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OPERATOR: Welcome and thank you for joining the ERG fourth quarter
and 2007 results conference call. (Operator Instructions) At this
time, I would like to turn the conference over to Mr. Alessandro
Garrone, Chief Executive Officer of ERG. Please go ahead, sir.
ALESSANDRO GARRONE, CEO, ERG SPA: Thank you. Ladies and gentlemen,
good afternoon and welcome to ERG's fourth quarter 2007 and full-year
results conference call. Joining me today are Luca Bettonte, the
Chief Financial Officer of ERG, and at his first webcast with ERG,
and Paolo Merli, the investor [relator] of the Company. Before we
start, I'd like to draw your attention on two issues -- very
important issues. First, today's webcast refers exclusively to 2007
results, while the presentation of the four-year business plan will
be held together with our first quarter results on May -- on the 15th
of May. Second, according to our policy and in line with practically
all international oil companies, we are not commenting on any rumors
or speculation today. Therefore, we will not answer today any
question on such subjects. I am sorry for that but I am sure you will
understand my position.
Now we start with the presentation. As you will see, we have done
some changes in our presentation. Not only formal changes, but also
substantial changes in order to try to explain you better the results
of 2007. Starting from the first slide, here is the group structure
with the four activities since we bought EnerTAD. I'll not comment on
this slide because I suppose you already know it very well. The only
difference is that now we hold 68% in EnerTAD, our vehicle for the
renewables, after the last December exercise of the call option of
the 17% of the Company.
Before I ask Luca Bettonte to take you through the details of our
fourth quarter and full-year results, I'd like to spend a few minutes
to reflect on 2007 and where ERG stands at the start of 2008. 2007
wasn't an easy year for us. Performances were weak and below what we
had expected for the year, a tough scenario in the integrated
downstream business. The recent decision of the Consiglio di Stato,
the Supreme Court, the strong depreciation of the U.S. dollar against
the euro, just to mention some external key issues -- key drivers --
didn't help. However, we should have done better, especially in
refining, where anyhow we don't think financial results reflect the
asset quality.
The progress made on our investment plan also fell short of our
initial expectations, wind and the repowering of Nuce Nord, in
particular. However, we believe that 2007 was a year of change for
ERG where some important objectives were achieved. Our refinery
plants performed well and we brought the new ISAB configuration on
stream. We completed a reliability study on ISAB energy, the results
of which were satisfactory. The plant is now performing very well.
The re-styling program in the integrated downstream, the retail
network especially, is on track, having re-styled 731 service
stations at year end.
We are now working to combine ERG's wind assets with EnerTAD and we
entered the French wind market and worked to integrate EnerTAD into
ERG organization, strengthening the vehicle through which we want to
grow in Italy and abroad. So I expect these achievements to begin
translating into financial results as of 2008. I will elaborate a bit
more on that in my final remarks. And now let me hand you over to
Luca, who will take you through 2007 results. Thank you, Luca.
LUCA BETTONTE, CFO, ERG SPA: Good afternoon, everybody. Thanks for
coming to this conference call. Let me say, first of all, thanks to
Alessandro for his brief introduction about myself and, even more
important, I was given the opportunity and very happy to join ERG
management. In reference to the figures, we prepared for you, on
chart number six, a chart that I am sure you are really familiar
with, showing our EBITDA performance, replacement cost EBITDA and the
breakdown relating to each business sector we are working in.
As you see, it has been a negative year and a negative Q4. But we
believe that in order to show you and share with you and analyze
properly the overall performance of our group in Q4 as well as in
2007, it's better to strip out some components that are affecting,
say, comparability. In particular, we have two items to be
underlined. The first one is related to the '06 insurance
reimbursement. And the second one is the impact in '07 and, in
particular, during the fourth quarter -- Q4 '07 of the downward
revision relating to the CIP6 tariff.
We have this way adjusted the figures of 2006 by deducting the
insurance reimbursement in both Q4 and for full year. While relating
to '07 -- Q4 '07, we have adjusted and we have stripped out EUR32
million that is the downward, the reduction in CIP6 tariff pertaining
to the first nine months of the year. While for the full year '07 we
didn't make any adjustment because we believe any case CIP6 tariff
decrease is something pertaining to our core business.
Having said that, we think that, from now on, we have to go ahead
just by focusing on the RC EBITDA comparable, which at the overall
level show better the performance of the group, while, from an
industrial viewpoint, we are going to be focused just on the unit
refining margin in order to understand really in that what has been
the real result of the group in '07.
Of course, we have done the exercise for all the sectors -- the
business sectors we are running. In any case, first of all, I want to
give you a flavor of what was Q4. In this chart, you see the
comparison between the RC EBITDA Q4 '06 and -- versus Q4 '07. It has
been down by 35% overall. Of course, I'm going to give you some
further detail later, just to mention that the impact of this -- as a
result of this -- the result of this figures are because of the lower
volumes for Coastal Refining, due mainly to the new configuration [on
stream] and the lower unit margin at the ISAB refinery. For the
integrated downstream, we have had some negative impact due to lower
distribution in the retail margin, and lower contribution from inland
refineries.
Talking about power generation, ISAB Energy contribution margin has
been lower, due to lower volumes as a result of the shutdown
requested by [Tanner] and the mentioned downward revision of the CIP6
tariff. EnerTAD has passed us a lower contribution, mainly due to the
wind certificate price revision, downward revision that has affected
the year '07.
While Nuce has been a nil contribution, say, because last year we had
some income from the sale of CO2, credit emission sales. We didn't
have this year, but we have offset everything thanks to today
contribution of the Nuce Sud turbogas.
