Consolidated financial statements

2017 Consolidated financial statements ANSALDO ENERGIA - Consolidated financial statements 2017

16152 Genoa - Italy - Via N. Lorenzi, 8 - Phone +39 010 6551 - Fax +39 010 655 3411 - [email protected] - www.ansaldoenergia.com

16152 Genoa - Italy - Via N. Lorenzi, 8 - Phone +39 010 6551 - Fax +39 010 655 3411 [email protected] - www.ansaldoenergia.com

Table of contents 6

Financial Highlights

7

Management report

11

Analysis of the financial position

16

Financial situation

18

Alternative NoN-GAAP performance indicators

20

Management performance

28

organisational and process/product developments

31

Research, development and technological innovation

34

Personnel

36

Risk management

37

Guarantees given as part of the agreement for the sale of the Parent Company's shares

38

Quality, environment

42

Management outlook

43

Consolidated Financial Statements as at 31/12/2017

44

Consolidated Income Statement

45

Consolidated Statement of Comprehensive Income

46

Consolidated Statement of Financial Position

47

Consolidated Statement of Cash Flows

48

Consolidated Statement of Changes in Equity

49

Reconciliation of the Parent’s equity and net result with consolidated figures as at 31 December 2017

50

Notes to the Consolidated Financial Statements as at 31/12/2016

50

1.

General information

50

2.

Form, contents and accounting standards applied

51

3.

Accounting standards adopted

66

4.

Recently issued accounting standards

68

5.

Accounting estimates

69

6.

Risk management

72

7.

Capital management

72

8.

Financial assets and liabilities by category

74

9.

Fair value measurement

74

10. Segment reporting

75

11. Business combinations

77

12. Intangible assets

79

13. Tangible assets

80

14. Equity investments

83

15. Receivables and other non-current assets

83

16. Inventories

84

17. Contract work in progress and advances from customers

85

18. Trade receivables

86

19. Financial receivables

86

20. Tax assets and liabilities

87

21. other current assets

87

22. Cash and cash equivalents

88

23. Equity

89

24. Non-current liabilities to related parties

89

25. Loans and borrowings

92

26. Provisions for risks and charges

94

27. Employee benefits

96

28. other current and non-current liabilities

97

29. Deferred tax liabilities and deferred tax assets

97

30. Trade payables

98

31. Derivatives

98

32. Revenue

99

33. other operating income and expense

99

34. Purchases and services

100

35. Personnel expenses

101

36. Change in finished goods, work-in-progress and semi-finished products

101

37. Amortisation, depreciation and impairment losses

101

38. Internal work capitalised

102

39. Badwill net of integration costs

102

40. Financial income and expense

103

41. Income taxes

103

42. Earnings per share

104

43. Impact of related party transactions

110

44. Cash flows from operating activities

110

45. Guarantees and other commitments

111

46. other information

112

47. Key events that took place after the reporting period

113

PARENT CoMPANy CoRPoRATE BoDIES

114

INDEPENDENT AUDIToR’S REPoRT

These Consolidated Financial Statements have been translated from those issued in Italy, from Italian into English, solely for the convenience of international readers.

