Consolidated financial statement

Equity investment in TotalErg

ERG S.p.A. holds a 51% investment in the TotalErg S.p.A. joint venture, incorporated in 2010 through the merger of Total Italia S.p.A in ERG Petroli S.p.A.
TotalErg S.p.A. is one of the primary operators in the integrated downstream market with a network of over 3,000 sales outlets and it is also active in the refining and logistics business.
In the Consolidated Financial Statements at 31 December 2013 the value of the equity investment amounted to EUR 258 million and it is measured at equity. It should be specified that the value at equity also includes a capital gain (approximately EUR 65 million) recognised on the occasion of the aforesaid integration.
In 2012, TotalErg launched a project for the transformation of the Raffineria di Roma into a logistical facility and a plan to rationalise the sales network. Moreover, during 2012 critical elements were noted, caused by significant volatility, particularly accentuated since the second quarter of 2012, of the Oil scenario and of the reference market in which the same CGU operates. This scenario volatility had negative effects, specifically both on the final results of the investee and on the expected profitability forecasts.
On the occasion of the 2012 Financial Statements, the value of the equity investment was tested in consideration of the critical issues commented above. The impairment test consequently carried out had shown that the recoverable value of the equity investment was in line with its carrying value in the Financial Statements as at 31 December 2012.
For the purposes of these Financial Statements, critical elements were noted, caused by the volatility of the oil scenario and by the performance of the reference market where TotalErg operates. These elements of uncertainty had a negative impact on the results of 2013.
In view of the persistence of said critical elements, the value of the equity investment was also tested in preparing these financial statements.
To conduct this test, an independent expert was appointed in January and conducted the analysis using the draft Plan already prepared by the TotalErg management for the shareholder ERG S.p.A.
The assumptions contained in such documents, although still in draft form and not yet approved by the Board of Directors of TotalErg, are deemed by Group Management to be reasonable and usable for the purposes of the impairment test.
For the purposes of the test, the CGU consists of TotalErg S.p.A. and by its investees, subsidiaries and associates.


The measurement was performed using the following criteria and assumptions:

  • unlevered Discounted Cash Flow on 6 years of explicit projections plus a terminal value1 calculated applying a multiple between 4.0x and 5.0x (in line with the market multiples observed in the past 10 years in the Integrated Downstream business) to the 2019 EBITDA of TotalErg;
  • the adopted discount rate is TotalErg's WACC (7.3%) provided by ERG's management, which is substantially in line with the WACC calculated on the basis of market parameters (6.9%);
  • the measurement was carried out on the basis of the draft consolidated economic-financial plan of TotalErg S.p.A., whose scope of consolidation includes TotalErg, Eridis, TotalGaz, Restiani, Guazzotti, Gestioni Europa and Raffineria di Roma;
  • the economic-financial plan takes into account updates that rely on higher profitability in terms of EBITDA. These updates are deemed reasonably probable by the Management.

The impairment test described above showed an excess carrying amount of the TotalErg equity investment in the Consolidated Financial Statements relative to its recoverable value; in particular the recoverable value, estimated according to the measurement paradigm, was slightly higher than ERG's share of the consolidated equity of the investee. The impairment, amounting to EUR 58 million, was allocated to write down the value of the equity investment with consequent decrease in the capital gain attributable to the business combination described above. The write-down is recognised in the income statement.

Sensitivity analysis

The result of the impairment test is derived from the information available to date and from the reasonable estimates on the evolution of variables tied to the expected margins, in particular with changes in the reference economic environment and in the discount rates.
In particular, sensitivity analyses were conducted on the basis of changes in the discount rate and in the EV/EBITDA multiples applicable to the EBITDA of the last year of the explicit period.
The analyses showed that:

  • a 0.5% increase in the discount rate would entail a greater write-down of the equity investment, by approximately EUR 10 million;
  • a decrease in the EV/EBITDA multiple from 4.5x to 4.0x would entail a greater write-down of the equity investment, by approximately EUR 33 million. The above analyses confirm the sensitivity of the assessments of the recoverability of the equity investment 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.

1  To calculate the terminal value, the perpetuity method was not used, because it is not among the usual market practices for TotalErg's reference industry.

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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