Management report

Risk and uncertainties

The ERG Group started implementing an integrated risk management model, based on a systematic approach to identify the foremost risks and to assess their potential negative effects and appropriate mitigation actions to be taken. The model is defined according to international standards and best practices and it is an integral part of the Internal Control and Risk Management System.

Within this context, the main risks identified, monitored and managed by ERG were:

  • Market risk;
  • Liquidity risk;
  • Risks related to industrial accidents;
  • Regulatory risk;
  • Credit risk;
  • Risk connected with climatic events;
  • Risk relating to medium and long term loan agreements;
  • Health, Safety and Environment (HSE) Risk.

Market risk 

Market risk consists of the risks deriving from fluctuations of the exchange rate, in the interest rate and in the prices of petroleum commodities and electricity.

Currency exchange rate risk

The currency exchange rate risk is the risk connected with fluctuations of the exchange rate of various currencies versus the Euro reference currency. Such fluctuations can have considerable impacts on the income of the company. The net cash flows generated by the company in currencies other than the Euro constitute the exposure to exchange rate risk. To reduce the volatility of these exposures, hedging transactions can be carried out.
Use of derivative instruments is authorised exclusively if there is an underlying asset, to pursue the reduction in the economic impacts tied to the volatility of the rates on the financial market and it is monitored by the Risk Committee. Transactions in derivatives having speculative purposes are not allowed in the ERG Group.

Interest rate risk

The interest rate risk identifies the change in interest rates that may cause fluctuations in the financial expenses of the ERG Group.
The ERG Group uses different forms of financing to cover the requirements of its industrial activities, in particular with regard to the thermoelectric and renewable energies businesses. Any changes in interest rates can cause unfavourable changes in the cost of financing. Consistently with its market risk management policies, the ERG Group uses derivative financial instruments to hedge interest rate fluctuations. In particular, interest rate risk is hedged by using contracts such as Interest Rate Swaps.
Use of derivative instruments is authorised exclusively if there is an underlying asset, to pursue the reduction in the economic impacts tied to the volatility of the rates on the financial market and it is monitored by the Risk Committee. Transactions in derivatives having speculative purposes are not allowed in the ERG Group.

Price Risk (petroleum commodities and electricity)
Petroleum commodity price risk consists of unexpected fluctuations in the prices of raw materials, of finished products and of the procurement of services.
The current risk management policy for the price of petroleum commodities prescribes the use of instruments and methods that can achieve the average monthly prices reported in Platts quotations both for raw materials and finished products. To mitigate the price risk and pursue its management policies, the ERG Group uses derivative instruments such as Futures and Swaps on commodities. 
The current policy for managing the commodity price risk of electricity calls for the independent monitoring of the contribution margin and of the Profit at Risk (P@R) limits by an independent function, as well as hedging activities aimed at assuring the hedging of the margins (PUN - cost of fuel).

Liquidity risk

Liquidity risk consists of the impossibility to fulfil payment commitments because of difficulties in obtaining funds or liquidating assets on the market. The consequence is a negative impact on income if the company is forced to incur additional costs to meet its commitments or, as an extreme consequence, a situation of insolvency that jeopardises the viability of the company as a going concern.
Risk management aims to define, within the planning process, a financial structure that, consistently with the business targets and with the limits defined by the Board of Directors, assures an adequate liquidity level for ERG, minimising the related opportunity cost and maintaining a balance in terms of debt maturity and composition.
The ERG Group assures adequate coverage of its financial requirements through cash flow generation and the availability of diversified financing sources.

Risk related to industrial accidents

The risk of industrial accidents consists of possible damages to the ERG Group's industrial production plants, linked to fires, explosions and other unexpected and dangerous factors.
Accidents of a certain magnitude could have a negative impact on the operations, equity and financial position of the Group, which mitigates such risks through suitable plant management policies aimed at achieving high levels of safety and operating excellence in
line with best industrial practices.
Furthermore, ERG transfers its own industrial risk to third parties via the insurance market, thereby providing a high level of protection for its facilities, even in the event of an interruption of activity.
As regards production processes, particular attention is paid to the prevention and control of the related risks, through the implementation of risk assessments, business impact analyses and a business continuity management activity, with the aim of ensuring the
operational continuity of industrial production plants.

Regulatory risk 

The regulatory risk consists of changes in local, national and international regulations which may affect the different businesses where the ERG Group operates. These regulations pertain, inter alia, to the sale of commodities and electricity, technical-operational compliance in the construction, commissioning, operation and disposal of the plants and environmental protection. The constant evolution of this reference regulatory environment may affect the business performance of the ERG Group. In this regard, the Business Units and the dedicated functions of the Parent Company constantly monitor and engage in a constructive dialogue with international, national and local institutions, in order promptly to assess regulatory changes as they occur and to act to minimise the economic impact deriving from them.

Particularly noteworthy for the year 2013 was the uncertainty surrounding the as-yet undefined regulatory framework with regard to the avoided cost component of fuel (CEC).
The better to estimate the CEC for 2013, the methodological criteria used are those indicated in AEEG Opinion no. 503/2013, which contains the proposal to the Minister of Economic Development for the definition of the procedures for updating the CEC and which includes the provisions of the "To-Do Decree" (Italian Law Decree no. 69/2013) as converted into Law no. 98 of 9 August 2013. This estimate was made while awaiting the formalisation of the calculation procedures by a dedicated Decree of the Ministry of Economic Development.

Credit risk

Credit risk consists of the possibility of default and/or of the deterioration in the creditworthiness of a counterparty.
The policy of the ERG Group for the choice of counterparties for both the industrial business and financial transactions requires high credit ratings.
Credit risk is mitigated through appropriate analyses and evaluations of each individual counterparty, assigning to each counterparty an internal credit rating (Internal Rating Based approach), and it is managed through appropriate risk transfer instruments. The assignment of the rating category provides an estimate of the probability of default by a particular counterparty and for each level, the maximum credit to be granted is indicated; it is then carefully monitored and it must never be exceeded. The Loans and Credits Committee is responsible for monitoring exposure to credit risk.

Risks connected with climatic events

Risks connected with climatic events entail the Company's exposure to the volatility of production with particular reference to the production of energy from renewable sources.
The characteristics of the energy sources used in the renewable energies segment entail a production characterised by high variability, connected with the climatic conditions of the sites where the wind farms are located. In particular, since the generation of electricity from wind sources is linked to "non programmable" climatic factors and it is characterised by seasonal phenomena in the course of the year, to manage said risks the ERG Group is diversifying the geographic location of the plants in order to minimise their impacts.

Risk relating to medium and long term loan agrrements

The ERG Group uses medium and long term borrowing (mainly, project financing) as a system for financing its development initiatives.
These loan agreements contain certain limitations to the use of financial resources and they prescribed that, if the covenants are not fulfilled and no remedy is provided within the set deadlines, the lending institutions shall be entailed, inter alia, to declare the acceleration clause as having come into effect on the borrowing and to terminate the agreement, with the consequent obligation to repay the loan immediately within the set date and with possible prejudicial effects on the Company's economic and financial results. The Company periodically monitors compliance with agree indicators and clauses.

Health, safety and enviromental (HSE) risk

The HSE Risk is mainly tied to the operation of industrial assets having an impact on environmental and workers' health and safety issues.
The ERG Group has adopted high quality, highly reliable management systems, safety standards and operating practices, to assure compliance with environmental regulations and safeguard the environment and employees. In particular, the Companies associated with significant HSE risk have implemented An OHSAS 18001 and ISO 14001 certified management system, also with the purpose of enabling the Organisation and Management models to exonerate the company from administrative liability.

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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