Moving to the full year, the replacement cost EBITDA sales in line if
we compare '06 to '07. Main reasons are for Coastal Refining, we had
higher volumes and unit margin at ISAB refinery. As you remember,
2006 figures have been affected by the fire at the north plant as
well as the general shutdown of the south plant of ISAB Energy.
Integrated downstream is a negative performance again, also at
full-year level in our volumes and lower retail distribution margin,
lower volumes and lower wholesale distribution margins and lower
contribution from inland refineries.
For energy, ISAB Energy has had lower volumes by 5% year on year, due
to the general shutdown mentioned and lower CIP6 tariff that has
affected the results by 9%. EnerTAD conversion has had a higher
contribution, mainly because it has been consolidated last year just
for a quarter and the contribution has been for the full year in '07.
Relating to Nuce, the impact is the same. I have just comment with
reference to that Q4 result.
Going down the profit and loss, not we are going to analyze items
relating to the reported figures. Moving from replacement EBIT to
EBIT reported, you have to add or subtract some non-characteristic
items as well as the gain or loss of inventories. This figure is
quite easy to be explained, based on the underlying scenario. I'm
referring, of course, to the gain on inventories. While with
reference to the non-characteristic items, they accounted for EUR51
million, of which EUR13 million due to the transaction with Alerion
and EUR18 million relating to costs associated with the cleanup of
[the oil] site, of which EUR5 million is a provision for ERG for the
next year.
The other two items I want to comment is -- firstly, is the financial
result and then taxation. Financial result is up EUR73 million versus
EUR48 million in '06. Main reason has to do with the higher average
debt as well as with a higher interest rate. We also had loss from
derivative instrument, which is mainly linked to the exercise of the
call option of EnerTAD, something you already knew very well. While
last year we had some income from the hedging on the refining
margins, we didn't have in '07.
With reference to that tax rate, its reported level is 36% in '07
versus 19%, '06. As you remember, in '06, there has been a tax asset
reevaluation write-up with a benefit from -- this is the reason why
the tax rate is so low last year. At replacement cost level, the tax
rate is in line, '06 versus '07.
And now, as I promised before, we are going through the single
sector, the single business sector that we are involved. We can begin
looking in the figures of the Coastal Refining. As mentioned before,
we comment just on comparable items and this chart show you, the
chart number 11, a sort of reconciliation between the two figures.
The RC EBITDA is minus EUR9 million, 2007, versus plus EUR126 million
in '06. And EUR117 million in '07 full year versus EUR149 million '06
full year. By deducting the appropriate figures relating to the
insurer reimbursement as well as CIP6 tariff downward revision, we
land at EUR4 million in Q4 '07 versus EUR47 million in Q4 '06 and
EUR117 million '07 versus EUR65 million in '06.
Comparing the RC EBITDA that we had called comparable, in the next
chart you see that, on the left side, RC EBITDA for 4Q '07 compared
to 4Q '06 is down by EUR43 million, while it is up by EUR52 million
if you move and analyze the full-year results. As you see in the
chart, there are some positive and some other negative effects
relating to this performance. Let me just underline the main
important. If we analyze Q4, on the negative side, we have had a low
profitability associated to the feedstock sold to ISAB Energy and
higher variable cost mainly associate with utilities and, of course,
a weaker U.S. dollar against euro.
On the positive side, we have to mention the total contribution from
the new plants, 180 and CR14 -- 40 and in any case, a better
scenario, mainly driven by gas oil price. This should explain
performance at Q4 level, while if we move to full year, still on the
negative side we have a gain, lower profitability associated to the
feedstock sold to ISAB Energy, still high variable cost and weaker
U.S. dollar against euro and the downward revision of the CIP6
tariff.
On the positive side, a better performance of the refinery plant --
remember that last year we had a fire -- and the contribution again
from the new plants. This performance, of course, has to be analyzed
along with the some indicators that, at market level, influenced our
performance. And we have reported something on page 13, the main
important ones. A few comments on this chart. From the top to the
bottom of the single rows, we have experienced that the differential
between light and heavy crude is still under strong pressure, has
been in '07 under strong pressure and is negative to us, while the
record diesel tracks and the gasoline slightly better than last year,
are positive to us. And really very important also to underline that
the fuel oil -- the record price of fuel oil both in absolute term]
and relative to crude has been also in the comment I made relating to
the fiscal agreement, a negative impact on our performance.
These are the main important indicators that could explain better
what's happened in our business this year in year '07. And in order
to have a more appropriate benchmark, we have adopted a new EMC
benchmark that we think better reflects the industrial performance,
the industrial configuration of our refinery. First of all, because
it's composed of a more balance crude slate -- 50-50 slate based on
light and heavy crude. Second because the price of products are on a
FOB basis, which is typical of a coastal refinery. And last but not
least because the utility costs are linked to the high sulfur fuel
oil while before they were fixed.
And as a consequence of what we have just comment on, on chart number
14, you have, as a matter of calculations, a -- our refining margins
at replacement cost. What is important, say, to underline again here
is the -- and as we have already mentioned, is the volume that is
down Q4 versus Q4 as a result of the new ISAB configuration and down
also year-on-year due to both the general shutdown and due to the
fire we had last year.
And finally, our slate -- crude and product slate. I think that,
relating to this chart, this was just saying that, from the product
side, we have increased the middle distillates substantially and
there has been a reduction of fuel oil, mainly in the fourth quarter,
while from a crude viewpoint, we have reduced the processing of Ural.
