Management report

Integrated Downstream 

Reference market  (1)

(thousands of tonnes) Year 2013 Year 2012
     
Italian retail market    
Gasoline 7,900 8,349
Diesel 14,614 15,281
 
Italian wholesale market    
Diesel 11,146 10,864
Heating oil  1,370 1,441
 
Specialties market    
Combustion LPG 1,719 1,784
Transport LPG 1,520 1,355
Bitumen 1,475 1,564
Lubricants 398 394

(1)  estimated figures
 

Italian Retail Market

In 2013, demand in the Retail network declined by 4.7% compared to 2012; there was a drop both in demand for gasoline (-5.4%) and for diesel, albeit to a slightly lesser extent (-4.4%).
The sharp contraction in demand is fundamentally due to the ongoing severe economic crisis which is conditioning and heavily changing motorists' consumption levels and habits; the recorded figure is particularly negative considering also that in 2012 demand in the Retail market had already declined by 9.5% compared to 2011.

Italian Wholesale Market

In 2013 Wholesale demand for diesel fuels (transport, marine and agricultural) sharply reversed its trend compared to the Retail network, increasing by 2.6% compared to the previous year; this increase is due to the higher demand in transport diesel, which increased by 3.7% for
higher delivery from "independent stations" through this network. There was a decline in demand for agricultural diesel (-0.8%) and marine diesel (-8.8%). With regard to heating oil, demand contracted by 4.9%.

Specialties Market

In 2013, total sales of LPG increased by 3.2% compared with 2012; in this case, too, the decline in consumption in the fuel network (-3.6% compared with 2012) was offset by the growth in the transport network (+12.2%).
Still evident were the effects of the economic crisis, and the consequent collapse in public investments, on demand for Bitumen, which declined further in 2013 compared to the already depressed values of 2012 (-5.7%). Lastly, there was a very slight recovery on sales of lubricants
(+1.0%), mainly affected by the increase in the industry channel (+6.1%) which offsets the decline recorded in the auto channel (-5.3%).

Highlights of integrated downstream performance at adjusted replacement cost

To enhance the understandability of Integrated Downstream performance, the results of this business are shown at their adjusted replacement cost, which reflects ERG's share (51%) of the consolidated results of the TotalErg joint venture.
It should be noted that the values below, in addition to the share of TotalErg, also include the activities in Sicily controlled by ERG Oil Sicilia.
 

(Eur million) Year 2013 Year 2012
     
Reveneues from third parties 3.317 4.325
Intra-segment reveneues 215 96
Reveneues from ordinary operations 3.532 4.422
EBITDA at replacement cost(1)(2) 45 53
Amortisation, deprecations and write-down (2) (60) (59)
EBIT at replacement cost (1) (2) (15) (6)
Capital expenditures on tangible and intangible fixed assets 41 37
 

(1) inventory gains (losses) of -6 in 2013 (+2 in 2012)
(2) they do not include non-recurring items as indicated in "Alternative performance indicators", to which reference is made for additional details


EBITDA at replacement cost for 2013 was EUR 45 million, down from the EUR 53 million recorded last year, mainly affected by the results of refining.
The Retail business improved, in a market environment which, even with higher margins than last year, characterised by particularly harsh price competition, continues to be penalised by further contraction in petroleum consumption.
With regard to the Wholesale and Specialties businesses, the results continue to reflect the weakness of the economic cycle and, with respect to the previous year, they are penalised by the contraction in wholesale activities in Sicily, because of ERG Oil Sicilia's exit from the Wholesale business.
In spite of the reduced exposure to the business, deriving from the shut-down of the Raffineria di Roma, refining had significantly lower results than in 2013, both because of some technical problems in Sarpom in the first part of the year, and because of a very weak environment, which has worsened compared to 2012; lastly, logistics was negatively affected by the overall decline in the activity tied to the decreased sales on all networks.

