ERG Renew (EGR.IM)

SELL

Sector: Energy / Renewable energies Initial Coverage: growing but with unsolved structural problems Investment view ERG Renew, previously known as EnerTAD, is the result of the merger of ERG Power and Gas’s assets with the former EnerTAD business. ERG Renew is organised as a holding company with four business units: Wind Italy, Wind France, Mini Hydro, and Water Services (which will be divested because no longer strategic). At the end of 2008 the portfolio of operating wind farms reached a total capacity of 199 MW, of which 144MW installed in Italy and 55MW in France; accounting for 80% of the Group revenues (44.5M€). ERG Renew’s industrial plan counts to install 169MW of new wind capacity by 2012, of which 140MW in Italy and 29.2MW in France. The plan will require investments worth 289M€. The financing will be provided through equity (90M€ of which 70M€ guaranteed by the parent company ERG) and debt (in the forms of project financing). There is still no evidence on the timing and the nature of the operation, thus the balance sheet remains stretch. Valuation In order to evaluate ERG Renew we made a SOTP adding together the NPV of the Wind businesses (calculated with a 25 years DCF model), the book value of the Mini-Hydro business and the book value of the Water Services business. The valuation returns a fair value of 0.65€ per share, which implies a 32% downside.

May 26, 2009 Key Data Last Price (€)

0.96

Target Price (€)

0.65

Upside/(downside)(%)

-32%

Market cap (€M)

127.4

EV (FY’08, €M)

382.0

Investment Profile

from 1 worst to 5 best

Liquidity Management Valuation Returns Growth 0

1

2

3

Risks Unfavorable changes in the future Italian incentive scheme could negatively affect the profitability of the investments made in renewable businesses. The current market conditions lead either to a lack of available financing or result in financing being more expensive. The authorization process is time consuming and expensive, causing capacity targets and profitability to be missed. Forecast 2008A 2009E 2010E 2011E Sales (€M) EBITDA (€M) EPS (€) Valuation EV/EBITDA P/E Dividend yield ROCE after tax EV/CE

44.5 9.9 -0.18

62.0 24.9 -0.19

62.2 25.1 -0.20

79.8 39.0 -0.18

2008A 34.3 neg. 0.0% neg. 0.9

2009E 19.5 neg. 0.0% neg. 1.0

2010E 25.0 neg. 0.0% neg. 1.1

2011E 17.3 neg. 0.0% neg. 1.1

5

Stock data Ticker Bloomberg

EGR.IM

Number of shares (M)

132.7

Free float

17%

Main shareholder

We initiate the coverage with a SELL rating. ERG Renew has high holding operating costs, which up to date did not translate into development of its pipeline, and a weak operational performance, at least since the Q4’08. The lack of diversification into different renewable sources other than wind increases the company’s risk profile.

4

ERG Spa (77.4%)

Daily trading volume

111k shares

120 100 80 60 40 20 0

Mibtel Share perf (%) Absolute Rel. to Mibtel

ERG Renew 3M

6M

1Y

3.8%

9.8%

-66.4%

-5.4%

14.7%

-25.9%

Jacopo Tagliaferri Equity analyst Tel: +39 02 76 00 96 52 [email protected]

Twice Research S.r.L. con Socio Unico - via San Vittore al Teatro 1, 20123 Milano – Tel. 02.80231410; Fax 02.80231490 P.IVA: 03227100967 – numero R.E.A.:1658947 – Capitale sociale: 15.000 € Società soggetta all’attività di direzione e coordinamento di Twice SIM S.p.A..

EGR

Investment case ERG Renew, previously known as EnerTAD, is the result of the merger of ERG Power and Gas’s assets with the former EnerTAD businesses. Today the company focuses on the production of electricity from renewable sources; mainly wind. ERG Renew has established itself as a second tier player in the Italian wind market, with a 4% market share. ERG Renew currently holds the following “renewable” assets:   

144MW of operating wind farms in Italy: the company runs 6 farms, 3 of which located in Puglia; 55MW of operating wind farms in France: the company runs 5 farms located in the North of the country; 2.2MW of Mini-Hydro plants: resulting from the merger of Erg Power and Gas’s assets; In addition the company controls Sodai and DSI, two subsidiaries which belong to the Water Service division, active in the treatment of industrial waste. The division will be divested because it’s no longer strategic. In March ERG Renew presented its new industrial plan for the period 20092012: the company expects to install new 169.9MW, investing approx. 302M€. The industrial plan relies on:

  

a solid pipeline: 140MW of wind farms are under construction in Italy, 29.2MW in France. This new capacity will come on stream in 2010 and in 2011; an experienced management, which wrote the last industrial plan; the financing of the parent company: ERG Group pledged itself to underwrite pro quota the future capital increase (77.4% on the whole), thus guaranteeing ERG Renew a minimum cash-in of 70M€. In the past ERG Renew has faced few problems:





the first industrial plan, released in May 2008, has been cancelled because of operational failures (i.e. delays in the achievement of authorizations and in the procurement of wind turbines) and weak financial markets (i.e. the 200M€ capital increase was cancelled); the integration of ERG Power and Gas structure into EnerTAD has been difficult and, at the management level, not functional. Thus we point out the following weaknesses:

 



structurally high holding costs (i.e personnel costs, expenses related to the development of greenfield projects and current lawsuits); weak operational results: in the Q1’09 the wind business was penalized by poor wind conditions at the French farms and grid connections’ problems at the Puglia’s farms; the lack of diversification into different renewable sources.

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EGR

Valuation As a result of the weaknesses highlighted above we initiate the coverage with a SELL rating: our fair value of 0.65€ per share implies a 32% downside. In order to evaluate ERG Renew we made a SOTP adding together the NPV of the wind businesses (calculated with a 25 years DCF model), the book value of the minihydro business and the book value of the water services business. In order to achieve the industrial plan goals, ERG Renew needs to increase its capital. The current balance sheet structure cannot bear the capex planned. In our estimates in 2009 the debt will reach 359.2M€ and the gearing (net debt/equity) 328.7%, which translate in a stretched capital structure. The parent company, ERG Group, committed itself for 70M€ but there is still no evidence on the timing and the nature of the operation. Risks 

Unfavorable changes in the Italian incentive scheme could negatively affect the profitability of the investments made in the renewable business.