Talking now about integrated downstream key figures. And here we
don't have anything to adjust. We don't have any adjustment in order
to -- because figures are comparable year on year and Q on Q. Say
that RC EBITDA has been down about EUR6 million from EUR19 million to
EUR13 million on quarterly basis and has been down from EUR127
million to EUR87 million comparing full-year result. Say we have both
-- in both market and refining, really negative results. Say that, as
a general comment, I can tell you that marketing results were
penalized mainly by two items. Steady rise in oil products price in
international markets takes some time to be transferred into the
price at pumps and some time they maybe not transferring full to the
price at pumps. And that's for the retail. For the wholesale, we
shouldn't forget that in -- that it has been a warm winter in early
'07 that result in a sharp drop in volumes. In the end, I could say
that increasing competitiveness has led to lower margin on the
market. So in details, lower margin in volumes for retail and also
lower margin in volumes at wholesale level, along with a weaker
result of inland refineries, due both to lower volumes and the weaker
dollar.
In fact, looking at marketing performance, you'll see on chart number
17, overall, the indicators relating of our marketing performance.
Let's just underline that, in any case, we have maintained our market
share, even though by suffering some lowering in the margins. While
from inland refining viewpoint, the main items to be underlined is
the lower volumes that has led to a lower contribution, as I
mentioned before.
Now switching to page Power Generation. Also in this earlier, there
are some items affecting the industrial comparability and we have
deducted them. We are just talking about the same items I disclosed
you at the beginning of this presentation. Of course, for the portion
pertaining to the power generation, which are summarized in the
chart. And so, now we go ahead by commenting the RC EBITDA
comparable, which has been higher in Q4 '07 versus Q4 '06 -- EUR61
million versus EUR56 million. And a bit lower on year-on-year basis,
[EUR118 million] versus EUR194 million.
Even in this context, there's some positive and other negative items,
say, at a glance. If we look at the Q4 figures, we have been a solid
contribution of the new turbogas and a lower environmental cost if
you talk about Nuce. ISAB Energy lower volumes entirely more than
offset by lower costs. And a greater production from EnerTAD that has
been offset by the downward revision of GC wind certificate price.
Full year we confirm the Nuce solid contribution of the first year --
for the first year of the new turbogas, lower volumes and tariffs of
ISAB Energy and a good result from EnerTAD because of the full-year
contribution versus just a quarter in '06. Going through or going
more in depth, key figures relating to ISAB Energy. We still focus on
comparable items with a positive outcome in Q4 '07 versus Q4 '06. And
a negative result, a lower result in '07 full year versus '06 full
year.
Say that Q4 '07, full-year '07 replacement cost EBITDA included EUR24
million related to the downward revision of the CIP6 tariff, of which
EUR18 million pertaining to the first nine months. Q4 ISAB Energy
performance has been slightly better during the quarter. As lower
volumes, minus 11%, and the reduction of the CIP6 tariff, minus 9%,
has been offset by lower cost, maintenance, insurance cost and
because of in '06 there has been a write-down of inventory affecting
the result.
While full year -- the full-year performance has been sharply down as
a result of the general maintenance shutdown during the second
quarter '07, again the revision of the full component relating to the
CIP6 tariff. As you know, Italian GAAP EBITDA is higher than IFRS
EBITDA because of the accounting mechanism that is different as the
incentive component of the tariff is spread over the entire life of
the CPI6 contract, so 15 years.
With reference to Nuce, there has been -- there's some minor
adjustments to have the EBITDA comparable. I don't have any comment
to make, but for to remember what we just told you. So last year, we
didn't have a sale of CO2 credit emission, while this year we had a
good contribution from the new turbogas. And last but not least,
EnerTAD performance. We have had an electricity production up, both
in Q4, versus Q4 and in full year versus full year, while the
performance at EBITDA level has been different, down by EUR5 million
in Q4 versus Q4, up in '07 full year versus '06 full year.
Q4 has been affected downwards -- has been affected by the downward
revision of GC price -- ISAB price -- related to '07, as a
consequence of the approval of the new incentive scheme included in
the '08 Italian budget law. These items were partly offset by higher
volumes due to better wind condition in Italy and thanks to the, say,
two months contribution by EnerFrance. As I just told you,
year-on-year basis, we are -- we have benefited from the full
contribution of EnerTAD compared to the previous year when the
company was consolidated just over the last quarter.
And now, investments. Here we have prepared for you a comparison
between the amount we have invested in '07 versus '06. The amount in
'07 is EUR507 million. That's slightly lower than EUR526 in '06. But
if we included EUR57 million spend by ERG Eolica, which is
consolidated just on an equity basis, the total amount would have
been EUR564 million. So a bit higher.
Of course, it is important to remember that, relating to renewables,
we are including EUR51 million from the exercise of the call on the
17% stake of Alerion and the enterprise value of the acquisition made
in France. Of course, and to be consistent, the number relating to
'06 for renewables includes the acquisition of the stake in EnerTAD
made this year. So, say, investments are in line year-on-year basis.
And from a cash generation, we started with a net debt of EUR1.356
million and we'll end in a EUR1.378 million. So pretty in line.
Operating cash flow has been EUR573 million and it has benefited, in
any case, by the insurance reimbursement of about EUR110 million, a
biy more. We have had CapEx, EUR372 million in EnerFrance and EnerTAD
investment, respectively -- EUR80 million and EUR51 million. And then
dividends distributed -- EUR60 million by ERG holding and the
remaining by ISAB Energy to the minority shareholders and some other
minor figures to land at the indebtedness of ERG. Leverage is
approximately at the same level, a bit lower than 50%.
And that's led us to have some comment on our financial structure --
long-term financial structure. I want to underline immediately that,
on a long-term basis we want to have a solid and conservative
financial structure. Just to be consistent, the deployment in the
case of our investment program within different business areas. So
our financial structure must be commensurate with a different group
business mix. It means that for oil we have to consider the EBITDA
volatility any time we try to find out, say, a ratio. While for wind
and power generation, we have to refer to the cash flow visibility
that this business usually allows.