Financial Highlights

OrDerS reveNue Net reSult

Net FiNaNCial Debt

6

2017: € 1,333.4 M 2016: € 1,531.2 M 2017: € 1,464.1 M 2016: € 1,253.3 M 2017: €

5.7 M

2016: €

60.4 M

OrDer baCklOg ebit Free OperatiNg CaSH FlOw

2017: € 585.5 M 2016: € 252.6 M

ANSALDO ENERGIA 2017 Consolidated Financial Statements

2017: € 4,836.8 M 2016: € 5,337.1 M 2017: €

2.0 M

2016: €

96.0 M

2017: € (183.1) M 2016: €

(3.0) M

Management report


7

Dear Shareholders The 2017 fiscal year closed with a positive result of Euro 5.7 million, as opposed to a positive result of Euro 60.4 million in 2016. However, a more uniform comparison between these two results must take into account two significant and unrepeatable aspects of the two financial statements in question. on the one hand, during the course of 2016 the result benefited from the badwill resulting from the acquisition of various assets from General Electric, amounting to Euro 69.6 million, being credited on the income statement, while on the other hand, as amply addressed below, the 2017 result deducts an extraordinary net expense, amounting to Euro 58.2 million, resulting from the combined effect of the write down of the financial receivable in relation to Unit NV and the release of the Enipower risk provision. More specifically: • on 28 November 2017, ruling on the judgement of the Court of Cassation, the Milan Court of Appeals declared the parent company Ansaldo Energia S.p.A. not guilty of all charges for allegedly failing to supervise an employee believed to have acted unlawfully within the context of procurement contracts commissioned by the company Enipower. Following this judgement, the risk provision previously set aside, amounting to a total of Euro 90.7 million, was released. • During the course of 2017, through the parent company Ansaldo Energia S.p.A., the Group reached an agreement with Unit NV, the majority shareholder of yeni Elektrik, to refinance the debt held by yeni Elektrik itself. The refinancing was carried out by means of a Project Finance Vehicle (AU Finance Holdings BV) 60% owned by Unit NV

8

and 40% owned by Ansaldo Energia S.p.A. In late August 2017, the new company received a loan for USD 120 million from a syndicate of banks organised by Nomura International Plc., which also acted as a subordinate lender by subsequently directing the funds to yeni Elektrik. This maturity date of this loan is 31 December 2019. The Parent Company, in turn, signed a commitment to underwrite part of this loan, up to a maximum of USD 45 million, if the syndication were not to be completed in time: this commitment, which initially had a duration of ninety days, was later extended to one hundred and twenty days. By the expiry date of the aforementioned commitment, amounts totalling USD 22 million were not yet underwritten, which the Parent Company arranged to pay in late December 2017. During the month of January 2018, the same Parent Company yielded a portion of those USD 22 million, amounting to USD 12.5 million, to Nomura. The terms of the agreement with Nomura require the Parent Company and Unit Investment NV, jointly, to make capital contributions to A-U Finance Holdings B.V. in the event that the same should find itself unable to meet the repayment obligations. This transaction is part of the general assessment conducted in relation to Unit NV, whose establishment is briefly described below. Upon stipulating the supply agreement for a combined cycle power plant with a power rating of approximately 825MW in the industrial district of Gebze – Istanbul (Turkey) in 2011, the Parent Company stipulated an agreement with Unit NV concerning a share capital investment in yeni Elektrik, the company that had been established to manage the plant in


question. Under the investment agreement, the Parent Company acquired a 40% holding in yeni Elektrik, worth 120 million USD (originally approximately Euro 86 million) and subsequently made the capital injections needed to provide the company with the means to construct and manage the plant. The equity investment was accompanied by a series of further agreements with Unit NV, which clearly stipulate how the parent company will have the right to sell its stake to Unit NV at a fixed date, at the amount of its investment plus an established return. This aspect justified the inclusion of this entry among the financial receivables. If our partner is in financial difficulty, and is therefore unable to meet the obligations described above, the agreements allow the Parent Company to pay off the receivable by selling off 100% of yeni Elektrik, or using the operating cash-flow. We therefore decided to perform a check on the value recoverable from yeni Elektrik, estimating its future cash flow and using a panel of European listed companies operating in the electric energy production business. During the course of 2017, the deterioration of yeni Elektrik's liquidity situation and its consequent temporary inability to meet its maturing liabilities, led to the need for the group to perform injections of liquidity at the end of December, even on behalf of the other partner, some of which have been described in this section. Following these operations, as of 31 December 2017 the receivable amounted to Euro 233,868 thousands. Due to the events cited above, it became necessary to conduct another prudent assessment of the receivable in question, which was carried out by the Directors of the Parent Company through an analysis of the estimated recoverability of the asset, the possibility of its sale, and the geopolitical situation in Turkey, and this resulted in the write down of the receivable by approximately Euro 148,868 thousands, bringing its net value to Euro 85,000 thousands, which is believed to be recoverable under the guarantees received and several collections recorded in early 2018. This assessment is also supported by the findings of the verification regarding the recoverable amount of the financial receivable held in relation to Unit NV, entrusted to a leading consulting firm, which, in relation to the worst case scenario, fully confirmed the assessments made by the Directors for the item in question. 2017 was also characterized by other important events: • the Parent Company's Board of Directors resolved to propose to the Shareholders a severable capital increase up to a maximum of Euro 80 million, to be offered as an

