Management report

Introduction

The Consolidated Annual Report at 31 December 2013 has been prepared in accordance with the Standards issued by the International Accounting Standards Board (IASB) and endorsed by the European Union, inclusive of all international standards that have undergone interpretation (International Accounting Standards – IAS and International Financial Reporting Standards – IFRS) and the interpretations of the International Financial Reporting Interpretation Committee (IFRIC) and of the previous Standing Interpretations Committee (SIC). The present document was audited by the independent auditor Deloitte & Touche S.p.A. in accordance with CONSOB (Italian Stock Exchange Regulator) regulations.

Disclosure pursant to article 70 and 71 of the Issures' Regulations

The Company has selected the option, introduced by CONSOB with its resolution no. 18079 of 20 January 2012, of waiving the obligation to make available to the public an information document upon carrying out significant transactions, i.e. mergers, demergers, capital increase by transfer in kind, acquisition and sale.

Results at adjusted replacement cost

To enhance understandability of performance, the results of the business are also shown at adjusted replacement cost that takes into account, for the portion attributable to ERG, the results at replacement cost of ISAB S.r.l. and of the joint ventures TotalErg S.p.A. for Refining & Marketing, and LUKERG Renew Gmbh for the Renewable Energy Sources segment, whose contributions to the Consolidated Income Statement not at adjusted replacement cost are reported in the equity of the investments measured under the equity method of accounting.
Net financial indebtedness is also shown at adjusted replacement cost that takes into account the portion attributable to ERG of the net financial position of the joint ventures LUKERG Renew Gmbh (50%) and TotalErg S.p.A. (51%), net of the relevant intra-group items.
Since joint governance in ISAB S.r.l. is no longer in place, from 1 September 2012 onwards the adjusted values of indebtedness and of capital expenditures no longer take into account the contribution of ISAB S.r.l.

Acquisitions of  IP Maestrale (Now Called ERG Wind)

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.
As a result of the acquisition, the ERG Group increased its installed power by 636 MW, of which 550 MW in Italy and 86 MW in Germany, reaching a total of approximately 1,340 MW, of which approximately 1,087 MW in Italy, positioning itself as the first wind power operator in Italy and among the top ten in Europe.
The enterprise value of the acquisition is EUR 859 million, i.e. approximately EUR 1.35 per installed MW. The price for the equity at the closing of the transaction was EUR 28.2 million for 80% of the share capital of IP Maestrale. The agreement provides for a put and call option on the remaining 20% of the capital, which may be exercised no sooner than three years after the date of closing.
The wind farms are already fully financed through non-recourse project financing, maturing in December 2022, issued by a pool of primary Italian and international banks. The acquired company had an EBITDA of approximately EUR 120 million in 2012, and of approximately EUR
121 million in 2013.

In July, on the basis of the existing arrangements, a price adjustment pertaining to 100% of the equity investment, amounting to approximately EUR 12.4 million in favour of the ERG Group, was agreed and settled.
The Italian wind farms are located in Sicily (161 MW), Sardinia (111 MW), Campania (95 MW), Puglia (91 MW), Basilicata (55 MW), Molise (37 MW), whilst the five farms in Germany (86 MW) are located in the Centre and North of the country. These high quality assets have a producibility of approximately 2,000 hours/year, above the Italian national average.
This Report reflects the impacts of the consolidation of ERG Wind Investments and of its subsidiaries from 1 January 2013 onwards.

ERG Renew shareholder body opening up to Unicredit 

On 19 December 2013, ERG announced that it had entered into an agreement with UniCredit, whereby the Banking Institution became a shareholder of ERG Renew through the acquisition of a minority interest equal to 7.14% of the share capital, through a reserved capital increase, for
a price of EUR 50 million. The transaction enables ERG Renew to obtain new capital to support its growth plans in renewable energies in Italy and abroad and to count among its shareholders one of the foremost financial Institutions in Europe, with significant presence in Eastern
European markets. UniCredit has been recognised the typical governance prerogatives of a minority investor, which shall be reflected in the Articles of Incorporation of ERG Renew: among them is the right to appoint a member of the Board of Directors.
The agreement provides for a lock-up period of four years starting from the closing of the transaction, subject to the possibility of listing ERG Renew, and for the recognition to UniCredit of the right to sell the equity investment to ERG if there is no listing or if no agreement is reached
on strategic transactions.
On 16 January 2014 the Shareholders' Meeting of ERG Renew voted a reserved capital increase, for a total price of EUR 50 million, simultaneously subscribed and freed by UniCredit, corresponding to a minority interest in ERG Renew that represents 7.14% of its share capital.