I can give you some pillars, to say, that the leverage should be in
the range of 50%, of course taking into account that we are running a
multi-energy business with multi-financial means. While EBITDA ratio
for the [L&M] should be the three area range, but subject to the
volatility that is typical of this business. Weighing the power and
gas, at the end, has to be project financing oriented from a
financial viewpoint with an equity share of about 25%, 30%. That's
led us to keep having our -- and maintaining our dividend policy,
whereby we increase dividend if just we are able to maintain at
higher level the afterwards.
These were our figures, our performance. Let me repeat that we
believe that by deducting some, say, one-off or extraordinary items,
we hope to have better explained to you the industrial performance of
the group in '07. And now I let the Alessandro to go ahead.
ALESSANDRO GARRONE: Thank you, Luca, and I really think the
explanation of the results was quite clear and I hope so for you. Now
I'd like to continue to focus on our achievement from last year,
which may have fallen short of expectation, as I said. But I still
believe we made good progress towards our objective to strengthen all
levels of activity. In Coastal Refining, we successfully completed
the strategic investment launched a few years ago. And for the last
few months, the new plants and layout of ISAB Refinery has been well
on stream. Fourth quarter results were disappointing, but we are
confident of the quality of our assets and expect this to turn into
good financial results as of 2008.
As far as integrated downstream is concerned, we have completed
almost half the re-styling program and we are on track to complete it
by the end of the year. Coming now into power generation business,
the new Nuce Sud turbogas went on stream at the very beginning of
2007 and the first year of operations was very positive. As you know,
our main project in the area is the repowering of Nuce Nord. Here,
unfortunately, we experienced some delays at the site where the plant
is beginning -- its [beginning] was sequestered on the back of some
environmental issues, which now appear to have been resolved. Work
has been underway since September, but I can't rule out a few months
of delay in addition to cost overruns compared to the guidance given
last year.
On the gas side, the authorization process here has turned to be
trickier than expected. Also we are not alone. There are many
projects in Italy, none of which has been authorized over the last
12, 18 months. Notwithstanding that, we are continuing on our part
and remain committed, together with Shell to this important project.
On renewables, there are significant delays with our investment plan
in this area due to various factors. Firstly, after reaching an
amicable agreement with Acciona to go our separate ways, management
focused heavily on the de-merger of the joint venture, which turned
out to be a lengthy and time-consuming process. It has now been
completed, becoming effective as of February 1 this year. Secondly,
we worked on the integration of EnerTAD into our organization, moving
EnerTAD headquarters to Genoa from Milan. This was also a time
consuming and difficult task.
Last but not least, here in Italy, the [transition] process is still
complicated and something must be done in order for the country to
meet European Union objectives. We are now working hard to finalize
the integration of ERG's wind assets and EnerTAD, which represents
the last and most important step towards building up the backbone of
our expansions into this business.
And now I'd like to spend just a few words on the strategic
objectives of the company as they have remained more or less
unchanged since being presented a year ago. On the Coastal Refining,
we are continuing with the debottlenecking projects announced last
year with the objectives to further increase production of fuel
transportation in compliance with the most stringent specifications.
In parallel, we are very much focused on improving the operational
efficiency of the refinery with several actions being taken to reduce
our fixed cost base.
On the integrated downstream, we are investing in our own network to
make it competitive and its profitability sustainable in the longer
term. As far as thermo power is concerned, the start up of Nuce Nord
will mark a major step forward in building up a solid production
portfolio. We are working towards that. Meanwhile, we are also
setting up a trading and sales platform to better enter the energy
market.
On the gas, we believe that leveraging on our industrial site with
the re-gasification terminal and burning our own gas to produce
electricity will give us the competitive edge in this business. And
on the renewables side, we believe the renewables market will see
huge developments going forward, both in Italy and in Europe.
Therefore, we want to play this business through EnerTAD. As we
mentioned at the beginning of this presentation, the details of the
plan and the CapEx for each business will be given on the 15th of May
when we present our 2008-2011 business plan.
Now I have some slides on the new regulatory framework and especially
on the green certificate and CIP6 tariff, et cetera. I know they are
a little bit complicated, but I'm trying to anticipate, I think, a
lot of your questions, we tried to put this on our slide and our
presentation. On the -- so let me now touch some -- these few themes.
The regulatory changes in the wind business, the CO2 allowances
mainly in relation with ISAB Energy and also the recent decision of
the Supreme Court regarding the CIP6 tariff.
Starting with the wind regulation framework, the government's 2008
budget included the approval of a new incentive scheme. I'd like to
underline three main aspects of the new regulatory scheme. A fixed
reference price of EUR180 per megawatt hour, the extension of green
certificates from 12 to 15 years and in increase in the mandatory
quota from renewable sources to 0.75% from 0.35% with retroactive
effect as of 2007 and until 2012. This should rebalance the green
certificate market by bolstering demand. However, any excess green
certificate will be withdrawn by the grid operator within three
years.
We think this new incentive scheme is fair and offers good visibility
in the longer term as well as[ appealing] the terms. On the
authorization side, we think more must be done in order to simplify
the process which remains an issue. We hope that more will be done to
provide the industrial investors like us with all the necessary
conditions in this market.
And I'd now like to give a quick update on recent events regarding
the CIP6 tariff, at which, I should remind you ISAB Energy has been
selling its entire production. On January -- on the 22nd of January,
the Supreme Court or Consiglio di Stato, as it is called here in
Italy, upheld the Authority's appeal. As such, resolution 2479/06
became effective again with retroactivity as of 2007. We are waiting
for the reasons behind the ruling as well as the position of the
authority to be published over the next few weeks in order to gain a
better understanding.