option to the Shareholders, in order to allow for a certain level of controlled debt over the course of the plan; • together with two joint partners, the Group established a Project Company called Cogenerazione Rosignano, one third of which is owned by each of the three shareholders (Ansaldo Energia, Solvay Belgium and Marubeni). The investment's value amounts to approximately Euro 50 million over two years, with a maximum investment amount of Euro 5 million being borne by the Group. The project, which has already been completed, was primarily aimed at boosting the energy efficiency and reducing the greenhouse gas emissions of the Solvay Group and Rosignano site, and involved the demolition of a part of the existing plant (1 GT) and the construction of a new plant with a GT and relative maintenance contract; • the Company acquired a minority shareholding consisting of 10% of the share capital of the company AC Boilers S.p.A., which manufactures and sells thermal plants and combustion systems. The investment for your Group amounted to Euro 6 million; • integration continued with the former Alstom businesses in the United States and Switzerland, which were acquired by the Group in February of 2016, with a major commitment to R&D and Service development activities. From an organisational standpoint, the Group began upgrading its processes with a Business Process Management initiative that involved all the functions and the various Italian and foreign business, with the aim of supporting the Group's activities in terms of processes, procedures, governance rules, and information systems. In this regard, as a natural continuation of the integration activities, the new SAP-Greenfield accounting system for the American and Swiss companies was introduced in early March of 2017, and was rendered fully operational in June; this implementation involved all of the Group's functions for over a year, with a major investment in terms of time and resources employed. More generally, the fiscal year saw the continuation of the economic and financial crisis that has characterized the global context over the past decade, which has even had an impact upon the Group's sector of operations. The energy market is undergoing a phase of structural difficulties, which is also affecting the main competitors, and, with regard to your Group, has had a particular impact in the area of the new plants. The causes can be attributed to the presence of certain geopolitical factors in areas where the Group has always had a historical presence, such as the Middle East or North Africa,


9

as well as economic factors, such as the decline in consumption, which has also had an impact on the demand for electrical energy and/or the growth of renewable energy, which render the construction of combined-cycle plants, especially of an intermediate size, more contestable for certain clients. Within this difficult context, your Group, in contrast to its competitors, has continued and has even increased the Research and Development investments necessary to market new products destined to become a driving force for the future. With regard to this vision of the future market, one of the most import events that has taken place, just two years after the transaction that resulted in your Group having the technologies necessary for the construction of the class H

10

machinery in its portfolio, was the presentation of the first GT36 built entirely at the Genoa production facility in late February of 2018, which is expected to be launched on the market during the course of 2018. Further impetus was also given to the digital transformation process initiated some time ago for Ansaldo Energia. Within this framework, we proceeded to consolidate and share, with all the Group's companies, the technological infrastructures and application platforms that constitute the enabling systems for the new applications addressed by the Enterprise 4.0 Plan. Despite the difficulties described, the Group made the decision not to resort to staff reductions or social safety nets, thus once again showing how it continues to have great faith in the future, and in the industrial capabilities of all of its staff.


Analysis of the financial position

The reclassified consolidated income statement is shown below:

euro/thousand

2017

2016

1,464,053

1,253,269

1,464,053

1,253,269

(1,306,560)

(1,070,761)

(59)

(1,283)

3,915

8,955

34,852

(11,454)

ebitDa

196,201

178,726

Amortisation and depreciation

(40,425)

(49,309)

ebita adjusted

155,776

129,417

Extraordinary (costs) / income

(98,389)

20,449

(2,352)

(4,023)

(53,069)

(49,854)

1,966

95,989

Net financial income (expense)

(56,261)

(47,591)

Income taxes

(59,950)

(12,047)

Net reSult

5,655

60,445

(25)

(114)

revenue

Purchase and personnel expense Impairment losses other operating net income (expense) Change in work-in-progress, semi-finished products and finished goods

Termination benefits Amortisation of intangible assets acquired with business combination ebit

of which third parties


11

The revenue trend over the past two fiscal years and its breakdown by Business Line is as follows (in millions of Euro):

