Consolidated financial statement

Impairment test 

This section provides the description of the impairment tests on the Group's main assets, as required by IAS 36. In particular, it should be specified that in testing the recoverable value of production plants with defined useful life, the value in use was considered, as calculated on estimated cash flows through the useful life of the assets. With regard to equity investments, which by nature have indefinite useful life, their specific features were taken into account: therefore, reference is made to the respective paragraph for the related clarification on the setup used.

Power-renewable energy sources segment impairment test

Through the years, the Group completed a series of acquisitions in the Renewable Energy Sources segment. Briefly, the main ones were:

  • acquisition of the Enertad group (now ERG Renew), starting from 2006 with subsequent step acquisitions concluded with the acquisition of 100% of ERG Renew, completed
  • through the Takeover Bid;
  • acquisition of five French companies owning as many wind farms situated in France. The transaction was completed through the transfer of the equity investments from Theta Energy to EnerFrance S.a.s (now ERG Eolienne France), wholly owned subsidiary, specifically incorporated as a sub-holding of the wind power segment for the assets located in France;
  • acquisition of ERG Eolica Adriatica S.r.l. (formerly IVPC Power 5 S.r.l.), owner of two operational wind farms in Molise and in Puglia, for a purchase price of EUR 71 million;
  • acquisition of 100% of ERG Eolica Campania (formerly IVPC Power 3 S.p.A.), owner of five wind farms, operational since 2008, between the provinces of Avellino and Benevento, with a total installed capacity of approximately 112 MW, for a total cost of EUR 100 million;
  • incorporation of the LUKERG Renew joint venture which in 2012 and 2013 acquired wind farms operating in Bulgaria and in Romania as well as additional authorisations for wind farms to be developed in Romania (please refer to the paragraph Joint ventures – LUKERG Renew GmbH);
  • acquisition of 80% of the capital of IP Maestrale Investments Ltd, a primary operator in Italy in the segment of renewable energy from wind power [(see the paragraph  Acquisition of IP Maestrale (now called ERG Wind)];
  • acquisition of 100% of the capital of ERG Renew Operations & Maintenance S.r.l., a company dedicated to the operation and maintenance of the Italian wind farms of ERG Wind (see the paragraph Acquisition of ERG Renew Operations & Maintenance S.r.l.).

The acquisitions were recognised and measured pursuant to IFRS 3 on business combinations, by allocating the cost of the acquisition to the acquired assets and assumed liabilities, including those not recognised prior to the acquisition.
Following the impairment tests in the 2008, 2009 and 2010 Consolidated Financial Statements, the values of the Enertad acquisitions had been partially written down. On occasion of the 2010 Consolidated Financial Statements, the capital gains relating to the acquisitions of the French companies were partially written down.

The residual value of these incremental, allocated assets before the 2013 impairment test is as follows:

  • approximately EUR 3 million allocated to the wind power plants in operation; 
  • pproximately EUR 231 million allocated to permits and preliminary agreements for wind farms in operation, of which EUR 98 million referred to wind farms of the ERG Wind Group;
  • approximately EUR 125 million to goodwill, divided among the different Business Combinations:
    • EUR 96 million referred to ERG Wind (Italy and Germany);
    • EUR 19 million referred to ERG Eolica Campania and ERG Eolica Adriatica (Italy);
    • EUR 10 million referred to ERG Renew Operations & Maintenance (Italy).

In consideration of the goodwill values posted in the financial statements, for the 2013 financial statements their recoverable value was verified and the measure business combination.
The Group then estimated the recoverable value of the aforesaid assets. According to IAS 36, the recoverable value of an asset or of a cash-generating unit is the higher of its fair value less costs to sell and its value in use.
The recoverable value of cash generating units ("CGUs") is tested by determining their value in use. The main assumptions used to calculate value in use pertain to the discount rate, the growth rate and the expected changes in the sale prices of energy and of direct costs during the period selected for the calculation. Group Management then adopted an after-tax discount rate that reflects current market measurements of the cost of capital and of the specific risk connected with the CGUs. The growth rates adopted are based on growth forecasts for the Group's industry, taking into account the Group's market share. Changes in
sale prices and in direct costs are determined on the basis of past experience and on future market expectations.
In determining the discount rate, the financial parameters considered were the Beta and Debt/Equity ratios derived from panels of comparable companies, in order to consider both the market risk of companies operating in the same industry and a market-based financial structure. With regard, instead, to the cost of equity (ke), it includes the rate of return of riskfree assets and it is identified as the average of the ten-year Government bonds of the reference country.

"Enertad" (Italy) business combination
With reference to the values connected with Authorisations and preliminary agreements:

  • the Cash Generating Unit (CGU) matching the individual wind farms, on which the capital gains were allocated, were identified;
  • in order to determine the recoverable value, in terms of value in use, the present value of cash flows from operating activities associated with the CGU for the first twenty years of operation of the farms was estimated;
  • expected changes in sales prices and trends in direct costs during the period that were assumed for the calculation were determined on the basis of past experience, adjusted for future market expectations;
  • a discount rate equal to the industry WACC (6.58%) was used to compute the present value of expected cash flows;
  • no terminal value was assumed beyond the explicit forecast period, in line with the methodology followed to allocate the purchase price.

