Management report

The strategy

The strategy pursued by ERG aims to consolidate the Group's current positioning in renewable energy sources in Italy and to continue its growth in wind power abroad, to optimise the operations and cash flow generation of thermoelectric plants, to rationalise the TotalErg Network, within an environment characterised by the profound changes taking place in the segment.

  • Power - Renewable Energy: ERG's strategy aims to continue the path to growth in the segment through the subsidiary ERG Renew, with the goal of consolidating its position as the leading operator in the domestic market and of accelerating growth abroad. In recent years, ERG Renew has significantly increased its installed capacity, which rose from approximately 200 MW in 2009 to over 1,300 MW at present, achieving this growth both through the acquisition of assets and through the construction of new plants. In particular, with regard to foreign
    countries, where approximately 20% of installed capacity is located, ERG's strategy aims to accelerate on the path towards the growth and geographic diversification of its asset portfolio, both through the investments made by LUKERG in Eastern Europe (where ERG's share of installed capacity in Romania and Bulgaria at the end of 2013 is 103 MW), and through the assessment of potential new investments in other countries. The size attained, the integration of IP Maestrale into ERG Renew and the in-sourcing of O&M activities, will enable ERG to obtain important benefits in the management of its assets, both in terms of efficiency and cost control and of operating performance.

 

  • Power - Thermoeletric: ERG continues to pursue a strategy of maximising the exploitation of its power plants, i.e. the IGCC plant of ISAB Energy (51% ERG) and the CCGT plant of the ERG Power subsidiary. With a view to best exploit its asset portfolio, ERG has entered into two important agreements that will lead in 2014, provided that certain conditions precedent are fulfilled, to the acquisition of the remaining 49% equity investment in Isab Energy, to the early termination of the CIP 6 agreement and to the subsequent sale of the plant, with a significant further strengthening of the Group's financial structure.
    With regard to the CCGT plant of ERG Power, the strategy aims at maximising and stabilising cash flows, through the agreement with IREN for the supply of 2 TWh of electricity per year for six years from 1 January 2012 onwards, the long-term agreements for the supply of utilities to the Priolo site and the recent participation in the Dispatching Services Market (MSD) with a significant contribution on margins. Also in light of these factors, the utilisation factors and the profitability of the ERG Power plant are well above the average for plants of this kind.

 

  • Refining & Marketing: In Integrated Downstream, ERG's strategy is aimed at improving its competitive position to boost its long-term profitability and sustainability, in an environment that is challenging both because of the very severe contraction in demand and of the inefficient structure of the Country's fuel distribution network, where average dispensed quantities per filling station are far smaller than the average of the main European countries. Against this backdrop, ERG, through the joint venture TotalErg, intends to rationalise and strengthen its fuel distribution network, also through greater station automation. At the same time, in addition to seeking the maximum possible efficiency in terms of cost reduction, the strategy also aims to rationalise capital use through a supply model, that is more oriented towards purchasing petroleum products on the cargo market to exploit the excess supply in the Mediterranean Area. In view of this situation, in 2012 TotalErg shut down the Rome Refinery and launched a project to reconvert the site into a major logistical hub.
    In Coastal Refining ERG, consistently with its strategy, sold the remaining 20% equity investment in ISAB S.r.l. in 2013. However, to leverage its significant capital of skills and relationships matured in the segment, ERG will continue to trade in crude oils and products through its subsidiary ERG Supply & Trading, to exploit profit opportunities on the market for these commodities, within the scope of highly restrictive risk management operating policies.

 

The strategy

The strategy pursued by ERG aims to consolidate the Group's current positioning in renewable energy sources in Italy and to continue its growth in wind power abroad, to optimise the operations and cash flow generation of thermoelectric plants, to rationalise the TotalErg Network, within an environment characterised by the profound changes taking place in the segment.

  • Power - Renewable Energy: ERG's strategy aims to continue the path to growth in the segment through the subsidiary ERG Renew, with the goal of consolidating its position as the leading operator in the domestic market and of accelerating growth abroad. In recent years, ERG Renew has significantly increased its installed capacity, which rose from approximately 200 MW in 2009 to over 1,300 MW at present, achieving this growth both through the acquisition of assets and through the construction of new plants. In particular, with regard to foreign
    countries, where approximately 20% of installed capacity is located, ERG's strategy aims to accelerate on the path towards the growth and geographic diversification of its asset portfolio, both through the investments made by LUKERG in Eastern Europe (where ERG's share of installed capacity in Romania and Bulgaria at the end of 2013 is 103 MW), and through the assessment of potential new investments in other countries. The size attained, the integration of IP Maestrale into ERG Renew and the in-sourcing of O&M activities, will enable ERG to obtain important benefits in the management of its assets, both in terms of efficiency and cost control and of operating performance.

 

  • Power - Thermoeletric: ERG continues to pursue a strategy of maximising the exploitation of its power plants, i.e. the IGCC plant of ISAB Energy (51% ERG) and the CCGT plant of the ERG Power subsidiary. With a view to best exploit its asset portfolio, ERG has entered into two important agreements that will lead in 2014, provided that certain conditions precedent are fulfilled, to the acquisition of the remaining 49% equity investment in Isab Energy, to the early termination of the CIP 6 agreement and to the subsequent sale of the plant, with a significant further strengthening of the Group's financial structure.
    With regard to the CCGT plant of ERG Power, the strategy aims at maximising and stabilising cash flows, through the agreement with IREN for the supply of 2 TWh of electricity per year for six years from 1 January 2012 onwards, the long-term agreements for the supply of utilities to the Priolo site and the recent participation in the Dispatching Services Market (MSD) with a significant contribution on margins. Also in light of these factors, the utilisation factors and the profitability of the ERG Power plant are well above the average for plants of this kind.

 

  • Refining & Marketing: In Integrated Downstream, ERG's strategy is aimed at improving its competitive position to boost its long-term profitability and sustainability, in an environment that is challenging both because of the very severe contraction in demand and of the inefficient structure of the Country's fuel distribution network, where average dispensed quantities per filling station are far smaller than the average of the main European countries. Against this backdrop, ERG, through the joint venture TotalErg, intends to rationalise and strengthen its fuel distribution network, also through greater station automation. At the same time, in addition to seeking the maximum possible efficiency in terms of cost reduction, the strategy also aims to rationalise capital use through a supply model, that is more oriented towards purchasing petroleum products on the cargo market to exploit the excess supply in the Mediterranean Area. In view of this situation, in 2012 TotalErg shut down the Rome Refinery and launched a project to reconvert the site into a major logistical hub.
    In Coastal Refining ERG, consistently with its strategy, sold the remaining 20% equity investment in ISAB S.r.l. in 2013. However, to leverage its significant capital of skills and relationships matured in the segment, ERG will continue to trade in crude oils and products through its subsidiary ERG Supply & Trading, to exploit profit opportunities on the market for these commodities, within the scope of highly restrictive risk management operating policies.

 

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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