The current markets conditions lead either to a lack of available financing or result in financing being more expensive.



The authorization process is time consuming and expensive, causing capacity targets and profitability to be missed.



There is an upside risk to our investment case. ERG Renew, if its operational performance improves and the industrial plan execution proves to be successful, could benefit from its listed status becoming an active player in the consolidation of the Italian wind business we expect to see in the next 2/3 years.

Table: SWOT analysis

Strengths

Weaknesses

- Geographical diversification

- High holding costs

- Equity provided by the main shareholder (ERG)

- Weak operational performances - Difficulties in obtaining new authorizations

Opportunities

Threats

- Internal development of the pipeline - Sale of the Water Services unit

- Unfavorable change in the incentive schemes

- Merger activity

- Execution risk

Source: Twice Research. Source: Twice Research

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Company description ERG Renew S.p.A., previously known as EnerTAD, is an Italian company operating in the renewable energy sector and in the environmental services. The new structure results from the merger of EnerTAD assets with ERG Power & Gas, the renewable division of the ERG Group. Therefore, ERG Renew is now focusing on the production of energy from renewable sources mainly developing wind farms in Italy and in France. Currently ERG Renew is organized as a holding company with four business unit: Wind Italy (since 2002, which belongs to the company ERG Eolica S.r.l.), Wind France (since October 2007, which belongs to the company ERG Eolienne France S.a.s.), Mini Hydro (an ERG Power & Gas asset, which belongs to the company Energie Pulite 2000 S.r.l.), Water Services (the historic business, which belongs to the company Ecopower S.r.l.).

Chart: Group structure as of April 2009

Source: ERG Renew

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Short history: 2001: Falck Group and TAD Group (Agarini) contribute their activities in the environmental and renewable energy sector to CMI, a listed company. 2002: TAD Group conferred to CMI, re-named EnerTAD, its stainless steel distribution activities; the group enter the renewable energy sector, starting with the wind energy production. 2004: EnerTAD issued a share capital increase of around 74€M to finance its wind business. 2006: EnerTAD divests the stainless steel distribution business, the waste to energy unit and the waste to management unit. ERG Group acquires 51% of EnerTAD. 2007: EnerTAD invests 50M€ in the acquisition of five French wind farms. ERG Group increases its stakes up to 68.3%. 2008: ERG Group through the transfer of its division, ERG Power & Gas, increases its stake up to 77.4%; therefore EnerTAD consolidates its renewable business with the acquisition of a Mini-Hydro plant. EnerTAD re-names in ERG Renew.

In 2008, the Wind Business unit (Italy and France) represented 80% of the total revenues (35M€); the remaining 20% being mainly linked to the Water Services unit (8.4M€). Chart: Revenues by business unit (in % of 2008 total revenues)

Source: ERG Renew At the EBITDA level the contribution of the Wind Business unit is even more important than at the revenues level.

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In 2008 the cumulated wind capacity reached 199MW thanks to 67MW installed during the year, of which 28MW still in process of starting the commissioning. Since 2007, the installed capacity includes 55MW of acquired French wind farms. Overall, the capacity CAGR of the period 2002–2008 has been 108%. Chart: Cumulated wind installed capacity since 2002 (in MW)

Source: ERG Renew

In accordance with the new 2009-2012 industrial plan, ERG Renew will mainly focus on the development of its Wind Business, both in Italy and in France. The company is also going to enter the Solar Business, marginally. The Water Services unit will be divested because no longer strategic.

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Table: Wind farms as of September 2008 Italian wind farms Location

Company

Share owned

Consolidated MW installed

Viticuso (Fr)

Eolo Srl

51%

9

Troia San Vincenzo (Fg)

EOS 1 Srl

100%

42

Troia San Cireo (Fg)

EOS 3 Srl

100%

30

Faeto (Fg)

EOS 4 Srl

100%

24

Pian dei Corsi (Sv)

EOS 2 Srl

100%

1.6

Vicari (Pa)

Green Vicari Srl

100%

37.5

Total

144.1

French wind farms Location

Company

Share owned

Consolidated MW installed

Hetomesnil

Parc Eolien de Hetomesnil Sas

100%

11.5

Le Carreaux

Parc Eolien du Carreaux Sas

100%

9.2

Les Mardeaux

Parc Eolien les Mardeaux Sas

100%

11.5

Lithus

Parc Eolien de Lithus Sas

100%

11.5

Le Bruyere

Parc Eolien de la Bruyere Sas

100%

11.5

Total

55.2

Source: ERG Renew

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Competition analysis Wind market End markets (size and trends): double digit growth The cumulative wind power installed in Europe at the end of 2007 is 57,136 MW; it represents 7% of the European energy production mix. In Germany the capacity installed is 22,247 MW; in Spain 15,145 MW, in Denmark 3,125 MW and in Italy 2,726 MW. In the period 2000 – 2007, wind power represented 30% of the European installed capacity. In 2007 the global new investments in wind technology was 43% of the total (Source: Frost & Sullivan). In 2007 among the EU-27 members the countries with the biggest share of new installed capacity have been: Spain (+3,522 MW), Germany (+1,667 MW), France (+888 MW) and Italy (+603 MW).

Chart: New installed capacity in 2007 among EU-27 members (in %) Netherlands 2% Sweden 3%

Others 7%

UK 5%

Spain 41%

Portugal 5% Italy 7% France 10% Germany 20% Source: Eurostat EWEA

BTM Consult ApS, a consulting firm, expects that over the next four years the USA will retain dominance as the largest single market worldwide. China will catch up fast becoming the second biggest market. The 10 biggest markets will account for 80% of the total expected energy production from wind power over the period 2009-2012.

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Chart: Top 10 wind markets 2009-2012E (in MW and %)

Canada 7,200 (5%)

Italy 5,500 (4%)

Portugal 4,100 (3%) USA 37,000 (28%)

UK 8,500 (6%) Germany 8,500 (6%) France 8,700 (7%)

Spain 9,000 (7%) India 13,000 (10%)

China 31,000 (23%)

Source: BTM Consult ApS

In 2008 the total wind capacity installed in Italy reached 3,736 MW thanks to 1,010 new MW installed during the year; the CAGR of the period 2003-2008 was 32.6%. Chart: Italian wind power installed in 2003-2008 (per year & cumulated, in MW)

MW 4000

3,736

3500 3000

2,726

2500

2,123

2000

1,718

1500

1,255

500

1,010

913

1000

342

463

603 405

0

0 2003

2004

2005

2006

2007

2008

Source: ANEV In 2008 the electricity generated from wind plants in Italy reached 6,000 GWh; the CAGR of the period 1997-2008 being 42.9%.