Downstream in Sicily

Downstream activities in Sicily are carried out through ERG Oil Sicilia (EOS), which started operations on 1 April 2010 within the scope of the performance of the agreements for the incorporation of TotalErg, and to which all the assets of ERG Petroli in the Region were transferred.
ERG Oil Sicilia operates mainly in the Retail market. The network at 31 December 2013 comprises 201 sales outlets with a nationwide market share of approximately 0.8%.
The results of 2013, in decline compared to the previous year, were affected by the termination of the agreement for the utilisation of the load overland within the ISAB Srl refinery, which occurred in September 2012, as a result of the broader transaction whereby ERG S.p.A. reduced
its equity investment in that refinery.
Total sales in the two channels amounted to 220 thousand tonnes in 2013 (473 thousand tonnes in 2012), of which 194 thousand tonnes referred to the Retail network (240 thousand tonnes in 2012). The decline of the sales, in addition to the aforementioned reduction in the activity of the Wholesale network, reflects in the Retail network the non-renewal of two lowmargin service station lease agreements; this decision is a part of a path directed at maximising the profitability of the company network.

Highlights of TotalErg performance

The following figures refer to 100% of the Consolidated Financial Statements of the company, which has operated since 1 October 2010.
 

(Eur million) Year 2013 Year 212
EBITDA at replacement cost(1) 76 84
Amortisation, depreciation and write-downs(2) (109) (107)
EBIT at replacement cost(1) (33) (23)
Capital expenditures on tangible and intangible fixed assets 76 71

 

(1) the data reported do not include inventory gains (losses) of -11 million in 2013 (+5 in 2012)
(2) they do not include non-recurring items as indicated in "Alternative performance indicators", to which reference is made for additional details

 

In 2013, EBITDA amounted to approximately EUR 76 million, a decline compared to the same period of the previous year, mainly because of the weaker results of refining, only partly offset by the improvement in marketing.
With regard to the marketing business, the results, in spite of the further weakening of demand, showed an improvement compared to 2012, thanks both to more sustainable market margins and to careful cost control.
With regard to refining and logistics, instead, results were lower than in the previous year both because of the refining scenario, which was extremely weak and lower than last year's, and because of the negative impact of the decline in demand on the results of logistics. In this regard, the shut-down of Raffineria di Roma in September 2012 contributed to limit, at least in part, the economic effects deriving from the severe decline in refining margins.
The process of obtaining the synergies of the joint venture, deriving from the unified management of the main business, is now up and running and it has made it possible to mitigate, if only in part, the negative effects generated by the challenging market environment.
The net financial position of TotalErg as at 31 December 2013 amounts to EUR 287 million, lower than EUR 374 million as at 31 December 2012, as a result of working capital dynamics.

Retail Network

In 2013, fuel sales of the TotalErg Network amounted to approximately 2,551 thousand tonnes, in decline compared with 2,646 thousand tonnes in the previous year, albeit at a less severe rate when compared to the general decline in demand. Market share, at 11.3%, has grown slightly compared to 2012 (11.2%).
As has already been pointed out Retail sales were severely affected by the overall performance of domestic demand, which was mainly conditioned by the persistence of the economic crisis.
In this environment characterised by marked weakness, TotalErg's efforts were focused on achieving the best possible operating efficiency, with the goal of safeguarding Business sustainability in the medium/long term. For this purpose, in 2012 the Company launched a significant plan to re-qualify its network in order to make it more competitive in terms of average dispensed quantities and operating efficiency. In 2013, the plan led to the closing of 134 corporate sales outlets.
At 31 December 2013, the TotalErg Network in Italy comprises 3,017 stations (of which 1,834 are owned by the Group and 1,183 are leased), compared with 3,248 stations at 31 December 2012.

Wholesale Network

TotalErg operates on the wholesale market by selling petroleum products mainly to companies that in turn resell them to end users on their own local markets and directly to consumers through the subsidiaries Restiani and Eridis.

