Genoa 5 August 2011-The Board of Directors of ERG S.p.A. met yesterday to examine the Half-Yearly Financial Report as at 30 June 20114. The figures for the second quarter, which are not subject to approval by the Board of Directors, nor to independent audit, are to be considered pro forma numbers and are presented here for the sake of the continuity and completeness of the information provided.
Consolidated adjusted financial results at replacement cost
Performance highlights (million Euro)
- 20 %
Group net result
Net financial debt (million Euro)
Adjusted net financial debt6 (million Euro)
In the words of Alessandro Garrone, CEO of ERG: “the reduction in the results recorded in the half-year compared to the same period in the previous year was mainly due to the heavy weakness of the situation of the refining markets, which was worsened by the persistent crisis in Libya. The results in the thermoelectric sector remained stable, even if they were slightly less than those recorded in the previous year, also due to the higher restrictions on the national electricity transmission grid. On the contrary, the renewables sector showed sharp growth, mainly thanks to the contribution from the assets acquired from IVPC last year and to the partial start of operations of the Fossa del Lupo wind farm in May. In the second half of the year, the R&M and P&G divisions are expected to record results less than those recorded in the previous year due to the persistent unfavourable situation of the refining market and for the scheduled shutdown for maintenance at the ISAB Energy plant. On the contrary, the renewables sector is expected to show a further increase, also thanks to the contribution from the acquisition, which is being completed, of IVPC Power 3, a company that owns five wind farms for an overall installed capacity of 112 MW, as well as to the full contribution from the Fossa del Lupo wind farm and to the entry into operation of the Ginestra wind farm for an overall capacity of 138 MW”.
Second quarter of 2011
Consolidated financial results
Consolidated adjusted EBITDA at replacement cost came to €60 million compared to €84 million posted in the same period of 2010.
- Refining & Marketing: adjustedEBITDA at replacement cost, amounting to €21 million, compared to €29 million in the same period of 2010, was penalised by the persistent unfavourable situation in the refining sector.
- Power & Gas: EBITDA at replacement cost came to €37 million, compared to €59 million in the second quarter of 2010. The decrease was attributable to the restrictions on the national electricity transmission grid during the period, to a less favourable situation in the electricity market and to the write-down of receivables for €6 million. It should be noted that the result for the second quarter of 2010 included the insurance refund of €18 million relating to the accident that occurred at ISAB Energy in 2008.
- Renewables: EBITDA at replacement cost came to €12 million, compared to €5 million in the second quarter of 2010. The increase was mainly due to the higher production of electricity following the contribution from ERG Eolica Adriatica, which was acquired on 23 July 2010, and the partial entry into operation of the Fossa del Lupo wind farm (with a power of 62.5 MW into commercial operation at 30 June 2011).
The consolidated adjusted EBIT at replacement cost came to €3 million (€32 million in the second quarter of 2010).
The Group net result at replacement cost posted a negative value of €8 million (+€17 million in the second quarter of 2010).
First half of 2011
Consolidated financial results
Adjusted EBITDA at replacement cost came to €108 million compared to €135 million posted in the first half of 2010.
- Refining & Marketing: adjusted EBITDA at replacement cost, which was negative by €2 million (+ €29 million in the first half of 2010), was negatively affected by a particularly adverse situation in the refining sector and by the planned shutdown for maintenance of the ISAB Refinery.
- Power & Gas: EBITDA at replacement cost came to €102 million compared to €108 million in the same period of 2010, for the same reasons reported in the comment on the quarter. It should be remembered that the result of the first half of 2010 included the insurance refund of €45 million relating to the accident that occurred at ISAB Energy in 2008.
- Renewables: EBITDA at replacement cost was €26 million, higher than the result for the first half of 2010 (€15 million), for the same reasons reported in the comment on the quarter.
The consolidated adjusted EBIT at replacement cost was negative by €8 million (+ €33 million in the first half of 2010), after amortisation and depreciation of € 116 million (€101 million in the first half of 2010).
The Group net result at replacement cost was negative by €40 million compared to the positive result of €2 million in the first half of 2010.
Net financial debt totalled €706 million, down by €17 million compared to 31 December 2010, mainly following the collection of the fees for the transfer of 11% of ISAB, which was offset by the investments made in the period, by the purchase of the minority interest of ERG Renew following the completion of the Take-Over Bid, by the payment of dividends and by the sharp trend in the working capital.