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Chart: Italian electricity generation from wind from 1997 to 2008 (in GWh) GWh 7000 6,000

6000 5000 4,034

4000 2,971

3000

2,343

2000 1000

1,179 118

232

403

1,404 1,458

1,847

563

0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: GSE With regards to the Italian market for wind power, there are two different estimates. The first, elaborated by the Italian government in the “Position Paper 2007” foresees: -

4,500 MW of installed capacity in 2010 (thus the CAGR of the period 2008-2010 would be 9.7%) 12,000 MW in 2020 (thus the CAGR of the period 2008-2020 would be 10.2%).

The second, published by ANEV (the wind energy national association), foresees: -

5,800 MW of installed capacity in 2010 (thus the CAGR of the period 2008-2010 would be 24.6%) 16,200 MW in 2020 (thus the CAGR of the period 2008-2020 would be 13%).

Market structure: more consolidation ahead In Italy the market for the production of electricity from wind power is dominated by 6 operators: IP Maestrale, Fri-El, Enel, Gruppo IVPC, Edens (Edison Energie Speciali) and Endesa Italia. All together they controlled 60% of the market in 2008. Out of this consolidated positions, there are few dynamic players with ambitious plans to develop and operate wind farms: Alerion, Erg Renew, Sardeolica (Saras Group), Falck Group, Terni Energia, Uni Land and Kinexia. In the coming years it’s reasonable to expect further consolidation among second tier players, once the best opportunities have been exploited. RWE. EDF Energies Nouvelles, EDP Renovaveis and Iberdrola Renewables, the biggest players in Europe, could decide to enter the market via acquisitions because of their marginal presence in Italy, a country where the internal development of wind farms requires up to 5 years.

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Chart: 2008 Italian market share per number of MW installed (in %) IP Maestrale 15%

Others 28%

Fri-El 11% Sardaeolica 2% Enel 11%

Moncada 3% Fortore Energia 3% Erg Renew 4%

Endesa Italia 7%

Gruppo IVPC 8% Edens 8%

Source: Anev Factors of production: wind and turbines The wind is clearly a free resource. In Italy the best territories are located in the South, near the coast. The regions showing the highest potential are: Puglia, Campania, Sicilia, Sardegna and Marche. The market for wind turbines is concentrated; in 2007 the first six players controlled 77% of the market. During the past years (2006 and 2007) the price for wind turbines increased because of a booming demand and of high commodities prices, approaching 2M€ for MW installed from the historic value of 1.3M€/MW. This led the producers of turbines to increase their capacities. The current credit crunch has reduced the number of projects financed by the banking system and, as a consequence, the global demand for turbines. The market has moved from a situation of excess demand to a new one of oversupply: the price for a MW installed is going down to 1.5M€. Chart: 2007 European market share of wind turbine suppliers (in %)

Others 23%

Vestas 21%

GE Wind 15%

Siemens 6% Suzlon 9%

Enercon 12%

Gamesa 14%

Source: BTM Consult ApS

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Suppliers: decreasing contractual power The suppliers’ contractual power is overall decreasing. The credit crunch has reduced the global demand. The wind turbine suppliers still demand pre-payments but lower compare to the period 2006-2007. The delivery time has also become shorter because the production bottle necks have disappeared. The wind turbine suppliers could try to react providing the O&M activity (if the producer of energy outsources the O&M activity to the turbine supplier, its dependence increases) and/or integrating downstream entering the electricity generation business. The wind turbines suppliers will continue to favor big producers of electricity because they ensure large and repetitive orders. Clients: low contractual power The electricity produced from renewable sources benefits from: 

Priority of dispatching: (D. Leg. 79/99, known as Bersani Decree). The electricity produced from renewable energy sources is given priority over other operators that use traditional power production plants. The energy is sold at market rates.



Minimum quota: producers and importers of energy from traditional sources are required to generate or purchase a specified percentage of electricity from renewable sources. In 2008 the compulsory quota was equal to 3.8% of the whole electricity production. The quota growth rate (established by the 2008 Budget Law) is fixed at 0.75% per year.



Green Certificates: electricity producers unable to comply with their mandatory quota have to buy as many Green Certificates (GC) as the MWh not produced from renewable sources. The GC could be bought from the GME, a public institution responsible to manage the trading market, or on the basis of bilateral contracts. The GC price is equal to the difference between a reference value, fixed by the GSE at 180€/MWh, and the annual average electricity transfer price (it was 67.12€/MWh in 2008). The green certificates unit value is 1 MWh.



Green certificates duration: the 2008 Budget Law increased the GC issuing period from 12 to 15 years for the new plants. The GC could be sold over three years.

The DM of December 18, 2008 established a new regulation concerning the GC price definition mechanism and the purchase conditions applied by the GSE. The decree foresees, for the period 2009-2011, that the GSE will withdraw the GC related to electricity produced by December 2010; at a price equal to the average market price of the three years before the year of the withdrawal request, thus removing the carrying risk previously written in the balance sheets of any producers of electricity with unsold GC. As a result of this legislation the buyers of GC are required to buy a minimum quota at a fixed price and as a consequence the producers of energy from renewable sources, known as IAFR, benefit of guaranteed prices.