1600

NEW UNITS OPERATIONS

SERVICE OPERATIONS

NUCLEAR

TOTAL REVENUES

1400

1,464

1200

1,253

1000 800 600 400

747 575

632

595

200 0

The 2017 fiscal year recorded an increase in revenue equal to approximately 16.8%, which was mainly due to the contribution of the New Units Business Line, which represented approximately 51.0% of the revenue and 33.1% of the gross margin generated during the fiscal year. During the course of the fiscal year, this Business Line's revenue increased by 30.0% with respect to the same figure for 2016, mainly due to the progression of the projects in oman. The Service Business Line represented 43.2% of the revenue, but contributed 63.1% to the gross margin. With respect to 2016, the item in question increased by about 6.2% for the Service Business Line. Finally, the Nuclear Business Line represented 5.8% of the revenue, and contributed 3.8% to the gross margin. This Business Line's revenue in 2017

12

2017 85

83

2016

showed an increase of 1.9% with respect to the same figure for 2016. The other net operating revenue/costs item, which was positive for the amount of Euro 3.9 million, mainly includes the following entries: • Euro 9.1 million relating to the release of provision due to the non-manifestation of the risks for which they had been set aside; • Euro 9 million in insurance settlements; • Euro 2.6 million of net exchange losses on operational entries; • Euro 8.1 million for amounts set aside in risk provisions; • Euro 3.1 million for indirect taxes; • Euro 0.2 million for other net operating expenses.


The trend of the main indicators in the reclassified income statement is as follows (in millions of Euro):

250

EBITDA

EBIT

NET RESULT

200

196.2 150

178.7

100

96.0 50

0

60.4 2016

The Ebitda underwent a good increase with respect to 2016 (+9.7%), mainly due to the increased revenue and the relative margins. The items that affected the Ebit are mainly the following: • Amortisation and depreciation for the amount of Euro 40 million (Euro 49 million in 2016);

euro/thousand

2017

5.7

2.0

• Amortisation resulting from PPA allocations in the amount of Euro 53 million (Euro 50 million in 2016); • Net non-recurring expenses and integration costs amounting to Euro 101 million (Euro 16 million in 2016), broken down as follows:

2017

2016

(31,766)

(49,141)

(148,868)

–

Enipower provision release

90,745

–

Asbestos risk provision accrual

(8,500)

–

–

69,590

(98,389)

20,449

(2,352)

(4,023)

(100,741)

16,426

Non-recurring expenses and integration costs Unit financial receivable write down

Badwill arisen from Gastone operation

Termination benefits


13

The trend of the total R&D expenditure can be summarised as follows (in millions of Euro):

140 120

of which:

Total expense Capitalized

Expensed

126.1

100

39.2 80

85.0

60 40

41.1 34.1

20

2017 0

The sharp increase in R&D activities over the past two fiscal years has been in response to the market prospects, which primarily appear to be oriented towards the new products in the portfolio. The financial management, which recorded a deficit of Euro 56.3 million (Euro 47.6 million in 2016) mainly includes Euro 15 million for interest on the Bond, Euro 2.7 million for other net interest expenses paid to banks, Euro 9.1 million in net foreign exchange losses, Euro 9.9 million in net capital losses resulting from the repurchase of bonds, Euro 4.5 million in net expenses on derivative instruments, and Euro 5.9 million for the write-downs of the equity investments. The other financial expenses (Euro 7.1 million) mainly consist of bank commissions and bank charges. The income tax liabilities amounted to Euro 60.0 million. The

14

5.1

2016

IRES for the 2017 fiscal year amounted to Euro 6.4 million, while the IRAP amounted to Euro 2.7 million; the taxes also include the allocation of deferred taxes on temporary deductible differences amounting to Euro 41.9 million, the most significant of which regarded the write-down of the Unit receivable, the releases of deferred tax liabilities amounting to Euro 21.7 million, and a release of deferred tax assets amounting to Euro 8.3 million, as detailed in Note 29. The other items include the allocation of taxes relating to previous fiscal years in the amount of Euro 3.9 million, surplus taxes set aside in previous fiscal years amounting to Euro 6.9 million, the release of the foreign tax reserve in the amount of Euro 11.2 million, and other taxes amounting to Euro 1 million. The following table shows the reclassified consolidated balance sheet as of 31 December 2017 and as of 31 December 2016:


euro/thousand

31.12.2017

31.12.2016

1,893,903

1,805,317

406,560

577,442

1,487,343

1,227,875

Inventories

627,503

534,325

Contract work in progress

200,208

119,726

Trade receivables

287,062

277,314

Trade payables

556,091

382,791

Progress payments and advances from customers

802,356

859,857

working capital

(243,674)