The adjusted net financial debt, including ERG’s share of the net financial position of the ISAB and TotalErg joint ventures, amounted to €1,025 million, down compared to 31 December 2010 (€1,082 million) for the same reasons described above.
Refining & Marketing*
Power & Gas
* Refining & Marketing investments include the ERG’s share of the investments made by ISAB S.r.l. and, from 1 October 2010, the share of the investments made by TotalErg S.p.A.
In the first half of 2011consolidated adjusted investments totalled €86 million (€149 million in the first half of 2010).
Refining & Marketing
- As regards Coastal Refining, in the first half of 2011, investments entered into production, including those that were made during the general shutdown carried out in the first quarter and that were aimed at boosting the output of diesel and distillates in general, as well as at improving efficiency and safety of the plants. In addition, works continued in relation to the programme of investments to further extend the useful life of the equipment, with specific reference to the Northern Plants site, as well as in relation to the further planned measures regarding Health, Safety and the Environment.
- As regards the Integrated Downstream segment, in the first half of 2011, investments were made for approximately €16 million, of which €14 million related to 51% of TotalErg and €2 million related to ERG Oil Sicilia (mainly for development activities). With reference to TotalErg, most investments in the period (about €10.5 million) concerned the Retail Network, mainly for development activities (new sales outlets, reconstructions, new agreements, the expansion of existing sales outlets, etc.).
- Power & Gas: during the first half of 2011, activities continued at the Northern Plant of ERG Power on the construction of a new water demineralisation plant to supply treated water for the processes of the Priolo site. At both the Northern Plant of ERG Power and the ISAB Energy plant, investments continued in the period which were aimed at increasing the operating efficiency and reliability of the plants, as well as in relation to the planned measures in the area of Health and Safety and the Environment. It is noted that the considerable reduction in investments compared to the same period in the previous year was due to the completion, during the first half of 2010, of the new ERG Power plant and to the reconstruction of ISAB Energy.
- Renewables: as regards the Ginestra wind farm (40 MW), the installation of 19 wind turbines (out of a total of 20) was completed and the farm will enter into operation in the second half of 2011.The construction of the Fossa del Lupo wind farm (97.5 MW compared to 90 MW as initially planned), even though it is behind schedule, was completed and the entire farm is expected to enter into commercial operation in the third quarter of 2011; as at 30 June 2011 25 wind turbines entered into commercial operation for an overall power of 62.5 MW. As regards the Greneville farm (20 MW), it is expected to obtain the relevant authorisation in the course of this year, behind the schedule that was initially expected, with the consequent postponement of the entry into operation, which was initially expected in 2011.
On 18 January 2011, Consob approved the document relating to the takeover bid promoted by ERG in relation to the whole of the ordinary shares representing the entire share capital of ERG Renew which are not held by ERG, including the notice issued by ERG Renew referred to in article 103, paragraph 3, of Legislative Decree no. 58 of 24 February 1998.
On 18 February 2011 ERG notified, after the conclusion of the period of the takeover bid promoted in relation to the whole of the ordinary shares of the entire share capital of ERG Renew which were not already held by it, that it had collected subscriptions for a total of 13,962,309 Shares, equal to 62.748% of the shares under the Bid and equal to 10.524% of the share capital of the Issuer, for a total counter-value of €13,543,439.73. During the period of subscription of the Bid, ERG also made purchases outside the Bid itself of a total of 952,629 shares corresponding to 0.718% of the Issuer’s share capital. Therefore, taking account of the shares subscribed under the Bid, the shares already owned at the start date of the Bid and those purchased outside the same, as at 18 February 2011 the Offeror held a total of 125,557,206 shares, equal to 94.641% of the share capital of the Issuer. In consideration of the above, ERG considered that the Bid was effective and, therefore, notified that it would purchase all the Shares subscribed under the Bid itself under the terms and conditions of the Offer Document.
On 24 May 2011 ERG S.p.A. announced, during the sell-out period within the take-over bid launched in relation to the total ordinary shares of the entire share capital of ERG Renew S.p.A. which were not already in its possession, that it had exceeded the 95% threshold of the aforesaid share capital.
On 27 May 2011 ERG S.p.A. notified the completion of the sell-out phase within the take-over bid launched in relation to the ERG Renew shares and the consequent achievement of a stake of 96.904% in the share capital of the latter.