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Chart: Sale’s procedures of Green Certificates

Power generators from fossil fuels

Independent Producers (IAFR)

Sell GC to

Energy wholesalers Through: • Private bilateral contracts • GC market, operated by GME

Source: Twice Research Barriers to entry: high There exist many important barriers to enter the business of electricity generation from wind power. Limited availability of windy locations. The increase of the capacity installed reduces the availability of windy sites. The efficiency (hours of wind/total yearly hours) of a wind plant ranges from 18% to 25%. Administrative authorization issues. The authorization procedure is complicated; it takes a long time (on average two years) to get the project approved. Credit crunch. The current financial turmoil is reducing the financial resources available and thus increasing the competition among the projects proposed; it is reducing the leverage (down to 75%) of each project and increasing the cost of debt (up to 6%). Sizable investments to build a wind power station. The capex per MW installed could approach 2M€, if the authorization is bought in the market. Securing wind turbines. Until the previous year it was useful to secure well in advance the turbines necessary to build a wind farm, due to the limited number of suppliers and the increasing demand. The current economic crisis is reducing the demand and decreasing the wind suppliers’ contractual power. Nevertheless turbines remain the key component of a wind plant. New entrants: not too many The cost to produce electricity from wind power is quite competitive compared to others sources. The legislation framework makes the Italian market one of the most interesting in terms of IRR achievable (>10%) thanks to the tariffs granted, thus making the business appealing to new entrants. On the other side, the uncertainty and the duration that involves the authorization process, combined with the significant investments necessary in an environment dominated by reduced credit availability, makes difficult for a new player to establish a visible position. In the medium term the tier one players will keep their market share and probably start a consolidation game together with the biggest international players.

13

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Appendix: reference legislation framework The Italian authorization procedure is regulated by the Legislative Decree N. 387/03 and in detail by Regional Laws. The wind plants are subject to a single authorization (Autorizzazione Unica) issued by the Region or Province. The authorization is delivered by a meeting, called Conferenza dei Servizi, where all the institutions that should grant the authorization participate. Even after the achievement of the plant building authorization, many other documents are necessary (demand for electric grid connection, request for the IAFR qualification, convention for the anemometric measurement and land buy-out) before a producer could start to sell the electricity generated.

14

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Business model and strategic positioning ERG Renew disclosed its new industrial plan together with the presentation of the FY’08 results. The company willingness is to strengthen its position in the Renewable Energy sector, consolidating and developing the Wind Business, both in Italy and in France. The industrial plan targets to install 169.2MW of new wind capacity by 2012; the CAGR of the capacity expected for the period 2008-2012 will be 17% of which 140MW to be installed in Italy, 29.2MW in France. The diversification of the renewable sources will be minimal. In the industrial plan there is only a marginal attention paid to the photovoltaic and mini-hydro businesses which target 0.7MW and 1.1MW of cumulated installed capacity respectively. Chart: Wind capacity growth (in MW)

Source: ERG Renew The total investments necessary to realize the plan should be 302M€ and will be allocated among the different renewable sources as follow: 81% for the unit Wind Italy, 15% for Wind France, 2% for Photovoltaic and 2% for Mini-Hydro (mainly for the repowering of existing assets). Chart: Capex plan (in M€)

Source: ERG Renew

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The industrial plan will be financed through debt and equity. ERG Renew estimates to need 90M€: the parent company, ERG Group, will guarantee 70M€ in 2009. During the life of the plan ERG Renew will continue to develop its pipeline of greenfield projects: the company expects to obtain the authorization to build wind farms in Italy for additional 100MW. The acquisition of Cita Wind has also brought in an interesting pipeline of projects located in France (where the authorization process is easier): 168MW are at an advanced stage, 120MW at an early stage. The growth in wind capacity is linked to the development of 4 farms: 2 in Italy and 2 in France. The farms are already in a phase of pre-construction thus granting a good visibility to the industrial plan.

Chart: Wind farms under construction Location Status

Expected start of operations

Capacity in MW

Ginestra (ITA)

In definition the contracts for the civil and electric works

Dec 2010

40.0

Fossa del Lupo (ITA)

In definition the contracts for the civil and electric works

2010-2011

100.0

Plogastel (FRA)

Civil works in course

Oct 2010

9.2

Greneville (FRA)

Still lacking the ZDE

Apr 2011

20.0

Total

169.2

Source: ERG Renew

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ERG Renew is a producer of energy from renewable sources thus positioned at the end of value chain. With the acquisition of Erg Power & Gas assets, ERG Renew has deeply increased its internal capability to develop greenfield projects. In addition the current top management, in place since March 2008, brought in a solid experience of the energy sector. Today ERG Renew is able to completely develop a project: from the scouting of the location, to carry out the authorization process and to the management of the financing and the EPC contracts. The construction works and the operation and maintenance activities are clearly outsourced. Chart: Value chain in the renewable business Siting

Project development

Authorization process

2 to 4 y

Phases

FINANCING

CONSTRUCTION

OPERATION & MAINTENANCE

O&M

Construction

6 to 9 m

1 to 2 y

20 to 25 y

Make/Buy

Critical factors

ERG Renew competitive advantages

Make in Italy; Buy in France.

Territory knowledge, technical ability, knowledge of rules and relationship with Local Administrations. Ability to negotiate EPC contracts.

The management has a deep knowledge of the utilities sector and of the renewable business.

Buy

Relation with the financial institutions and availability of the equity stakes.

Willingness of the main shareholder to provide the equity; ability to secure project financing.

Buy

Ability to enter into favorable and timely procurement agreements. Efficiency and experience of the internal team in handling the project management.

Buy

Ability to select a reliable operator and to secure punctual provisions of raw materials to feed the plants.

PROJECT DEVELOPMENT Siting Development Regulatory Procedures Pre-construction

Financing

Source: Twice Research

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Corporate profile Shareholders: limited free float Since 2006 the reference shareholder of ERG Renew (ex EnerTAD) is the ERG Group (through San Quirico Spa); today the parent company holds 77.4% of the outstanding shares. Generali Investments France S.A., a financial investor, holds 5.3% of the outstanding shares. As a result the free float is limited to only 17% of the outstanding shares. Chart: Shareholders structure

Source: Consob, as of May 2009

Management: experienced The actual management, in ERG Renew since March 2008, has a good experience of the renewable sector. The President of the Board, Mr Raffaele Tognacca, comes from ERG Power & Gas. His previous experience was within the utility sector in Switzerland. Mr Francesco Del Balzo, the CEO, has gained a deep knowledge of the renewable business during his previous tenure at Edison Energie Speciali. Disclosure: fair The company discloses all the elements the market needs to properly understand the major decisions taken by the management. The new management that is in charge of carrying out the latest business plan goals is open and transparent with the market communication. Corporate governance: good The Board of Directors is composed of 9 members. In the Board seat 4 independent members: Italo Giorgio Alfieri, Lorenzo Caprio, Giorgio Mazzanti and Ernesto Monti. Mr. Vittorio Garrone is Vice President of the Board. The group has also adopted the compensation committee and the internal committee in its corporate governance structure.