The new criteria to calculate the fuel component, based on
Authority's resolution, adopts a different natural gas reference
price, whose formula still tracks the oil scenario albeit with a
greaert time lag than under the previous method. As we understand,
the matter is complex and I'd like to provide you with our estimate
for the fuel component price in 2008, which is about EUR70 per
megawatt hour. Both ISAB Energy and ISAB Refinery will benefit from
the expected increase in the fuel component as [CIP6] price is linked
to it.
And now, something about the CO2. The Italian National Allocation
Plan, approved on the 20th of February this year, provides for a
severe cut in the allocation to CIP6 plant for the 2008-2012 period.
ISAB Energy has received allocation of around 0.4 million tons per
year, while we expected emissions to be around 3 million, 3.2 million
tons per year. On November 2006, the Italian Authority for
Electricity and Gas published a white paper, giving an indication for
the full reimbursement of the cost associated the purchase of credit
emissions in line with the CIP6 law which clearly stated that any
additional cost arising from changes in regulations would be
reimbursed.
We are confident that we will obtain the relevant reimbursement and
think the Authority should issue a resolution to clarify the matter
shortly. Although we believe that we will be fully compensated for
those costs, we regard such a cut as totally unacceptable and shall
take all possible political and legal action against it.
And finally, I'd like to conclude by looking briefly at 2008, an
important year for us and we expect the operational achievement I
mentioned before to begin translating into financial results. As far
as Coastal Refining is concerned, we are confident that 2008 will be
a good year thanks to the absence of scheduled maintenance and the
contribution of the new ISAB Refinery layout. We expect a better
scenario for the full year, partly due to better feedstock conditions
as I mentioned earlier. Typically, margins -- [did a start of --
brilliantly] in January, but since then have recovered very well,
having been at a satisfactory level since the second half of
February.
As far as integrated downstream activity is concerned, our
profitability is expected to improve slightly. Coming to the power
generation activities, we expect a stronger contribution from ISAB
Energy as a result of higher tariffs as well as greater volumes, due
to the absence of the general turnaround. Slightly better results are
also expected for Nuce. Coming to our wind activities that will
benefit from the new wind farms -- Faeto and Vicari -- to be fully
operative in the second half of the year.
All in all, in 2008, we expect a marked improvement in group results
compared to 2007. Let me conclude by saying again that the 2008-2011
business plan will be presented of the 15th of May together with our
first quarter results. Thank you very much for your attention. I know
that it has been a long presentation, longer than always, but I think
was necessary. And now we are ready for your questions. Thank you.
OPERATOR: (Operator Instructions) The first question is from
Alexandre Marie of Exane BNP Paribas. Please go ahead.
ALEXANDRE MARIE, ANALYST, EXANE BNP PARIBAS: Good afternoon. My
question is on the refining margin. Could you split, explain,
elaborate on why the margin was lower than in Q3, despite the new
unit being on stream and also despite stronger diesel tracks. And
also, if possible, could you split out the positive impact from the
new unit which you started up in Q4 and the negative impact from the
CIP6 revision? And my second question is on your new EMC benchmark.
Could you please give us a guidance on the differential between your
Coastal Refining margin and this benchmark going forward? Thank you.
ALESSANDRO GARRONE: Yes. On the performance of the refinery margins,
as we have also said in the presentation, the main factor affecting
the quarterly results have been mainly four factors. The lower
profitability, as I said, with the sales of feedstock to ISAB Energy.
That's a very important factor. It's due -- for two reasons. One is
the revision of the CIP6 tariff following the ruling of the Supreme
Court. And the second that affects the revenues, I'd say, of the
selling of the asphalt. The second is the increasing, the rising in
the oil -- in fuel oil prices, which affect the cost of the asphalt,
let's say, and the margin of it.
Second reason in the refining margins is the weaker U.S. dollar
against the euro. The third reason is a stronger contraction in the
light-heavy crude differentials. And the last one is the impact on
utility expenses of the high fuel oil prices, resulting in higher
variable cost. So all these factors were just partially offset by the
good margins on diesel as well as the positive contribution from new
configuration of the refinery. So I think -- I hope to have answered
your question.
ALEXANDRE MARIE: Yes, could you please quantify the impact of the new
unit and the impact of CIP6?
LUCA BETTONTE: Alex, the new plans during the quarter more or less
contributed for more than one dollar per barrel.
ALEXANDRE MARIE: Okay. Thank you.
ALESSANDRO GARRONE: Of course, it depends on the scenario, but in the
last quarter --
LUCA BETTONTE: I think your second question was about the EMC
benchmark, if I'm right.
ALEXANDRE MARIE: Yes, could you please give a guidance on the
differential between your Coastal Refining margin and the benchmark
going forward?
ALESSANDRO GARRONE: Maybe first before I'd like to explain why we
have changed the EMC benchmark. We have used this new benchmark
because we think using a mix of light and heavy crude oil as a
[player] in Ural is more similar to our mix of crude. The second
reason is that prices of products sold in the EMC benchmark are on a
FOB basis -- FOB basis, which is typical for a coastal refinery such
as ISAB. This change translates into $2.00 per barrel of reduction
compared to the benchmark we had before. And also utility cost in
this benchmark are linked to high sulfur fuel oil, the utility costs,
well, before they were fixed.
So this is the reason why we have adopted this new benchmark that, if
you look at the trend of the new -- this benchmark compared to our
refining margins are, of course, in 2006 have been affected by other
internal factors that are much more similar, the trend. Of course,
there is a difference because we think we have highly converted
plants, but the trend of this benchmark compared to ours is similar.