On 7 June 2011, the ERG Renew shares were delisted from the Electronic Stock Exchange (Mercato Telematico Azionario)in order to complete the take-over bid launched by ERG S.p.A..
Transfer of 11% of ISAB S.r.l.
On 31 January 2011, the Board of Directors of ERG approved the exercise of the put option on a stake equal to 11% of ISAB S.r.l. The transaction falls within the scope of the agreement entered into with LUKOIL in 2008, which provided for the establishment of a joint venture for the joint management of the ISAB Refinery in Priolo (Sicily). The value of the transfer of the 11% stake in ISAB (excluding stock) to LUKOIL is €205 million, net of a reduction of €15 million, as required by the subsequent amendments to the initial agreement of 24 June 2008. Following the transaction, ISAB is 60% owned by LUKOIL and 40% owned by ERG. The Company continues to be managed by the two shareholders on the basis of the existing shareholders’ agreements with governance on a 50/50 basis as regards the main business decisions, and by virtue of an operating agreement which ensures its autonomy and operational independence.
1 April 2011 saw the closing of the transaction for the transfer of the 11% stake of ISAB S.r.l. subsequent to the exercise of the put option, with the payment of a temporary consideration of €241 million (including the value of the stock).
Other significant events
On 20 May 2011 ERG Renew and LUKOIL-Ecoenergo executed an agreement aimed at establishing a joint venture LUKErg Renew on a 50/50 basis, with registered office in Wien, as an instrument to cooperate in the renewables market in the Eastern European countries and in Russia.
On 21 June 2011 the Director and Vice-Chairman Pietro Giordano resigned from his office. The Director Alessandro Careri was co-opted to replace him.
On 23 June 2011 ERG S.p.A. notified that it had reached an agreement with Maluni S.r.l. (former IVPC S.a.s.) for the acquisition of the entire share capital of IVPC Power 3 S.r.l., a company that owns 5 wind farms, which became operational in the provincial districts of Avellino and Benevento in 2008, with a total installed capacity of about 112 MW. The value of the acquisition in terms of enterprise value is about €2.1 million per MW. ERG will pay the seller an equity consideration of €100 million, in addition to the repayment of an intra-group loan with a residual value of about €33 million as at 31 December 2010.
Significant events occurring after the end of the period
On 20 July 2011, following the delisting of the Company and the resignation of the Directors of ERG Renew S.p.A., the Shareholders’ Meeting of the same appointed a new Board of Directors chaired by Luca Bettonte who then replaced Pietro Giordano. On the same day, the Board of Directors appointed Massimo Derchi as the new CEO, who then replaced Francesco del Balzo.
On 28 July 2011 the decision-making Conference of Services (Conferenza di Servizi) of the Ministry of Environment approved the plan for the safety and reclamation of the ISAB Refinery, Southern Plants. On 2 August ISAB S.r.l. signed the settlement agreement with the Ministry of Environment within the Priolo Programme Agreement dated November 2008. The settlement agreement of about €30 million finally settled the age-old administrative litigation with the Ministry of Environment and made available the areas at the southern site for future developments.
On 4 August 2011 TotalErg, a joint venture between ERG and Total, signed a 5-year term loan agreement denominated in Euros and Dollars with a pool of leading Italian and foreign banks to finance the long-term development plan of the company. The loan, which is made up of a term credit line of €400 million and of a revolving credit line of €500 million, for a total of €900 million, is a senior loan and is not secured by collaterals, nor by guarantees on the part of the two shareholders.
Outlook on operations
It should be noted that actual results may materially differ from those disclosed, due to a variety of factors, including: future developments in the prices of crude oils, operating performance of plants, impact of regulations governing the oil and energy industry and the environment, other changes in business conditions and in the action of competitors.
Refining & Marketing
As regards Coastal Refining: we expect that the results for the sector will continue to be hit by the effects of the crisis in Libya with margins being negatively affected; however, higher levels than the exceptionally low levels recorded in the half-year. This was also due to some factors,as the slowdown in the economy in Europe (even if within a worldwide growth always driven by Far East and Middle East), the completion of maintenance activities in the North Sea and a second phase of maintenance at the refineries in Europe between September and October that should mitigate pressures on crude oil prices. However, it is expected that, as a whole, the results from the coastal refining segment will continue to be very weak.