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Financial Communication: open, but not always properly defined ERG Renew has a dedicated Investor Relation Manager, which communicate the financial results efficiently. The review of the first industrial plan and the cancellation of the capital increase associated have affected the company’s track record. Auditors Deloitte & Touche S.p.A. is responsible for the auditing of ERG Renew’s financial statements. The contract expires on 31 December 2011. In 2008 the remuneration of the Auditors was 61K€. Share price Chart: ERG Renew share price over the last 12 months

120

Source: Twice Research. 100 80 60 40 20 0

Mibtel

ERG Renew

Source: Twice Research

Liquidity: poor ERG Renew is listed on the Standard segment of the Italian Stock Exchange. The th current share price (as of 25 of May 2009) is 0.96€ and thus the market capitalization is 127.4M€. The total outstanding shares are 132.7 millions. The average daily volume exchanged during the last 3 months is equal to 111k shares. Thus only 18% of the capital is exchanged on a yearly basis.

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Last results

2009 first quarter results ERG Renew results have been penalized by: a) strong decline in the French wind production (-29.1%); b) lower Italian wind production due to Terna improvements of the Italian national grid (-15.7%); c) price reduction of both electricity (77.5€/MWh down 9.0% YoY) and Green Certificates (87€/MWh vs. 95€/MWh in 1Q’08). The only positive contribution is related to the full workability of the Vicari wind farm. The Q1’09 consolidated EBITDA was 5.5M€, down 32.3% YoY. The Wind businesses EBITDA shows an overall decline compared to the previous year: the Italian Wind business EBITDA fell 1.2% down to 6.6M; the French Wind business EBITDA plunged 35.1% to 2.1M€. The Mini-Hydro and the Water Services EBITDAs were in line with the previous year performance; their contribution is marginal to the consolidated results. The EBITDA at the holding level was negative for 3.3M€, due to increasing costs for current lawsuit and for personnel. After increased depreciation (5M€ in Q1’09 against 3.7M€ in Q1’08) the Q1’09 EBIT resulted at 0.5€ (-3.9M€ in Q1’08); the first quarter recorded a loss of 1.9M€ (compared with a 1.5M€ profit in Q1’08). The Capex for the period were only €3.2mn, exclusively related to the wind business development. As a result the Net Debt increased to 261.3M€ from 254.3M€ at the end of 2008. ERG Renew expects the production slowdown at Troia SV and Troia SC wind parks to continue for the entire year, thus penalizing the 2009 results. The Faeto wind park will start to fully contribute during the Q2’09, although it may be affected by the same production slowdown which hit the other parks in Puglia. The capex for the year are confirmed at 93M€.

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2008 full year results 2008 full year results have been penalized by: a) decline in the domestic wind production (-6.3%); b) 7.2M€ write-down of wind intangible assets, related to the uncertainly in the authorization process; c) provisions for 4.8M€; d) credit write-down for 5.8M€ of a non core stake in Ansaldo Fuel Cells S.p.A. (R&D company in the hydrogen sector). FY’08 total revenues are equal to 43.4M€, up 17.3% on FY’07. Such increase is related to French wind parks acquisition and to the consolidation of the ERG Power & Gas assets (2 wind parks and the mini-hydro power station). The EBITDA by division shows overall worsening performance compared to the previous year: the Italian wind division went down 9.4M€ YoY, the water services business went down 0.2M€ YoY and the holding registered a 5M€ YoY reduction. These performances have been partly offset by the French wind business unit that registers an EBITDA contribution for 6.2M€. Therefore non-current costs weighted on the bottom line; thus negatively affecting the FY’08 net result. ERG Renew closed the financial year with a 24.4M€ loss (2007 net result was 2.3M€). The CAPEX have been equal to 41.7M€ (33M€ in 2007). It exclusively relates to the Italian wind business. The NFP at the end of 2008 is negative for 254.3M€ (-111M€ at end of 2007). Such increase is mainly linked to the project financing related to the wind business and to the consolidation of the ERG Power & Gas debt.

2008 last quarter results ERG Renew registered a significant increase in revenues in Q4’08 that is related to the consolidation of the French wind parks and to the ERG Power & Gas assets. Q4’08 EBITDA is negative (comparing with the positive 1.4M of the previous year) at 0.8M€ as a result of: a) 10.7% decline in production, from 67.2GWh to 60.0GWh; b) -3.7M€ as credit write-downs relative to the Italian wind business; c) -2.8M€ as provisions for WTG supply agreement. Q4’08 Adjusted EBITDA is 5.M€, up 49.5% YoY. Q4’08 EBIT is -16.2M€ (-2.3M€ in Q4’07): because of provisions for 9.2M€, of which 7.2M€ for wind write-down of capitalized cost and 2M€ of provisions for the Waste to energy and Steel divisions disposal. Q4’08 Net loss is 19.9M€ (-2.5M€ in Q4’08). It’s related to the financial costs for the consolidation of French wind parks and to a 5.8M€ credit write down of the stake in Ansaldo Fuell Cells.

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EGR

Chart: Main financial figures (in M€) €M

Q4'08

Q4'07

Var.

FY'08

FY'07

Var.

Q1'09

Q1'08

Var.

Sales EBITDA margin

12.2 -0.8 -6.6%

8.5 1.4 16.5%

44% -157%

43.4 10 23.0%

37 18.4 49.7%

17% -46%

13.2 5.5 41.7%

13.6 8.1 59.6%

-3% -32%

EBITDA Adjusted margin EBIT NET INCOME

5.6 45.9% -16.2 -19.9

3.8 44.7% -2.3 -2.5

47%

16.4 37.8% -16.6 -24.4

20.8 56.2% 8.5 2.3

-21%

0.5 -1.9

4.4 1.5

-88.6%

604.3%

-295.3%

Source: ERG Renew

Chart: Wind business main financial figures (M€) REVENUES Wind Italy

Q4'08 7.8

Q4'07 5.0

Var. 56%

FY'08 25.2

FY'07 29.0

Var. -13%

Q1'09 8.8

Q1'08 7.8

Var. 13%

Wind France

2.4

2.0

22%

9.7

2.0

387%

2.8

3.6

-22%

Total Wind

10.2

7.0

46%

34.9

31.0

13%

11.6

11.4

2%

Q4'08

Q4'07

Var.