OPERATOR: The next question is from Mr. Paolo Citi of Intermonte.
Please go ahead.
PAOLO CITI, ANALYST, INTERMONTE SECURITIES SIM: Hello. Good
afternoon, everyone. Just three questions. First of all, regarding
the fuel oil refinery. [Do you have] an idea in terms euro million of
the variable costs recorded in '07 compared to '06. I have for '06,
EUR147 million, if correct. And what do you expect in terms of the
evolution regarding variable cost for '08. The second question is
related to the tax rate for '08. If you could please give guidance
following the tax rate cut provided by the budget of '08. And then,
have question is related to the Brent Ural spread. We saw a sharp
contraction in '07 compared to the previous two years. If you could
please elaborate regarding the issue that moved this spread and what
do you expect for '08 and for the following years?
ALESSANDRO GARRONE: Yes, thanks. Maybe Luca can explain about this
tax rate and then I will answer on the other two questions.
LUCA BETTONTE: About tax rate, it's going to be a positive impact, of
course, in '08, thanks to the reduction in the nominal tax rate, in
particular, from 33% to 27%. And also for IRAP from 4.25 to 3.9. As
you know, IRAP has the highest weight as a component of the taxation
we paid and based on the existing situation on net assets and
liability level, we don't expect any negative impact from the change
of the taxable income relating to the new rule containing the [extra]
tax rules and legislation. So we foresee for the next year just a
positive impact in terms of taxation relating to the group.
PAOLO CITI: Could you please give us also an indication in terms of
number -- 36%, 37%?
LUCA BETTONTE: I'd say that I prefer to say something around minus 5%
is going to be the impact, but we can more precise later when we are
going to meet again with you showing our four-year business plan in a
month and a month-and-a-half from now on.
ALESSANDRO GARRONE: About the other two questions, one was about the
variable cost in the refinery. In effect, we had, in the last
quarter, especially, quite a strong increase in variable cost. The
reason of this increase is especially for the rising of energy price
-- fuel oil, as we have said, and of course, not only the fuel oil.
And also for the fact that we have new plants being on stream and
with these new plants we added some variable costs to the production
of our fuels, et cetera. So this is the reason why the variable costs
are higher than before.
On the Brent Ural differential, we -- I mean, the trend of this
differential is due to, of course, some reasons, not only one reason.
One is the rising price of fuel oil that has pushed up the value of
Ural, reducing the spread compared with the Brent. Also the lower
production of the OPEC, which usually means less heavy crude oil on
the market has reduced the spreads. And third, the increasing
availability of low sulfur predominately in the Mediterranean, coming
from North Africa, Middle East and some ex-Soviet Union countries
such as Usbekistan, Kazakhstan is putting pressure on medium sour
crudes just are Ural.
And lastly, also the basket, which Brent is made of -- is halving,
thus reducing the technical differential. These are a -- I mean, the
main reason we see, in order to explain the trend of the
differential. There is also on top of that, there is also a
continuing political action of Russia, stressing its role in
controlling the energy sector. So this is also tightening this
differential. But at the end, I mean, we still expect that this
differential to be recovered compared to what has been trading in the
recent past.
Even if it might not go back to the level seen in recent years. I
mean, we had, in 2006, a differential -- the differential was $2.00
barrel. 2007 was 0.6 -- and I'm talking about the commercial
differential, not the overall differential. In 2008, we see, I mean,
a differential between $1.00 and $2.00 per barrel. So not as 2006,
but similar -- not much higher than 2007.
PAOLO CITI: Thank you.
OPERATOR: The next question is from [Ahbinash Galki] of Lehman
Brothers. Please go ahead.
AHBINASH GALKI, ANALYST, LEHMAN BROTHERS: Yes. Hi, guys. I had two
questions. One was on the CapEx guidance for 2008. And the second one
was something, which probably I have missed, was in terms of the CIP6
quantification. How much will it impact your margins?
ALESSANDRO GARRONE: On the -- if I understood well, the 2008 guidance
we normally -- we don't give guidance on 2008 on the -- so, but I
don't know if you were referring to something in particular or in
general with that.
AHBINASH GALKI: The capital expenditure, I meant.
PAOLO MERLI, HEAD, INVESTOR RELATIONS, ERG SPA: The CapEx -- we're
going to spend something between EUR600 million and EUR650 million,
but the pace on this will be given when present in the four-year
business plan on May 15.
AHBINASH GALKI: Okay.
ALESSANDRO GARRONE: But roughly on the figure Paulo gave you, we are
going to spend -- 30% of this will be on refining -- coastal
refining. Some 15% of the downstream and the remainder in power
generation and renewables.
AHBINASH GALKI: Right. And something on the CIP6 quantification. I
think I had missed that point. You said it would impact.
UNIDENTIFIED COMPANY REPRESENTATIVE: You mean, the revision, the
downward revision of CIP6 price or just the lower profitability, as I
said
AHBINASH GALKI: The quantification of the CIP6 impact going forward
on the refining margins. It's a question, which was asked previously.
I missed that.
UNIDENTIFIED COMPANY REPRESENTATIVE: So we, during the presentation,
Alessandro said that next year we expect CIP6 tariff of EUR136 per
megawatt hour, which is considerably higher than the one posted in
'07. So as a consequence our refining margins will benefit from this
and, of course, the profitability associated with the feedstock is
going to be higher than the one in 2007. But it's very difficult to
quantify the impact on our refining margins. So we are not disclosing
figures like that.
AHBINASH GALKI: Okay. Fine. Thank you.
OPERATOR: The next question is from Kim Fustier of JPMorgan. Please
go ahead.