(311,283)

Current provisions

15,552

21,765

(20,747)

(43,333)

Net working capital

(279,973)

(376,381)

Net invested capital

1,207,370

851,494

621,868

598,861

(147)

(122)

585,502

252,633

Non-current assets Non-current liabilities

other net current assets (liabilities)

equity attributable to non-controlling interests Net financial debt

The non-current assets mainly include intangible fixed assets amounting to Euro 1,539.4 million, tangible fixed assets amounting to Euro 261.4 million, equity investments amounting to Euro 39.9 million, and deferred tax assets amounting to Euro 52.5 million. The non-current liabilities include severance pay benefits and other defined employee contribution plans amounting to Euro 34.8 million, provisions for risks equal to Euro 132.3 million, the deferred tax liabilities provision for Euro 151.3 million, and other non-current liabilities amounting to Euro 88.2 million. The decrease in non-current liabilities for the fiscal year, which amounted to Euro 170.9 million, was mainly due to the aforementioned release of the Enipower fund in the amount of Euro 90.7 million, and the transfer of the first tranche of debt held in relation to General Electric

for the Gastone operation, for the amount of Euro 40 million, to short term. The net working capital changed from a negative value of Euro 376.4 million in 2016 to a negative value of Euro 280 million in 2017, for a variation of Euro 96.4 million. This change was primarily due to operational entries (inventories, work in progress net of advance payments, trade payables and receivables), which showed an increase of Euro 67.6 million, as well as the change in the other current assets and liabilities, which increased by Euro 31.8 million. The company's equity of Euro 621.9 million consists of Euro 100 million in share capital, retained earnings and other reserves amounting to Euro 516.2 million, and profit on the year for Euro 5.7 million.


15

Financial situation

The net financial debt as of 31 December 2017 and 2016 is shown below.

euro/thousand

31.12.2017

31.12.2016

Current loans and borrowings

158,351

199,646

Non-current loans and borrowings

780,118

484,644

(276,300)

(250,889)

433,401

433,401

(5)

(1,235)

other financial receivables

(85,000)

(184,355)

CurreNt FiNaNCial reCeivableS

(85,005)

(185,590)

Related parties loans and borrowings

1,519

1,295

other current loans and borrowings

6,818

3,527

OtHer lOaNS aND bOrrOwiNgS

8,337

4,822

585,501

252,633

Cash and cash equivalents baNk lOaNS, bOrrOwiNgS aND bONDS Related parties financial receivables

Net FiNaNCial Debt

The net financial debt amounted to Euro 585.5 million as of 31 December 2017, for an increase of Euro 332.9 million with respect to 31 December 2016 (Euro 252.6 million). This change is mainly due to the following factors: • the Parent Company's issuance of a new senior unsecured bond for an amount of Euro 350 million, with a fixed interest rate of 2.75% and maturing in 2024, intended exclusively for the institutional clientèle and listed on the Euro MTF market of the Luxembourg Stock Exchange; • the buy back of the first senior unsecured bond issued by the Parent Company in 2015, maturing in 2020 with a fixed interest rate of 2.875%, which was also intended for the institutional clientèle and listed on the Euro MTF market of the Luxembourg Stock Exchange. The nominal amount of the bonds repurchased within the context of the offer was

16

•

• •

•


equal to Euro 159.2 million, and this transaction fell within the scope of the Group's strategy aimed at optimising the management of its financial liabilities and maturing debt. As of 31 December 2017, the residual carrying amount amounted to approximately Euro 261 million; the underwriting of two new loans for a total of Euro 140.5 million, and repayments on outstanding loans for a total of Euro 115.3 million; the increase of the hot money credit lines by Euro 47 million; a net reduction of the current financial receivables by Euro 99.2 million, due to that which has been previously indicated with regard to the company yeni Elektrik; change in the cash and cash equivalents by an amount of Euro 25 million;