FY'08

FY'07

Var.

Q1'09

Q1'08

Var.

Wind Italy

1.1

2.5

-56%

13.3

22.7

-41%

6.6

6.7

-1%

Wind France Total Wind

1.8 2.9

1.6 4.1

9% -30%

7.9 21.1

1.6 24.4

379% -13%

2.1 8.7

3.2 9.9

-34% -12%

EBITDA Adjusted Wind Italy Wind France Total Wind

Q4'08 7.6 1.8 9.4

Q4'07 3.7 1.6 5.3

Var. 106% 9% 76%

FY'08 19.8 7.9 27.6

FY'07 23.9 1.6 25.6

Var. -17% 379% 8%

Q1'09 -

Q1'08 -

Var. -

EBIT Wind Italy Wind France Total Wind

Q4'08 -10.3 0.0 -10.3

Q4'07 0.5 0.5 1.0

Var. -1996% -92% -1102%

FY'08 -3.7 871.0 -2.9

FY'07 15.1 482.0 15.5

Var. -125% 81% -119%

Q1'09 3.6 0.3 3.9

Q1'08 4.9 1.5 6.4

Var. -27% -80% -39%

EBITDA

Source: ERG Renew

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EGR

Valuation In order to evaluate Erg Renew we used a SOTP, valuing the Wind Italy asset and Wind France asset with 25 years DCFs without any terminal value; and valuing the Water asset and Mini Hydro asset at their book value. 1.

The DCF model we used to value the Italian wind business is based on the following assumptions for the period 2009-2038: The cumulated capacity will reach 284MW. In details, we forecast operating 144MW in 2009, 144MW in 2010, 194MW in 2011, 254MW in 2012 and 284MW starting 2013; The useful life of a wind farms is set equal to 25 years; Plant efficiency: on average 20% (1,752 annual operating-hours); Energy price and Green Certificates: we set the sum of the two at 180€/MWh as established by the law; Capex: on average 1MW costs 1.750M€; the amortization period is 13 years starting at the end of the construction period; The investment is 75% financed by debt; the interest on the debt is 6.0%; Ebitda margin equals to 79%; Wacc equals to 6.99%.

The model returns an enterprise value for the Italian wind business of 366.9M€ and an IRR equals to 10.3%. 2.

The DCF model we used to value the French wind business is based on the following assumptions for the period 2009-2038: The cumulated capacity will reach 84MW. In details, we forecast operating 55MW in 2009, 55MW in 2010, 64MW in 2011 and 84MW in 2012 and 84MW starting 2013; The useful life of a wind farm is set equal to 25 years; Plant efficiency: on average 23% (2,015 annual operating-hours); Energy price: 83.8€/MWh in 2009 (annual inflation equal to 2%); Capex: on average 1MW costs 1.750M€; the amortization period is 13 years starting at the end of the construction period; The investment is 75% financed by debt; the interest on the debt is 6.0%; Ebitda margin equals to 79%; Wacc equals to 6.71%.

The model returns a net present value for the French wind project of 76.5M€. 3.

We evaluate the Water Services business on the basis of its book value (22M€). Erg Renew is willing to sell it in the medium term because no longer strategic.

4.

We evaluate the Mini Hydro business on the basis of its book value (4.8M€). Erg Renew will only marginally invest in its development.

5.

We don’t consider the photovoltaic business for the SOTP valuation, even if ERG Renew is targeting to install within 2010 0.7MW, which correspond to a 2.5M€ capex, equal to less than 1% of the total capex planned by the industrial plan.

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EGR

6.

To our valuation we subtracted the cost of the holding, mainly personnel and SG&A costs, not allocated to the different divisions but strategic to manage the business and to develop the pipeline.

SOTP Wind Italy Wind France Water services Mini-hydro EV

EV (M€) 366.9 76.5 22.0 4.8

Per share 2.77 0.58 0.04 0.17

470.2

3.54

Holding costs

-129.9

-0.98

NFP

-254.0

-1.91

Minorities

-0.2

EQUITY VALUE

86.1

Method DCF 2009-2038 DCF 2009-2038 Book Value Book Value NPV

0.65

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EGR

Comparables The listed European comparables of ERG Renew are: -

Iberdrola, Spain, Market Cap: 14.7B€: is the worldwide leader in wind energy with nearly 9,000 MW of installed capacity at the end of 2008. The majority of its plants are located in Spain, USA and UK; it also has a major presence in Greece, France and Poland.

-

EDP Renovaveis, Portugal, Market Cap: 6.2B€: is the world’s fourth largest wind energy company, with 4,155 MW of installed capacity in Europe and in USA at the end of 2008.

-

EDF Energies Nouvelles, France, Market Cap: 2.5B€: is a major player in wind energy with 2,200 MW installed capacity. Wind power accounts for more than 90% EDF Energies Nouvelles' total installed capacity at the end of 2008; the remaining capacity is in PV, biomass and hydro power. The wind farms in operation are mainly located in Europe and in the USA.

-

Terna Energy SA, Greece, Market Cap: 557.6M€: is actively involved in the production of energy from Renewable Energy Sources and, in particular, in the construction and operation of Wind Farms, Small Hydroelectric Plants and Integrated Process Units for the overall management and energy utilization of wastes and biomass. At the end of 2008 the company had 9 wind farms in operation, with a total installed capacity of 142 MW.

-

Theolia, France, Market Cap: 139.1M€: is a leading European producer and manager of electricity from wind energy. Theolia is active in France, Germany, Spain, Greece, Italy, India, South America, some East European countries and Morocco. At the end of 2008 the company’s portfolio of wind plants in operation counted 671MW installed.

-

Alerion, Italy, Market Cap: 220.1M€: is an industrial group focused on renewable energy. Alerion mainly invests in wind farms and in solar plants. The portfolio of wind farms reached a total operating capacity of 89MW at the end of 2008; 120MW are under construction.

-

Kinexia, Italy, Market Cap: 40.7M€: is a holding company with three different business units: cosmetics, nutrition, and, since 2008, renewable energies. It’s currently running 10 MW of biogas plants. The company’s business plan counts to install 450 MW of electrical power by 2013, mainly in wind.