In 2013, wholesale diesel sales amounted to 1,149 thousand tonnes, down compared with 1,236 thousand tonnes recorded in the same period of 2012. The decline in sales was affected by the persistent generalised drop in demand tied to the ongoing recession, as well as by the rationalisation of the least profitable, high credit risk customers, and the product shortage on the Raffineria di Roma logistical facility, caused by the severely adverse weather of the first half of the year.
In addition to the sales made directly by TotalErg, the sector benefited from the results of the subsidiaries:

  • Restiani S.p.A., 60% controlled, which operates in the marketing of petroleum products and heat management services for private users in particular in the North-West area.
  • Eridis S.r.l., wholly owned subsidiary that operates in the marketing of petroleum products in the North-West and Centre-South areas.

Specialties

TotalErg operates in the Specialties sector by selling lubricants (of which it purchases the bases, which it then mixes with additives in its own plant in Savona and at third party plants), bitumen, both normal and modified (produced by its own plants), and LPG, both directly and
through the wholly owned subsidiary TotalGaz.
In 2013, sales of lubricants amounted to 45.9 thousand tonnes (48.0 thousand in 2012), of which 4.1 were in the marine/foreign market, with total market share of 10.1%.
LPG Sales amounted to 227.3 thousand tonnes, a decrease compared to 248.8 thousand tonnes in the same period of 2012, fundamentally in the business to business network, affected by the shut-down of production at Raffineria di Roma, which took place in September 2012.
Lastly, bitumen sales, amounting to 127.8 thousand tonnes, declined compared with 152.2 thousand tonnes in 2012, as a result both of the severe drop in demand, and of the shut-down of internal bitumen production in the Raffineria di Roma and on the Sarpom Refinery during
2012.

Refining 

After the shut-down of the Raffineria di Roma, which took place in September 2012, TotalErg's exposure in the refining business was significantly reduced, from total annual balanced distillation capacity of approximately 6.0 million tonnes to a capacity of approximately 1.6 million tonnes provided solely by the share held in the Sarpom Refinery.
The Sarpom Refinery is equipped with catalytic conversion, more focused on the production of light distillates, and it processes mainly crude oils with low sulphur content. In 2012, transformation work was carried out, to achieve a structural reduction in costs, thus causing TotalErg bitumen production to be suspended from July onwards.
With regard to the reconversion of Raffineria di Roma, work was completed, fully according to schedule, on the transformation of the refinery into a logistical facility and specifically on the upgrade of the tank farm and of the maritime terminals.
Reaching the target configuration enables optimising the operations involved in receiving products by sea and the storage and shipment of finished products. Moreover, the flexibility of the logistical facility, thus dimensioned, will enable to exploit the business opportunities
that should emerge in the future.

Margins and processing 

  Year 2013 Year 2012
     
Unit contribution margins at replacement cost(1) TotalErg inland refineries    
USD/barrel 1,87 3,48
Eur/barrel 1,41 2,71
Eur/tonne(2) 10,5 19,9
 
Processed volumes (Ktons) 1.385 3.854
of which    

    Sarpom (Trecate)

1.385 1.552

    Rome

- 2.302

(1)   the unit contribution margins at replacement cost, net of variable production costs (mainly utility costs) do not include inventory gains (losses)
and non-recurring items
(2)   barrel/tonne conversion factor equal to 7.451 in 2013 (7.355 in 2012)

In 2013, 1,385 thousand tonnes were processed, down sharply from the 3,854 thousand tonnes processed in the same period of the previous year.
Unit contribution margins, hard to compare with 2012 in light of the different scope of activities, were negatively affected by a very weak environment, in particular in the second half of the year, as well as by the technical problems that occurred at the Sarpom Refinery in
the first part of the year, and particularly by the slow-downs in the catalytic cracking plant; the plant was also taken out of service twice for extraordinary maintenance, in both cases for approximately 10 days: the first outage was in the first quarter and the second one in June.
After these actions, the issues were resolved and the refinery is functioning according to its standards.

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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