The short-term loans and borrowings, amounting to Euro 158.4 million as of 31 December 2017, mainly consist of the hot money credit lines, for an amount of Euro 127 million, and payables due to factoring companies, for an amount of Euro 5.2 million (Euro 80 million and Euro 3.3 million as of 31 December and 2016, respectively), and the current portion of the medium/long-term loans for an amount of Euro 25.2 million (Euro 31.3 million as of 31 December 2016). The medium/long-term financial debts, which amounted to Euro 780.1 million as of 31 December 2017, mainly consist of the bonds, for an amount of Euro 606.8 million (Euro 420 million as of 31 December 2016), with the residual amount being attributable to the medium and long term loans, of which Euro 140 million were underwritten during the course of 2017.

euro/thousand

The explanatory notes contain detailed information regarding the aforementioned financial relationships. With the exception of the bonds, compliance with certain financial covenants is required for all the loans, all of which have been complied with as of 31 December 2017, as better described in the appropriate section of the explanatory notes. The financial receivables amounted to Euro 85.0 million, and mainly consist of the receivable due from Unit NV. As previously mentioned, this receivable, which amounted to Euro 184.2 million as of 31 December 2016, increased to Euro 233.9 million during the course of 2017, and was subsequently written off by an amount of Euro 148.9 million. The overall liquidity amounted to Euro 276.3 million, for an increase of Euro 25.4 million during the course of the fiscal year, as indicated in the following reclassified cash flow statement.

2017

2016

Cash and cash equivalents as at 1 January

250,890

98,260

Gross cash flows from operating activities

161,962

120,968

(125,058)

(58,643)

36,904

62,324

Change in working capital

(72,515)

52,775

Cash flows generated from (used in) operating activities

(35,611)

115,099

Cash flows used in ordinary investing activities

(147,536)

(118,078)

Free operating cash-flow (FOCF)

(183,147)

(2,979)

(11,008)

(42,524)

(291)

(2,922)

Cash flows generated from (used in) strategic investing activities and other

(11,299)

(45,446)

Cash flows generated from (used in) investing activities

(158,835)

(163,524)

–

40

Net changes in financial liabilities

222,748

201,139

Cash flows generated from (used in) financing activities

222,748

201,179

(3,804)

(357)

912

233

276,300

250,890

Change in other operating assets and liabilities Funds from operations (FFO)

Strategic transactions Change in other investing activities

Dividends paid

Exchange rate gains (losses) other changes Cash and cash equivalents as at 31 December

The strategic investments, which amounted to Euro 11 million, regarded the purchase of a 10% equity share in the company AC Boilers, and the establishment of the company

Cogenerazione Rosignano with two joint partners, as already mentioned in the first part of this report.


17

Alternative non-GAAP performance indicators

The management assesses the Group’s financial performance using certain non-IFRS indicators, as described below.

indicator ebit

18

Description The unadjusted profit before taxes, financial income and expenses.

2017

2016

€ 2 million

€ 96 million

adjusted ebita

EBIT excluding the following elements: • any impairment losses on goodwill; • amortisation from business combination; • restructuring costs; • other income or expenses not of an ordinary nature.

€ 156 million

€ 129 million

ebita

Adjusted EBITA excluding amortisation and depreciation of tangible and intangible assets.

€ 196 million

€ 179 million

Free Operating Cash Flow (FOCF)

The sum of the cash flows generated by the operational management and investments, excluding any cash flows qualified as "stategic investments".

€ (183) million

€ (3) million

Funds From Operations (FFO)

The cash flows generated by the operational management excluding the component represented by changes in working capital.

€ 37 million

€ 62 million

economic value added (eva)

The difference between the Adjusted EBITA and the cost of the average invested capital during the two years under comparison, calculated using the WACC (8,6% as at 31 December 2017).

€ 127 million

€ 70 million


indicator

Description

2017

2016

working Capital

Trade receivables and payables, contract work in progress, and progress payments and advances from customers.

€ (244) million

€ (311) million

Net working Capital

The working capital excluding provisions and other current assets and liabilities.

€ (280) million

€ (376) million

Net invested Capital

The sum of non-current assets, noncurrent liabilities, and the Net Working Capital.

