Management report

Significant events during the year

Closing the exercise of the put option on the final 20% equity
investment in ISAB S.r.l.

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.

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 (indirectlyheld 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 Grid Operator (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.

Inclusion of Unicredit among ERG Renwe shareholders

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.

Acquisition of IP Maestrale (Now Called ERG Wind)

On 13 February 2013, ERG, through its subsidiary ERG Renew, closed the agreement with International Power Consolidated Holding Ltd (100% GDF SUEZ) for the 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 with an installed capacity of 636 MW, of which 550 MW in Italy and 86 MW in Germany. 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, 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 largest ten in Europe. The enterprise value of the acquisition is EUR 859 million, i.e. approximately EUR 1.35 million per installed MW. The provisional price for the equity at the closing of the transaction was EUR 8.2 million for 80% of the share capital of IP Maestrale. The agreements prescribe a put and call option on the remaining 20% of the capital, which may be exercised no earlier than three years after the date of closing. The farms are already entirely financed with non-recourse Project Financing with maturity in December 2022, issued by a group of primary Italian and international banks. 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. The high quality assets have a producibility of approximately 2,000 hours/year, above the national average. In July, 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.

Refining & Marketing

On 20 December 2013, a settlement agreement was signed to end the dispute with Versalis S.p.A. (formerly, Polimeri Europa S.p.A.) for compensation of damages allegedly ascribable to the fire of 30 April 2006 in the Priolo Refinery. The settlement entailed the payment, by ERG S.p.A. to Versalis (which also receives it on behalf of ENI Insurance and of the related reinsurers), of a comprehensive amount of EUR 32 million, thereby settling and extinguishing any and all claim or right which Versalis S.p.A., as well as ENI Insurance and the reinsurers, have or may put forth. In view of said settlement, Generali recognised EUR 16 million in favour of ERG S.p.A.

LUKERG Renew

On 20 June 2013  LUKERG Renew, a joint venture of ERG Renew (100% ERG) and LUKOILEcoenergo entered into two agreements with Vestas for the acquisition of 100% of two already operational wind farms (total installed capacity, 84 MW): Gebeleisis in Romania and Hrabrovo in Bulgaria. The Gebeleisis wind farm is in the region of Galati (Romania), fully operational since February 2013, has a total installed capacity of 70 MW (35 WTG Vestas V90-2 MW) and an expected average annual generation of over 165 GWh. The enterprise value of the acquisition is EUR 109.2 million (approximately EUR 1.56 million per MW). The Hrabrovo wind farm is in the region of Dobrich (Bulgaria); it has been fully operational since March 2012 and it has a total installed capacity of 14 MW (7 WTG Vestas V90-2 MW) and an expected average annual generation of over 34 GWh. The enterprise value of the acquisition is EUR 17.6 million (approximately EUR 1.26 million per MW). The transaction strengthens the strategic partnership between ERG Renew and Vestas and it enables ERG significantly to speed up the achievement of the growth targets in Eastern Europe set out in the business plan for 2015. Moreover, as a result of these acquisitions and of the construction of the wind farm in Romania, ERG Renew's installed capacity abroad has reached approximately 20% of the entire portfolio. With regard to the Gebeleisis wind farm, the transaction was closed on 28 June 2013 , whereas the closing for the Hrabrovo farm took place on 5 September 2013. The electricity generated by the two new wind farms will avoid approximately 77 thousand tonnes of CO2 atmospheric emissions per year. On 7 October 2013 LUKERG Renew, through the subsidiary LUKERG Bulgaria, signed the Project Financing agreement with Raiffeisen Bank International as Mandated Lead Arranger (MLA) for the partial coverage of the acquisition of its own Hrabrovo wind farm in Bulgaria, with installed capacity of 14 MW. The loan, for a total amount of EUR 10.6 million and 5 year maturity, was integrated within the project financing signed in June 2012, also with Raiffeisen Bank International, for the acquisition of a wind farm in Bulgaria with installed capacity of 40 MW.

