ERG S.P.A. ANNUAL REPORT AS AT 31 DECEMBER 2017 ANNUAL REPORT AS AT 31 DECEMBER 2017 2 ANNUAL REPORT AS AT 31ST DECEMBER 2017 TABLE OF CONTENTS Letter to Shareholders ................................................ 4 Financial Statements ........................................... 100 Alternative performance indicators ........................ 107 ERG S.p.A. Financial Statements ........................... 112 1 REPORT ON OPERATIONS Significant events after the reporting period ........ 120 Corporate Bodies ........................................................ 10 Business Outlook ......................................................... 122 Introduction .................................................................. 11 Business Description .................................................. 14 REPORT ON CORPORATE GOVERNANCE Strategy .......................................................................... 17 AND OWNERSHIP ................................................ 124 ERG’s Stock Market performance ........................... 19 Executive summary .................................................... 125 Performance highlights ............................................. 20 History of the governance structure ....................... 135 Performance highlights by sector ........................... 21 Information about the ownership structure as of Sales ............................................................................... 22 December 31, 2015 pursuant to art. 123-bis of Comments on the year’s performance .................. 23 legislative decree 24 February 1998, Significant events during year .................................. 25 (consolidated finance law or T.U.F.) ........................... 137 Regulatory framework: main changes ................... 30 Corporate Governance ............................................... 139 Business segments .................................................... 46 Statutory Bodies .......................................................... 140 Non-programmable sources ............................. 46 Board Committees ............................................... 161 Programmable sources ...................................... 57 Internal committees ............................................ 176 Capital expenditure .................................................... 62 Corporate Governance documents ................. 179 TotalErg .......................................................................... 64 Management and coordination ............................... 186 Risk and uncertaintes ................................................ 66 The internal control and risk management Health, Safety and Environment .............................. 81 system of the ERG Group .......................................... 187 Governance .................................................................. 85 Structure and operation of the Internal Human resources ........................................................ 87 Control and Risk Management System Cultural and social activities ..................................... 93 of the ERG Group .................................................. 190 Treasury shares ........................................................... 97 Information on the main features of the Branch offices .............................................................. 97 existing internal control and risk Related parties ............................................................. 97 management systems in relation Financial Statements ................................................. 98 to the process of financial disclosure, Scope of consolidation and business including at a consolidated level ............................ 192 segments ................................................................ 98 The independent auditors ......................................... 196 TABLE OF CONTENTS 3 Investor relations ......................................................... 196 3 notES to THE sEPARATE Commitments .............................................................. 197 FINANCIAL STATEMENTS BOARD OF DIRECTORS’ PROPOSAL ............... 203 Ordinary Shareholders’ meeting notice of call ..... 344 Separate statement of financial position .............. 347 2 notES to THE CONSOLIDATED Separate income statement ..................................... 348 FINANCIAL STATEMENTS Other comprehensive income .................................. 349 Consolidated statement of financial position ...... 206 Statement of cash flows ............................................ 350 Income statement ....................................................... 207 Statement of changes in shareholders’ equity..... 351 Other comprehensive income .................................. 208 Analysis of the separate statement Statement of cash flow .............................................. 209 of financial position ..................................................... 372 Statement of changes in shareholders’ equity..... 210 Separate income statement analysis ..................... 395 Notes to the consolidated financial staments ...... 211 Representations on the separate financial The Group .............................................................. 211 statements ................................................................... 409 Criteria for the preparation of the financial Board of the statutory auditors’ report ................... 410 statements ............................................................. 211 Auditors’ report ............................................................ 425 Form and contents of the consolidated Financial statements of the main subsidiaries .... 430 financial statements ......................................... 212 Accounting standards and consolidation principles ................................................................ 212 Analyses of the consolidated statement on financial position .................................................... 259 Consolidated income statement analysis ............. 307 Representations on the consolidated financial statements .................................................. 333 Board of Statutory Auditors’ Report on the Consolidated Financial Statements at 31 December 2017 ................................................. 334 Auditors’ report ............................................................ 336 Courtesy translation 4 ANNUAL REPORT AS AT 31ST DECEMBER 2017 LETTER TO SHAREHOLDERS Dear Shareholders, The year 2017 was also a very satisfying year for ERG with significant growth compared to the previous year and the guidance offered to the Market, despite the poor wind and water conditions that marked the period. With the transfer of TotalErg and entrance into the solar energy market, we have successfully concluded our process of industrial transformation from oil to renewable sources, an ambitious and complex journey, which over the past ten years has led us to become groundbreakers in the energy sector and a leading European supplier of electrical energy from renewable sources, as well as the very first windfarm operator in Italy. In November 2017, we signed a transfer agreement for our holdings in TotalErg to the api Group. The operation marked our definitive exit from the oil business and allowed us to strengthen further the financial structure to the benefit of the development of renewable sources. Also in November, we signed a purchase agreement for 30 photovoltaic fields for 89MW, located in eight Italian regions, bringing another important element to our technological portfolio. We now boast a combination of electrical generation of very high value, due to the balance of programmable and non-programmable sources, the integration and complementarity of the four sources of production (wind, sun, water and natural gas) and the geographical diversification in Italy and abroad. The year 2017 also saw the continuation of our development plan in the wind power sector. We experienced further growth in Germany, arriving at 216 MW of installed power through the acquisition of six farms totalling 48.6 MW. We strengthened our presence in France at the beginning of this year. We now have 268 MW of installed capacity, with the acquisition of two parks of 16 MW and a pipeline of approximately 300 MW. Also in France, in April of this year, we signed an agreement for the purchase of two more farms of 26 MW, one of these will be operative by the end of the year. We also acquired a 750 MW pipeline and a local team with proven development experience that will reinforce and integrate our structures that are already established in the area. As such, by the end of the year we will have almost 300 MW of capacity installed in the country and can count upon the development of a pipeline of approximately 1,000 MW. 5 In March 2018, we communicated the transfer of the Brockaghboy windfarm that started full operations upon the completion of construction work at the end of 2017. The sale, motivated by high investment return, will help to finance other growth projects included in the Plan. We evolved a new Business Development structure over the course of 2017, creating the foundations for organic growth in France, Germany and the United Kingdom. This is also supported by the implementation of a local organisational structure, an essential prerequisite for the Group’s long-term development in the target countries. With respect to economic and financial figures for 2017, apart from improving the results compared to the previous