€ 1,207 million

€ 851 million

Orders

The sum of the contracts stipulated with customers during the financial year that met the contractual requirements to be recorded in the order book.

€ 1,333 million

€ 1,531 million

Order backlog

The difference between the orders acquired and the revenue for the reference period, excluding the change in contract work in progress.

€ 4,837 million

€ 5,337 million

return On Sales (rOS)

The ratio between the Adjusted EBITA and the revenue.

10.6%

10.3%

return On investments (rOi)

The ratio between the Adjusted EBITA and the average net invested capital for the two financial years under comparison.

15.1%

14.6%

return On equity (rOe)

The ratio between the Adjusted EBITA and the average equity in the two periods compared.

0.9%

10.6%

Headcount/ average Headcount

Number of employees as of the reporting date. Average number of employees during the year.

4,367

4,254

4,291

4,228


19

Management performance

20


business outlook and competitive positioning With regard to the nuclear power plants, in 2016 over 10 GW

the performance of the global market for the construction of power generation plants and components, and the relative prospects The global market for power plants and components in which your Group operates relies heavily on forecast demand for electricity, which in turn varies according to changes in macro-economic variables. In 2017, there was a moderate recovery in the global GDP (+3.6% as opposed to 3.2% in 2016), with the increases in the Euro area, Japan, China, the emerging markets of Europe, North and sub Saharan Africa, and Russia more than offsetting the less-than-stellar performance of the United States, Britain and India. The forecast for 2018-2022 is one of stable global growth (GDP +3.7% in 2018 and +3.8% in 2022) characterised by general stability among advanced economies and growth in the emerging markets. The regions where greater growth is expected include the Middle East, Asia, sub-Saharan Africa, and South America. The medium/long term forecasts indicate a global increase in electricity demand from 2018 to 2030, with a CAGR of approximately 2.9% (Source: GlobalData). In terms of the fuel mix used to generate electric power, coal continued to be the primary source throughout 2017, although less than in the past, accounting for roughly 36% of production, followed by gas at approximately 24%. Nuclear power made up around 11% of the total, hydroelectric 16%, while oil represented a marginal quota of less than 4%. The other renewable sources (biomass, wind, solar, etc.), which are continuing to grow, provided for roughly 9% of worldwide electricity production (source: GlobalData / International Energy Agency). In 2017, the figures of the global market for fossil fuel electric plants and components fell slightly with respect to the same period in 2016. This decrease affects both orders for traditional cycle fossil fuel steam turbines and orders for gas turbines. A further decrease in orders for steam turbines is expected in the coming years, mainly due to the gradual reduction of coal as an energy source, while an increase in orders for both open and combined cycle gas turbines is expected from 2018 to 2022.

became operational, and work began on 3GW of new capacity, equivalent to about half the average of the five previous years. In 2017 there was a decrease in installed volume by approximately 13% with respect to 2016, and the ordered amount also decreased with respect to 2016, above all due to the small number of orders received from the Asian market. Approximately 60 reactors were under construction in 2017, for a total capacity of 65 GW, which should become operational by 2025. The majority of these new plants will be built in Asia, with over one third in China. Nuclear fuel's contribution to the mix of fuels used to generate electricity is expected to grow in 2040, and will reach approximately 15%, although a heightened awareness of environmental issues could affect this forecast. (source GlobalData/International Energy Agency/World Nuclear Association). Due to the increasingly restrictive safety measures adopted by many countries, an increase in the service activities to be carried out upon the existing nuclear power plants is expected. Furthermore, the exclusion of nuclear fuel from the mix of fuels used to generate electricity by some countries, combined with an increasing number of plants reaching the end of their service lives, will result in a growth of the waste management and decommissioning segment in the coming years. The renewable energy plants also continued to show good growth trends on nearly all the international markets during 2017. In particular, the continued decline in the cost of electricity (LCoE) opened up new possibilities in the Wind and Solar Power sectors. With regard to the evolution of the fuel mix for generating electricity, the use of gas is expected to increase considerably among fossil fuels; this is due, on the one hand, to a major increase in gas production and exports (both conventional and unconventional) in the USA, which could reduce worldwide prices, and, on the other hand, to the widespread use of natural gas powered plants as a back-up (network balancing) to the increasingly popular installation of renewable technologies. Furthermore, in addition to stimulating a recovery in the sales of new gas turbines, the gradual decline of coal could lead to an increased use of the existing fleet, with consequent positive impacts upon the service activities. The increased contribution of renewable energies to the energy mix also entails the need for oEMs to provide integrated hybrid solutions that will offer electricity storage possibilities, and, at the same time, to develop highly efficient, flexible, and responsive gas turbines in order to