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EGR

Table: Listed comparables valuation 2009 Company name

2010

EV/Sales

EV/EBITDA

EV/EBIT

P/E

EV/Sales

EV/EBITDA

EV/EBIT

P/E

Iberdrola Ren.

6.6

10.3

17.7

31.2

5.4

8.2

13.8

25.1

EDF EN

4.2

13.2

19.4

28.1

3.3

9.5

13.8

22.2

EDP Ren.

8.0

10.6

19.3

38.4

6.1

7.9

14.2

20.3

ERG Renew

7.8

19.4

n.m.

neg.

10.0

24.9

n.m.

neg.

Terna Energy SA

5.0

12.0

16.2

23.2

4.4

8.9

11.9

20.3

Kinexia

1.0

12.6

neg.

neg.

0.9

2.4

6.3

34.6

Alerion

13.6

22.5

47.6

neg.

9.3

12.9

25.5

neg.

Sources: Bloomberg and Twice Research estimates

26

EGR

Questions and Answers Q: What are the economics of a wind farm? A: The life expectancy of a wind farm is 20-25 years. The annual efficiency in Italy (number of hours in operation out of the total number of hours per year) ranges from 20% to 25% approximately, corresponding to 1,752 - 2,190 working hours per year. The operative costs (insurance contract, ground lease and O&M contract) weight, on the whole, for around 20% of the revenues. As a result the Ebitda margin of the investment is about 80%, in the case of revenues equal to 180€ per KWh (as established by legislation). The capex amounts to 1.75M€ per MW installed, including the cost of the turbine (around 1.2M€) and the cost to acquire or develop the authorization (around 300K€). Q: What is the achievable IRR of a wind investment? A: The IRR of a wind investment ranges between 9-12%, depending on the economics of the wind farm. Q: What is the sustainable leverage of a renewable project? A: The banking system today provides debt up to 75% of the capex needed to realize a wind farm; up to 85% in the case of a PV plant. The debt is provided in the form of project financing. Q: What is the cost of debt today? A: The cost of debt is calculated as the sum of the Euribor 6 months (currently below 2%) plus 250/300 bps of spread. Q: Are there any risk related to the Green Certificates? A: No, there aren’t. The DM of December 18, 2008 established a new regulation concerning the GC price definition mechanism and the purchase conditions applied by the GSE. The decree foresees, for the period 2009-2011, that the GSE will withdraw the GC related to electricity produced by December 2010; at a price equal to the average market price of the three years before the year of the withdrawal request, thus removing the carrying risk previously written in the BS of any producer of electricity with unsold green certificates. Q: Do the electricity producers sign reference contracts with a turbines producer? A: No, they don’t. Following the credit crunch, the demand for wind turbines decreased dramatically; today there exists a wind turbines over-supply. As a consequence a reference contract isn’t strategic, the electricity producers being able to negotiate from time to time the purchase terms (down payment and delivering time). Q: Which is the Net Financial Position structure? A: At the end of 2008 the NFP was negative for 254.3M€. Cash and liquid assets equaled 28.9M€. The long term financial liabilities equaled 173.6M€: its’ mainly debt linked to the project financing of the Special Purposes Vehicles.

27

EGR

Q: What does the final industrial plan foresee? In May 2008 ERG Renew approved a first industrial plan (for the period 2008 – 2011) with a target investment of 880M€ in order to reach, in Italy and France, a 700MW total installed wind capacity by 2011. One month later, the BoD resolved for a capital increase up to 200M€, to support the business plan. In December the company withdrew the industrial plan because of the increasing difficulties associated with the development of wind farms in Italy (i.e. delays in the authorization process) and the negative financial conditions (i.e. credit crunch). With the FY’08 results ERG Renew issued a new industrial plan (for the period 2009 – 2012). The plan targets to add new 169MW of capacity by 2012; the total investment required is now 302M€. The financing will be provided through equity (90M€ of which 70M€ provided by the parent company ERG) and debt (in the form of project financing). Q: Are the development costs of the pipeline capitalized? No, they aren’t. With the FY’08 results the management adopted a more conservative accounting policy: the development costs related to the pipeline will be expensed until the outcome of the authorization process becomes positive. Therefore the management decided to write-offs all the cost related to wind parks not yet authorized.

28

EGR

FINANCIALS Income statement (€M)

08A

09E

10E

11E

Balance sheet (€M)

Sales

44.5

62.0

62.2

79.8

COGS

0.4

0.4

0.4

0.4

Gross Profit

44.1

61.6

61.8

79.4

EBITDA

9.9

24.9

25.1

39.0

Depreciation, Amortization

26.6

27.1

27.1

35.0

EBIT

-16.6

-2.1

-2.0

4.0

Net Financial Results

-14.1

-22.7

-24.4

-27.4

MINORITY INTEREST

Income tax

6.4

-0.6

-0.6

-0.6

Net result

-24.3

-25.5

-27.0

-24.0

08A

09E

10E

11E

LONG LIVED ASSETS

353.7

429.8

542.8

560.2

WC

42.1

39.0

39.0

41.7

CAPITAL EMPLOYED

395.8

468.8

581.7

601.9

EQUITY

134.8

109.4

80.8

53.7

0.2

0.2

0.2

0.2

PROVISIONS

6.2

6.2

6.2

6.2

PENSIONS (e.g. TFR)

0.4

0.4

0.4

0.4

NET DEBT

254.3

359.2

500.7

548.1

CAPITAL INVESTED

395.8

468.8

581.7

602.0

Ratios

08A

09E

10E

11E

EPS (€)

-0.18

-0.19

-0.20

-0.18

DPS (€)

0.00

0.00

0.00

0.00

Margin (%)

08A

09E

10E

11E

Gross Margin

99.1%

99.4%

99.4%

99.5%

ROCE after tax

Neg.

Neg.

Neg.

Neg.

EBITDA Margin

22.3%

40.2%

40.3%

48.9%

ROE

Neg.

Neg.

Neg.

Neg.