"ERG Eolica Campania and ERG Eolica Adriatica" (Italy) business combination
The value of Goodwill was determined by identifying two Cash Generating Unit (CGU) connected with the wind farms on which goodwill is allocated, i.e. those of ERG Eolica Adriatica and ERG Eolica Campania.
In order to determine the recoverable value, in terms of value in use, the present value of cash flows from operating activities associated with the CGU for the first twenty years of operation of the farms was estimated.
A discount rate equal to the industry WACC (6.58%) was used to compute the present value of expected cash flows.
A terminal value was also estimated for each wind farm included in the CGU, determined as a perpetuity with a growth rate (g) of zero. The terminal value thus obtained was conservatively reduced by 50%.

"EnerFrance" (France) business combination
With reference to the values connected with Authorisations and preliminary agreements:

  • the Cash Generating Unit (CGU) matching the individual wind farms, on which the capital gains were allocated, were identified;
  • in order to determine the recoverable value, in terms of value in use, the present value of cash flows from operating activities associated with the CGU for the first twenty years of operation of the farms was estimated;
  • expected changes in sales prices and trends in direct costs during the period that were assumed for the calculation were determined on the basis of past experience, adjusted for future market expectations;
  • a discount rate equal to the industry WACC (5.13%) was used to compute the present value of expected cash flows;
  • no terminal value was assumed beyond the explicit forecast period, in line with the methodology followed to allocate the purchase price.

"LUKERG Renew" (Bulgaria and Romania) business combination
With reference to the value of the equity investment in LUKERG Renew:

  • the Cash Generating Unit (CGU) matching the individual wind farms, on which the capital gains were allocated, were identified;
  • in order to determine the recoverable value, in terms of value in use, the present value of cash flows from operating activities associated with the CGU for the first twenty years of operation of the farms was estimated;
  • expected changes in sales prices and trends in direct costs during the period that were assumed for the calculation were determined on the basis of past experience, adjusted for future market expectations;
  • a discount rate equal to the industry WACC (7.86% for Bulgaria and 8.46% for Romania) was used to compute the present value of expected cash flows;
  • a terminal value was also estimated for each wind farm included in the CGU, determined as a perpetuity with a growth rate (g) of zero. The terminal value thus obtained was conservatively reduced by 50%.

"ERG Wind" (Italy and Germany) business combination
With reference to the values connected with Authorisations and preliminary agreements:

  • two Cash Generating Units (CGU) were provisionally identified, consistently with the methodology used to determine the purchase price, coinciding with the CGU that comprises the wind farms located in Italy and the CGU that comprises the wind farms located in Germany, on which the capital gains indentified when accounting for the acquisition were allocated;
  • in particular within the CGU in Italy, the capital gains were allocated with reference to each point of sale of the energy to the national grid, grouping the related wind farms connected to the same point of sale;
  • in order to determine the recoverable value, in terms of value in use, the present value of cash flows from operating activities associated with the CGU for the first twenty years of operation of the farms was estimated;
  • expected changes in sales prices and trends in direct costs during the period that were assumed for the calculation were determined on the basis of past experience, adjusted for future market expectations;
  • a discount rate equal to the industry WACC (6.58% for Italy and 5.09% for Germany) was used to compute the present value of expected cash flows;
  • no terminal value was assumed beyond the explicit forecast period, in line with the methodology followed to allocate the purchase price.

The goodwill acquired in the "ERG Wind" business combination was allocated, at the acquisition date, to the cash generating units from which benefits connected with the combination are expected; consequently, the same Cash Generating Units as those selected to determine the recoverable value of the Permits and preliminary agreements.
In order to determine the recoverable value, in terms of value in use, the present value of cash flows from operating activities associated with the CGU for the first twenty years of operation of the farms was estimated.
A discount rate equal to the industry WACC (6.35% for Italy and 5.09% for Germany) was used to compute the present value of expected cash flows.
With regard to the terminal value, consistently with the methodology used upon determining the purchase price, an extension of the explicit forecast period from twenty to twenty-five years was considered, assuming the increase of maintenance costs in support of said extension.
Lastly, with reference to the company ERG Renew Operations & Maintenance, dedicated to the operation and maintenance of the wind farms of ERG Wind, no impairment test was carried out, because the company was acquired in the final part of the year (please refer to the paragraph Acquisition of ERG Renew Operations & Maintenance).
Group Management has deemed that the assumptions adopted to identify the recoverable value of tangible assets, intangible assets and goodwill connected with the "Renewable Energies" business are reasonable, and no impairment emerged on the basis of the aforementioned assumptions.
Lastly, the value in use of the different CGUs that characterise and comprise the "Renewable Energies" business is determined according to measurement parameters that are extraneous from the logic of negotiation; instead, it is based on industry parameters that, as such, lead to a definition of value that takes on a distinct meaning from the concept of "price".

Sensitivity analysis
The result of the impairment test derives from information available to date and from reasonable estimates on future changes in the following variables: wind strength, energy price and interest rates.
The Group took into account the aforesaid uncertainties in processing and defining the basic assumptions used to determine the recoverable value of the capital gains allocated to the "Renewable Energies" segment and it also carried out a sensitivity analysis on the recoverable value of the various CGUs: this analysis assumed that total revenues from energy sales (i.e., energy remuneration and generation) could undergo upward or downward fluctuations, to an extent that can be estimated at 5% relative to the values estimated for the Plan.

If revenues were to decline by 5%, persisting throughout the time interval of the plan, the value of Goodwill would decrease by approximately EUR 8 million and the value of the Assets would decrease by approximately EUR 6 million. Lastly, a 0.5% increase in the discount rate would also have led to an impairment amounting to EUR 6 million of Goodwill allocated to the "Renewal Energies" CGU.
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 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 noncurrent assets in the Consolidated Financial Statements.

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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