Renewable energy sources

On 15 January 2013, ERG won the tender that will enable it to benefit from twenty-year incentives for a 34 MW wind farm in the municipality of Palazzo San Gervasio (PZ), with a 2.5% bidding discount. On 15 January 2013 , ERG won the tender that will enable it to benefit from twenty-year incentives for a 34 MW wind farm in the municipality of Palazzo San Gervasio (PZ), with a 2.5% bidding discount. On 22 March 2013  ERG Eolica Amaroni S.r.l. (100% ERG Renew) executed the project financing loan agreement for its own wind farm located in the Catanzaro province, subsequently commissioned in the second half of 2012, with an installed capacity of 22.5 MW. The agreement, for a total amount of EUR 35 million and a term of validity of 14 years, was signed by the Mandated Lead Arrangers (MLA) ING Bank and Crédit Agricole CIB, which also acts as agent bank, and Cariparma Crédit Agricole CIB as account bank. On 31 October 2013  ERG Renew closed with I.V.P.C. Service, indirectly controlled by Maluni, the acquisition of the entire capital of the company, dedicated to the operation and maintenance of ERG Wind's Italian wind farms. The Shareholders' Meeting of the company, held on the same date, resolved to change the name of the company to ERG Renew Operations & Maintenance S.r.l. and to move the registered office to Genoa. As a result of the transaction, 136 persons joined the ERG Group: they are mostly technical personnel, highly specialised in the maintenance and operation of wind farms, and they are added to the 42 persons acquired through the investment in ERG Wind (formerly IP Maestrale)thus further strengthening the ERG Renew organisation in the South of Italy, where most wind farms are concentrated. While the economic value of the transaction – amounting to approximately EUR 10 million in terms of Enterprise Value – is modest, nonetheless it has great strategic significance, because it enables markedly to enhance ERG Renew's competencies, necessary to manage, in a direct and integrated manner, the operations of the wind power business, in a sector with mature infrastructures. Through ERG Renew O&M, major benefits are expected in terms of cost optimisation and efficiency improvement in the operation of ERG Wind's farms, which will then be progressively extended also to ERG Renew's other wind farms, in Italy and abroad.

New organisational model 

On 3 December 2013  the company ERG Services S.p.A., with its registered office in Genoa, Via De Marini 1, was incorporated. The share capital of ERG Services S.p.A., i.e. EUR 120,000 was fully subscribed and paid in by ERG S.p.A. On 20 December 2013  the Extraordinary Shareholders' Meeting of ERG Services S.p.A. voted to increase the share capital from EUR 120,000 to EUR 1,200,000, fully subscribed through the transfer of a business unit, with effect as at 1 January 2014. The transferred business unit consists mostly of some of the service activities carried out by ERG S.p.A. also in favour of the companies of the ERG Group and of the personnel and assets employed in the performance of the aforesaid activities. On 3 December 2013  the company ERG Supply & Trading S.p.A., with its registered office in Genoa, Via De Marini 1, was incorporated. The share capital of ERG Supply & Trading S.p.A., i.e. EUR 120,000 was fully subscribed and paid in by ERG S.p.A. On 20 December 2013  the Extraordinary Shareholders' Meeting of ERG Supply & Trading S.p.A. voted to increase the share capital from EUR 120,000 to EUR 1,200,000, fully subscribed through the transfer of a business unit, with effect as at 1 January 2014. The transferred business unit consists of the petroleum commodity trading activities of the Oil Business Unit of ERG S.p.A. and of the personnel and assets employed in the performance of the aforesaid activities.

TotalErg investigation

On 3 December 2013, at the offices of TotalErg S.p.A. in Rome and Milan and of ERG S.p.A. in Genoa, the Tax Police of Rome executed the local search and seizure warrant issued by the Prosecutor's Office at the Court of Rome within a criminal proceeding initiated against certain officers of ERG S.p.A. and of TotalErg S.p.A. (company resulting from the merger by incorporation of Total Italia S.p.A. into ERG Petroli S.p.A.). The investigation – according to the charge formulated in the aforementioned warrant – pertains to alleged tax irregularities referred to the year 2010, allegedly carried out by recording, in the accounts of TotalErg S.p.A., invoices for alleged non-existing transactions involving the purchase of crude oil, issued for a total amount of EUR 904 million by Bermudabased companies belonging to the Total group, whose costs were included in the tax returns of TotalErg S.p.A. and reported by the consolidator ERG S.p.A. in the national tax consolidation return of the ERG Group. As soon as it was informed of the ongoing investigation, the Company started an intense audit activity, aimed at thoroughly reconstructing the facts and the transactions in question, and at carefully analysing the internal control system. ERG deems that it has always operated in full compliance with current laws and regulations and therefore it is confident that its complete innocence with respect to the facts under investigation will be ascertained. As at the date of authorisation to the publication of these Financial Statements, the investigation is still ongoing and ERG S.p.A. and TotalErg S.p.A. have not been served with any notices of a tax-related nature in connection with the aforesaid investigation.

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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