KIM FUSTIER, ANALYST, JPMORGAN: Yes. Hi. Good afternoon, gentlemen.
Just a very general question. You said your performance in the
Coastal Refining division was affected by higher cost of fuel
consumed, higher utilities cost and weaker dollar. But it looks as
though all of these problems are not just short-term issues, but
rather they're here to stay. So my question is how confident are you
that the upgrade program of the coastal refinery can offset these
negatives going forward? Thank you.
UNIDENTIFIED COMPANY REPRESENTATIVE: Kim, can you repeat your
question because we didn't get very well.
KIM FUSTIER: Sure. You said your performance in the fourth quarter
was affected by various negatives such as higher cost of fuel
consumed, higher utilities cost and the weaker dollar. But it sounds
to be like all of these issues are not just short-term issues, but
they're here to stay (inaudible - background) the short term. So
right -- how confident are you that your upgrade program of the
Priolo refinery can offset these negatives in the future?
UNIDENTIFIED COMPANY REPRESENTATIVE: Yes, so we are expecting, as
Alessandro said, we are expecting profitability in the coastal
refining to be much better in 2008. First, because the feedstock we
have already mentioned, will go up. And the second because we hope to
be able to better translate the quality of our assets into financial
results. But as many majors in this quarter are reporting results at
replacement cost, we have suffered from a climbing scenario.
KIM FUSTIER: Okay. Thank you.
ALESSANDRO GARRONE: But sorry, you have also to consider that, I
mean, the -- in 2007, the refinery, new plants in the refinery
started at the end of 2007. So 2008 will be a full year with the new
configuration of the refinery which is, of course, different from
2007.
KIM FUSTIER: Sure.
OPERATOR: The next question is from Mr. Roberto Ranieri of Banca IMI.
Please go ahead, sir.
ROBERTO RANIERI, ANALYST, BANCA IMI: Yes, good afternoon, gentlemen.
Just a follow-up question about the EMC calculation and the coastal
refinery margin. I don't get -- I didn't get very well how you had a
substantially -- a refining margin of coastal refinery broadly in
line with the EMC despite a better product mix you had been
increasing in mid distillates production in the fourth quarter versus
the fourth quarter 2006 with the respected sensible increase in
Italian margin. So could you please give me the reasons why this did
not occur?
I have one -- a couple of other question, general questions. You
don't have -- you have at the moment, only [2 process] so I'm
wondering if you're considering a third-party process in -- for the
near future. So if you basically considering, as an option, the
option [process] in -- for ENI or any other company in the near
future. And the last question is about the near future as well. You
were talking about upgrades in the coastal refinery. And you
particularly mentioned organic upgrade is the only option for growth,
if I understand well. So does that mean that other M&A activities
is not -- are not considered as options for growth, like for instance
Tamoil acquisition or any other major option with other companies or
agreements or something. Thank you very much.
ALESSANDRO GARRONE: So on the third question, I really -- I cannot
comment as I said at the beginning. And also on the second and on the
processing, I mean, we always look at commercial opportunities and
processing we have also looked at processing before ENI. And so, it's
a normal, let's say, a routine way of managing the refinery to look
also at the commercial opportunities not only through long-term
contract, but also through processing. I mean, it's -- we are
starting this every day, but nothing concrete at the moment.
On the -- I didn't get exactly the -- your first question about the
comparison between EMC margins and our margins.
ROBERTO RANIERI: Yes, I'm wondering why the fourth quarter of 2007,
if I imagine, in -- for the coastal refining is basically 2.8
(inaudible) which is broadly in line with the EMC, so I'm wondering
if -- - and looking at any possible, in the near future
outperformance of this EMC margin. I understood that you had the
(inaudible) operating in the fourth quarter, so I'm wondering why we
didn't see any -- from this plant?
ALESSANDRO GARRONE: As I said, explaining the -- our new EMC
benchmark, I said that we think that the trend of this benchmark is a
good indicator for our refining margin. But of course, being we are
looking -- we have to look at a trend in medium term, not only in two
or three month's time. As I said and also as Luca said in his
presentation, I mean, in the fourth quarter we had a mixture of
impact, a mix of impact in our results, including the lower
profitability in the asphalt, which is not reflected in EMC -- in the
EMC benchmark and other impacts that, of course, have to be
considered. So that's why, looking at a short period of time, of
course, and there are also other reason in order to explain our lower
profitability in the refinery. But again, in the medium term, it's a
good indication, we think.
ROBERTO RANIERI: Thank you.
OPERATOR: The next question is from Mr. Domenico Ghilotti of
Euromobiliare SIM. Please go ahead.
DOMENICO GHILOTTI, ANALYST, EUROMOBILIARE SIM: Good afternoon. I have
a question on your CapEx for '07. You explained why you were, say,
below the guidance in the renewals. I would like to have some
indications, explanations on the reason for lower thermo electric and
refining CapEx and in particular in refining. And my second question
is related to the securitization you announced a few weeks ago. I
would like to know if you have already executed this, say, this
agreement. And the last question, if you are, say, open to consider
disposal of minority stakes in your divisions.
ALESSANDRO GARRONE: Again, I'm sorry, but I cannot actually answer
your third question, as I said at the beginning. On the first one, in
general, on the CapEx for 2007, I tried to say -- reconstruct, in
general, the -- what we have done.. Our CapEx in 2007 was EUR573
million, including exercise of the call on EnerTAD, which was EUR51
million and the acquisition of wind farms in France for EUR80
million. And also the EUR57 million investment by ERG Eolica and the
de-merged company of the joint venture -- the Cesa Eolica with
Acciona.
DOMENICO GHILOTTI: Sure.
