A. and its investees, subsidiaries and associates.

The measurement was performed using the following criteria and assumptions:

  • unlevered Discounted Cash Flow on 6 years of explicit projections plus a terminal value1 calculated applying a multiple between 4.0x and 5.0x (in line with the market multiples observed in the past 10 years in the Integrated Downstream business) to the 2019 EBITDA of TotalErg;
  • the adopted discount rate is TotalErg's WACC (7.3%) provided by ERG's management, which is substantially in line with the WACC calculated on the basis of market parameters (6.9%);
  • the measurement was carried out on the basis of the draft consolidated economicfinancial plan of TotalErg S.p.A., whose scope of consolidation includes TotalErg, Eridis, TotalGaz, Restiani, Guazzotti, Gestioni Europa and Raffineria di Roma.
  • the economic-financial plan takes into account updates that rely on higher profitability in terms of EBITDA. These updates were judged to be reasonably likely by the Management.

The impairment test described above showed a loss resulting from the fact that the carrying value at which the equity investment in TotalErg is reported in the financial statements is greater than its recoverable value. In particular, the recoverable value, estimated according to the measurement paradigm, was found to be slightly greater than the value of the ERG stake in the consolidated shareholders' equity of the investee. The impairment, amounting to EUR 86 million, was allocated as a reduction in the value of the equity investment and, specifically, applied as a decrease in the gains described above. The write-down was recorded in the income statement.

Sensitivity analysis

The result of the impairment test is derived from the information available to date and from the reasonable estimates on the evolution of variables tied to the expected margins, in particular with changes in the reference economic environment and in the discount rates.
In particular, sensitivity analyses were conducted on the basis of changes in the discount rate and in the EV/EBITDA multiples applicable to the EBITDA of the last year of the explicit period. 

The analyses showed that:

  • an increase of 0.5% in the discount rate would result in a greater write-down of the equity investment in the amount of about EUR 10 million;
  • a decrease in the EV/EBITDA multiple from 4.5x to 4.0x would entail a greater write-down of the equity investment in the amount of around EUR 33 million.

The above analyses confirm the sensitivity of the assessments of the recoverability of equity investments to changes in the aforesaid variables; in this context, the Directors will
systematically monitor the evolution of the aforesaid external, uncontrollable variables for any necessary adjustments of the estimates of the recoverability of the carrying values of non-current assets in the Consolidated Financial Statements.

ERG Nuove Centrali S.p.A.

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.
The Separate Financial Statements of ERG S.p.A. identify a CGU constituted by the equity investment in ERG Nuove Centrali S.p.A. which in turn owns 100% of the company ERG Power S.r.l. and by the cash flows generated by the ERG Power & Gas Business Unit, which operates the CCGT through a tolling agreement and places the generated energy on the free market.

In the preparation of the 2011 Separate Financial Statements, these values were verified in view of the increased weighted average cost of capital (WACC), of the higher Robin Tax rates for 2011-2012-2013 and of the lower profitability as a result of the worsening scenario that characterised the domestic electricity market.
Said test had resulted in an impairment of EUR 63 million, net of the tax effect. This impairment was allocated to the carrying value of the equity investment in ERG Nuove Centrali, which therefore had been completely written off. The residual difference (amounting to EUR 29 million) was then recognised in a provision for charges on equity investments.

Also in the preparation of these Separate Financial Statements, an impairment test was conducted to verify recoverability of the carrying value of said plant, considering the persistent uncertainties and variability (or volatility) of the scenario that characterised the domestic electricity market also in 2013.
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%.

From the impairment test described above, no impairment emerged with respect to the recognised carrying value of the ERG Nuove Centrali equity investment in the Separate Financial Statements of ERG S.p.A.
The write-down posted in 2011 was based on the expected future cash flows from the CGU. The provision for charges on equity investments allocated as a result is thus linked to the actual achievement of these flows and, therefore, is expected to be gradually used over time.
Therefore, in these Separate Financial Statements, the provision for charges on equity investments was reduced by EUR 9 million, in line with the reversal of the corresponding write-down on the CCGT asset in the Consolidated Financial Statements.

Sensitivity analysis

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: this analysis showed that in the event of a reduction of approximately 50% in the profitability of site agreements, expiring after 2021, the recoverable value would decrease by an amount of around EUR 38 million. However, this would not result in any write-downs to the carrying value.
Lastly, we point out that an increase of 0.5% in the discount rate would result in a decrease in the recoverable value of around EUR 17 million, without any write-downs to the carrying amount. The above analyses confirm the sensitivity of the assessments of the recoverability of non-current assets to changes in the aforesaid variables; in this context, the Directors will continue to systematically monitor the evolution of the aforesaid external, uncontrollable variables for any necessary adjustments of the estimates of the recoverability of the carrying values of non-current assets in the Separate Financial Statements.

 

1 To calculate the terminal value, the perpetuity method was not used, because it is not among the usual market practices for TotalErg's reference industry.

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


Basket
Go to basket
Add to basket
Add page to the basket
Print
Print the page
Favorities
Add page to favorities
Mail
Share the page
Download
Download pdf of this section
Charts
Go to the interactive charts
 
Close

Print folder

Please choose from the following options:

Print all Reload the folder Remove all
Close

Share the article

Send