As regards Integrated Downstream: in the Marketing division, profitability is expected to grow in the second half of 2011, compared to the first six months of the year, following the gradual implementation of the synergies linked to the joint venture, the improvement of performance of the Retail Network and the higher results from the Wholesale Network/Specialties. On the contrary, the results from inland refineries will continue to be penalised by a negative situation.
Overall, for the Refining & Marketing sector, results for 2011 are expected to be lower than those recorded in 2010.
Power & Gas
The whole of 2011 will benefit from the definitive configuration of the production plants, as both the ISAB Energy and the Northern plant of ERG Power are fully operational, even though the production of ISAB Energy will feel the effects of the shutdown for scheduled maintenance during the fourth quarter. For the Power & Gas segment, a satisfactory level of profitability is expected, although lower than that of 2010, also in consideration of a situation that is expected to decline for the generation margins of the gas plants and of the shutdown for general maintenance of the IGCC plant of ISAB Energy expected in the fourth quarter.
ERG Renew will continue to take actions for the implementation of its business plan. In particular, it is expected that production of the Ginestra wind farm (40 MW) will be started up by 2011 and that of the Fossa del Lupo wind farm, which is currently limited to 62.5 MW entered into commercial operation in June 2011, will gradually increase during the third quarter of 2011, when the final capacity of 98 MW will enter into full commercial operation. Following this and the expected contribution from the acquisition of IVPC Power 3 S.r.l., which owns five wind farms for an overall installed capacity of 112 MW, it is expected that the remaining part of the year will show sharp growth in the results. However, it should be noted that, due to the possible continuation of the congestion on the National Grid in some areas in Southern Italy, production from wind farms could be negatively affected also in the second half of 2011 as it happened during 2010 and in the first half of 2011.
The layout of the accounting statements corresponds to the format used in the Interim Report on Operations. Appropriate explanatory notes illustrate results at replacement cost and adjusted results at replacement cost.
Pursuant to Article 154-bis(2) of the Consolidated Finance Act, the manager in charge of the preparation of the company accounts, Giorgio Coraggioso, declares that the accounting information contained in this press release corresponds to the accounting documents, books and records.
The results for the second quarter and the first half of 2011 will be illustrated to analysts and investors today at 3.00 p.m. (CEST), during a conference call and simultaneous webcast, which may be viewed by visiting the company website at www.erg.it.
This press release, regarding the approval of the Half-Yearly Financial Report as at 30 June 2011, issued on 5 August 2011 at 8.00 a.m. (CEST), was prepared pursuant to the provisions to implement Legislative Decree no. 58 of 24 February 1998, adopted by CONSOB with resolution no. 11971 of 14 May 1999 as subsequently amended. This press release, together with the Half-Yearly Financial Report, is made available to the public at Borsa Italiana S.p.A. and on the website of the Company, www.erg.it. The Half-Yearly Financial Report is also made available to the public at the registered office in Genoa, via De Marini 1.
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1 Results at replacement cost do not include inventory gains (losses) nor non-characteristic items.
2 Adjusted results at replacement cost also include the contribution, as regards ERG’s share, of the results of ISAB S.r.l. (a joint venture company with LUKOIL) and of TotalErg (a joint venture company with Total), the contributions of which, not at replacement cost nor adjusted, are reflected in the income statement with the equity investment being recognized at equity. For the definition and reconciliation of the adjusted results at replacement cost, reference should be made to the content of the section “Alternative performance indicators” which is attached to this communication.
3 Group net result at replacement cost does not include inventory gains (losses), non-characteristic items, or applicable theoretical taxes and it corresponds to the adjusted Group net result at replacement cost.
4 The half-Yearly Financial Report as at 30 June 2011 was prepared in accordance with the valuation and measurement criteria set out by the International Financial Reporting Standards (IFRS) and based on the relevant guidelines contained in article 154-ter of the Testo Unico della Finanza (Consolidated Finance Act). The independent auditors carried out a limited audit within the time limits set out in the relevant regulations.
5 The ratio of total net financial debt (including project financing) and net invested capital.
6 It also includes the contribution, as regards ERG’s share, of the net financial position of ISAB S.r.l. (a joint venture company with LUKOIL) and of TotalErg (a joint venture company with Total).