ALESSANDRO GARRONE: So this figure should compare with the EUR760
million we have announced last year. So there is roughly EUR200
million of difference. On this -- on this EUR200 million, 70% is due
to lower expenditure in wind and thermo power activities. The
refining -- you were mention is roughly EUR40 million, which is
related to some delays and cost reduction in the refining, in our
refining investments. But the main reduction was due to the thermo
gas and wind investment that has been mainly postponed due to delays
in the constructions.
DOMENICO GHILOTTI: Okay. Do you think that the delays in the refining
could affect let's say -- at least the timing for the achievement of
the, let's say, improvement in the margin that you are projecting?
ALESSANDRO GARRONE: -- refining. I mean, refining is --
LUCA BETTONTE: On the refining side, we have just revised the minor,
minor projects and we have saved some money. So it's not something
related to the layout which, going forward, should remain probably
the same we have presented last year.
ALESSANDRO GARRONE: All the main investment, the strategic investment
has been completed.
DOMENICO GHILOTTI: Okay. And my last -
ALESSANDRO GARRONE: And I didn't get your second question.
DOMENICO GHILOTTI: Was on the securitization. I was curious just to
know if you have already, let's say, executed the agreement, so if
you have already, let's say, recovered some cash from the trade
receivables.
LUCA BETTONTE: Yes, yes. We have done everything we signed and we
have already passed the bank, the first to say amount of trade
receivables for the amount you see in the press release or so, EUR150
million. It's going to be today or yesterday, I don't remember. But
in any case, we have done the deal.
DOMENICO GHILOTTI: Okay. Thanks.
OPERATOR: The next question is from Mr. [John Deri] of BNP Paribas.
Please go ahead.
JOHN DERI, ANALYST, BNP PARIBAS: Good afternoon. I've got, actually,
a question on the renewable activities. I wanted to know, following
the demerger with Accciona if you could give the value of the
pipeline the remaining in ERG Eolica, excluding Fossa del Lupo and,
of course,[de Guy], which is under construction. And I wanted to get
some clue on why is the process taking so long for the integration of
all the renewable in [Nuce]. Is it an issue of stock market
environment, a price issue. And my next question is are you going to
sell parts of the renewable activity or do you mean to keep it all in
your consolidation scope? Thanks.
ALESSANDRO GARRONE: Yes. Okay. The project we have on the, let's say,
the bundle that we kept from the -- from the joint venture we had
with Acciona is including some wind farms and it's including Fossa
del Lupa, de Guy and dei Corsi. So they are all in our -- in our
projects. On the timing of the, let's say, integration with and the
EnerTAD and the -- our part of Cesa Eolica, of course, it took more
than expected because, in the same period in 2007, we had to deal
with the demerging of [HA], which was not in our forecast together
with the reorganization of EnerTAD.
So that took more time than expected. We are now in a very good
situation. We are now completing, I mean, the demerging is completed.
We are reorganizing EnerTAD. We have moved all the people into Genoa,
so that's, I mean, we are ready to start with the new group of people
working on the renewable. Of course, we need to understand and we are
working on the -- how to merge our edge activities into the EnerTAD.
We are working on that together with advisors. And that -- the
principle is that we want to -- we still want to have an industrial
and majority role in our renewable company. Okay. So all the
methodology we will use will follow this principle -- or this
principle in the renewable setting.
JOHN DERI: Okay. Thanks.
OPERATOR: (Operator Instructions) The next question is from Will
Forbes of Credit Suisse. Please go ahead.
WILL FORBES, ANALYST, CREDIT SUISSE: Good afternoon. I have a number
of questions. The first one is you mentioned in the comments
initially that you were looking at [official measures] within the
refineries. Could you quantify the kind of things you're looking for,
either in terms of dollars per barrel, savings or perhaps in absolute
numbers?
The next one is could you give us an indication of how the EMC
benchmark is doing so far in Q1? And then lastly, in terms of CapEx
for the wind projects, are you seeing any inflation or any further
delays that you can give us further details on? Thanks.
UNIDENTIFIED COMPANY REPRESENTATIVE: Will, about these details, as
Alessandro said at the beginning of the presentation, we are going to
give any details in a month time when presenting the plan. So sorry,
you have to wait.
ALESSANDRO GARRONE: Yes, because we are not only presenting the plan,
but as I said the fourth quarter 2008.
UNIDENTIFIED COMPANY REPRESENTATIVE: And in that case, as far as wind
is concerned, we are going to present the plan for the combined
entity. I mean, [Ener] together with our wind assets and in that
occasion, any details will be given.
WILL FORBES: Okay, in that case, could I ask another question, which
is you've indicated a delay to Nuce startup from the repowering side.
Are you still expecting that within 2008 or is it -- could it stretch
potentially to 2009?
LUCA BETTONTE: As Alessandro said, we are not -- we can't rule out
that some delays and some overruns cost would be in the site, but
again, details will be given in one month time.
WILL FORBES: Okay. Thank you.
ALESSANDRO GARRONE: I am sorry if sometimes we are not very precise,
but we have learned a lesson and we are not always -- I mean, it's
not so easy on such a big project to be precise in the timing,
especially in international --
WILL FORBES: Okay. Thank you.
ALESSANDRO GARRONE: So thank -- I think, I mean, I think we can -- we
have no other questions, so we can close our webcast. Thank you to
everybody and I hope to hear from you and to see you on the -- not to
see you, but to hear from you on the 15th of May with the full-year
plans presentation. Thank you.
UNIDENTIFIED COMPANY REPRESENTATIVE: Thank you. Bye.
LUCA BETTONTE: Thank you.
OPERATOR: Ladies and gentlemen. Thank you for joining. The conference
is now over. You may now disconnect your telephones. Thank you.
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