Closing the exercise of the put option on the fional 20% Equity investment in ISAB

On 30 December 2013, the exercise of the put option for the final 20% equity investment in ISAB S.r.l., approved on 9 October 2013 by the Board of Directors of ERG S.p.A., was closed. The transaction entailed the provisional collection of EUR 426 million, which takes into account the value of inventories and the definition of certain environmental issues involving the refinery. As a result of the transaction, LUKOIL holds 100% of the capital of ISAB S.r.l. In view of the significance of the interest and of the existence of the operating processing agreement until the end of 2013, consistently with the previous periods, the income statement data at replacement cost of ISAB S.r.l. are included in the adjusted results, in proportion to ERG's share until the end of 2013.
For a better understanding of data commented in this Report, the transaction's main impacts are pointed out:

  • the reduction of net financial debt by approximately EUR 426 million as a result of the collection of the sale price;
  • the recognition of the realised capital gain of EUR 177 million, net of the related tax effects and of other ancillary components. The gain and the other income components associated with the sale of the equity investment are considered non-recurring items and therefore
    they are not reflected in "Group EBIT at replacement cost";
  • the contribution of ISAB S.r.l. to adjusted results in the proportion of 20% throughout 2013. In 2012, the contribution of ISAB S.r.l. was recognised in the proportion of 40% through August 2012 and of 20% from September 2012 onwards.

The aforesaid impacts refer to the provisional price collected on 30 December 2013. This amount is subject to final adjustment, expected to be defined in the first quarter of 2014 and therefore not reflected herein.
With reference to the aforesaid transaction, it should be pointed out that in the Notes to 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 results inclusive of those relating to the aforesaid business are shown and commented in this Report on Operations.
Lastly, this Report includes the balance relating to the final sale price of the equity investment that had been sold in September 2012, i.e. a positive amount of EUR 9 million.

Agreement for the sale of the ISAB Energy plant and early termination of CIP 6 

On 30 December 2013, ERG announced that it had reached an agreement with GDF SUEZ for the acquisition of the equity investments, amounting to 49% of the share capital (indirectly held by GDF SUEZ itself and by Mitsui & Co.) in ISAB Energy, the company that owns the IGCC power plant (528 MW) of Priolo Gargallo (SR), in ISAB Energy Services, a company dedicated to the maintenance and operation of the plant, and in ISAB Energy Solare, owner of a 1 MW photovoltaic plant.
The total price for the purchase of the three equity investments was set to EUR 149.4 million, to which is added, at the closing date, ERG's takeover of the shareholder loans granted by the sellers to ISAB Energy and ISAB Energy Solare, totalling EUR 23.8 million. Before the closing, ISAB Energy and ISAB Energy Services will distribute to the shareholders dividends totalling EUR 52.5 million, of which EUR 25.7 million to GDF SUEZ and Mitsui & Co, and the remainder to ERG.
At the same time, ERG entered into an agreement with ISAB, a subsidiary of the LUKOIL Group, for the sale of the ISAB Energy and ISAB Energy Services business units, consisting mainly of the IGCC plant and of the personnel for its operation and maintenance; the agreement will be
finalised following the early termination of the CIP 6/92 agreement. The agreed price for the asset value is EUR 20 million.
The effectiveness of both agreements is subject to the approval, by the competent Antitrust Authority, both of the acquisition of the equity investments and of the sale of the ISAB Energy and ISAB Energy Services business units, as well as to the acceptance, by the National GridOperator (GSE), of the early termination of the CIP 6/92 agreement for the ISAB Energy plant, effective 1 July 2014. The closing of the two transactions is expected by the second half of 2014.

New organisational model 

In 2013, the rationalisation of the Group's organisation continued with a project that led to the definition of a new Group organisational model, whose goal is to assure the alignment between business strategies and corporate operating model, seeking the optimal environment where
ERG's personnel can best express their capital of ideas and skills. The new corporate organisational model is meant to meet these needs through the interaction of three macroroles:

  • the Parent Company ERG S.p.A., which will provide strategic direction, managerial control and protection of the human, financial and relational capital as essential assets for growth;
  • the business units, i.e. special purpose entities focused on their respective business and provided with adequate structures of their own, able to assure operating efficiency, momentum for growth and prompt responses to the volatility of reference markets;
  • ERG Services S.p.A., a company tasked with reaching operating excellence in the performance of support services to all the companies of the ERG Group ("shared services").

The implementation of the Group's new corporate organisation model entails:

  • spinning off business activities previously carried out by ERG SpA, by transferring the business units (activities, personnel, assets and contracts) of the Oil and Power businesses respectively to ERG Supply & Trading S.p.A. and to ERG Power Generation S.p.A., both
    controlled by the single shareholder ERG S.p.A.;
  • retaining all activities pertaining to the Renewables business in the subsidiary ERG Renew S.p.A.;
  • spinning off the main service and support activities that cut across the Group's activities which were previously carried out by ERG S.p.A., by transferring the related business unit (activities, personnel, assets and contracts) to the newly established ERG Services S.p.A.,
    controlled by the sole shareholder ERG S.p.A.

The new organisation was launched in the final weeks of the year and its actual implementation, both with regard to compliance with formal requirements and with regard to the realignment of all operating processes, is expected in the first half of 2014.

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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