EBIT Margin

-37.4%

-3.5%

-3.2%

5.0%

Capital Turnover

0.1

0.1

0.1

0.1

Net Margin

-54.7%

-41.0%

-43.4%

-30.1%

Net Debt / EBITDA

25.6

14.4

20.0

14.1

Gearing

189.0%

328.7%

620.2%

1021.9%

WC / Sales

94.6%

62.8%

62.6%

52.3%

Amortization / Sales

59.7%

43.7%

43.5%

43.9%

Capex / Sales

-68.1%

-166.4%

-225.0%

-65.8%

11E

Growth (%)

08A

09E

10E

11E

Sales growth

17.6%

39.4%

0.3%

28.3%

EBIT growth

-293.9%

-87.1%

-7.0%

-298.9%

Net growth

n.m.

4.6%

6.0%

-11.0%

Cash Flow statement (€M)

08A

09E

10E

11E

Valuation

08A

09E

10E

Cash Flow

2.2

1.6

0.1

11.0

EV/Sales

7.7

7.8

10.1

8.5

+/- Var. Working Capital

-15.3

3.1

0.0

-2.7

EV/EBITDA

34.3

19.5

25.0

17.3

Operating Cash Flow

-13.1

4.8

0.1

8.3

EV/EBIT

n.m.

n.m.

n.m.

n.m.

Op. Cash Flow / Sales

-29.4%

7.7%

0.1%

10.4%

P/E

Neg.

Neg.

Neg.

Neg.

Capex

-30.3

-103.3

-140.0

-52.5

P/B

0.6

1.2

1.6

2.4

FCF

-43.4

-98.5

-139.9

-44.2

EV/CE

0.9

1.0

1.1

1.1

FCF / Sales

Neg.

Neg.

Neg.

Neg.

P/FCF

-2.0

-1.3

-0.9

-2.9

-50.3%

-77.3%

-109.9%

-34.7%

0.0%

0.0%

0.0%

0.0%

FCF Yield Stock data Number of Shares (M)

08A

09E

10E

11E

132.7

132.7

132.7

132.7

Dividend yield

Average share price LTM (€)

0.7

1.0

1.0

1.0

Market cap (€M)

86.3

127.4

127.4

127.4

See Legend for all definitions

Enterprise Value (€M)

340.5

486.6

628.1

675.5

Source: Company data, Twice Research estimates

29

EGR

LEGEND EV or Enterprise Value = Market capitalization + Net Debt + Pension (i.e. TFR) CE or Capital Employed = Fixed Assets + Working Capital Fixed Assets = Tangible + Intangible + Financial assets WC or Working Capital = Stocks + Trade Accounts Receivables + Other current assets + Deferred and prepayment – Trade Accounts Payables - Other current liabilities - Deferred and prepayment Net Debt = Interest Bearing Liabilities – Cash – Securities IC or Invested Capital = Shareholders’ Equity + Minorities + Net Debt + Pension (i.e. TFR) DA = depreciation and amortization CF or cash flow = net result + depreciation and amortization FCF = free cash flow NOPAT = net operating profit after tax COGS = cost of goods sold Gross Profit Margin = net sales – cost of goods sold EBITDA = Earning before interests, taxes, depreciation and amortization EBIT = Earning before interests, taxes ROCE = return on capital employed after tax ROE = return on equity ROA = return on assets Capital Turnover = Sales / Capital Employed Gearing = Net Debt / Shareholders’ equity PE = price to earnings PB = price to book FCF yield = FCF / market capitalization EPS = Earnings per share (fully diluted) DPS = dividend per share (fully diluted) Risk free rate = 10 years Italian Government Bond (e.g. BTP) Unlevered Beta = Beta / [ 1 + ( 1 – t ) ( D / E ) ] WACC = Ke * E / EV + Kd ( 1 – t ) * D / EV

30

EGR

DISCLAIMER Analyst Certification The analysts who prepared this report write their own opinions and their remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. The financial analysts or their relatives are not manager, company director or adviser of the Issuer. TWICE SIM S.P.A. and TWICE RESEARCH Srl have adopted internal procedures to ensure the independence of their financial analysts and to prescribe appropriate rules of conduct. Disclaimer This recommendation has been prepared by TWICE RESEARCH’s financial analysts; TWICE RESEARH is a company of TWICE GROUP. This analysis is based on information deemed to be reliable and originating from the company under analysis or other reliable sources, for the completeness and accuracy of which TWICE RESEARCH Srl assumes no liability. TWICE RESEARCH Srl is used to show a draft of the study to the Investor Relations Office of the Issuer to check the information contained, not to valuating them. The financial instruments herein are valorized at the reference price of the day before the publication, where the valorization is different it is indicated. Coverage policy TWICE RESEARCH Srl intends to provide continuous coverage of the financial instrument analyzed in this document and to produce additional reports in conjunction with the release of periodic financial data and related significant company and market events occurring within the sphere of activities of the issuing company. During the last 12 months TWICE RESEARCH Srl did not draw any recommendations about the instrument as far as this report is an initial coverage. Specific disclosures Pursuant to Article 69-quarter and 69-quinquies of CONSOB regulation no. 11971/99 we hereby declare that TWICE GROUP has a specific interest in the issuing company, as well as the financial instruments and transactions mentioned in the analysis, as a result of occasional long and short positions in the financial instruments mentioned in the analysis or the execution of related transactions. The analysis is drawn up with care, clearness and disclosure. It is released solely for information purposes and is in no way to be considered an offer to sell, underwrite, or trade, or a recommendation of any kind to purchase, underwrite, or trade financial instruments or, in general, to invest in the related securities. TWICE RESEARCH Srl may not be held liable for any effects resulting from the use of this report. In particular, and in consideration of the fact that past performance is not an indicator of future earnings, TWICE RESEARCH Srl provides no guarantee that investments goals will be met, nor does the company assume responsibility for any imprecision in the data report and/or elaborated upon in the report. Any reproduction, in whole or in part, of this report without the express written consent of TWICE RESEARCH Srl is prohibited. It is not intended for and should in no way be transmitted or otherwise distributed neither in the United States, Canada, Australia, or Japan, nor in any other nation in which distribution requires prior authorization by the proper authorities. Valuation methodology Company valuations are based on the following valuation methods: discounted cash flow method (DCF), asset-based evaluation method and multiplesbased models (for examples PE, P/BV, PCF, EV/Sales, EV/EBITDA, EV/EBIT etc.). The financial analyst chooses the valuation method that prefers.

31