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meet the network's demands. However, an improvement in power storage technologies could lead to a stabilisation of the energy generated by renewable sources, and could pose a long term threat to the sale of new traditional plants, although this would be offset by the foreseeable decommissioning of the existing nuclear power plants.

performance of the reference market and outlook With respect to 2016, the 2017 data showed a 30% worldwide decrease in orders on the 50 Hz market, and for machinery with power ratings greater than 50MW, with several regional variations.

With regard to the medium-term outlook, in keeping with the main macroeconomic and geopolitical scenarios, a partial recovery in gas turbine orders is expected during the fouryear period from 2018 to 2021 in terms of MW installed, while a more contained growth is expected in terms of number of units. This is mainly due to major competitors focusing upon higher level technologies (class H).

In fact, there was a slight upturn in orders throughout Europe (both East and West), while the Middle Eastern market, shaken by geopolitical tensions, recorded a 37% decrease in orders with respect to 2016.

In particular, Europe appears closer to resolving what has become a structural crisis, the Middle East/North Africa are continuing to grow, but are still struggling with political and social instability, and the countries of Southeast Asia are continuing to grow as well, but with a more contained trend with respect to the past.

The African market declined sharply, although the comparative historical data is skewed by a major Siemens order signed with the Egyptian Government in 2015/2016. In particular, sub-Saharan Africa has not yet achieved the expected growth levels.

In general, the Asia Pacific region (China in particular) has once again confirmed its increasing importance in terms of orders for new installations.

Southeast Asia and China, which have confirmed themselves to be set among the larger and more dynamic global markets, have remained stable. orders have declined in South America following last year's exploit. orders have also declined in Russia, which continues to suffer from a major crisis linked to the prices of oil in recent years. An analysis of the orders for turbogas units (used for open or combined cycle plants) within the regions belonging to the main reference market showed that the Group had a market share of approximately 10% in 2017. With about 38%, General Electric gained market shares with respect to Siemens, which had 31%, while Mitsubishi's share decreased slightly to about 11%. Now representing almost 35% of the entire market, the class H machines enjoyed considerable success. (Source: McCoy). With regard to the 60Hz market above 70MW, the preliminary 2017 figures showed a sharp decline of around

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27% with the following main market shares: General Electric at 73%, Siemens at 12%, Mitsubishi at 15%. your Group currently does not operate in this sector, but does not preclude the possibility of evaluating any opportunities that may arise in this segment.

With regard to the service activities, the medium to long term outlook indicates a growing market for at least the next decade, but one that will be characterised by increasing competition. China, Southeast Asia, and the Middle East are the regions where greater growth is expected. The increase in renewable sources requires a greater use of the existing systems’ capacities, with a focus upon reliability and availability, costs, greater flexibility, improved turndown and ramp rate, and predictive maintenance: all areas upon which your Group is currently focusing. In Countries of interest to the Group, the nuclear markets generally gave mixed signals during the course of during 2017. In fact, the investments in the modernisation of the plants currently in function continued, for the purposes of making safety improvements and extending their service lives, and have even been fostered by the signs of economic recovery in Europe. your Group has been able to take advantage of this situation by winning a major contract for safety improvements at the Krsko power plant in Slovenia. In the Decommissioning segment, the levels of investment


throughout Europe have remained largely stable, even if a certain slowdown has been noted in Britain, which has mainly been due to a comprehensive rethinking of the strategies, with the aim of obtaining significant results in shorter time frames. In particular, it should be noted that Germany, which has chosen to abandon nuclear production and seems destined to become one of the most important markets for the Decommissioning segment in the next two decades, has launched concrete initiatives. Moreover, there was no significant recovery in the construction of new plants during 2017 (if not in Russia and the Far East). In fact, the serious difficulties encountered during the realisation of various projects have resulted in crises among several of the industry’s major companies. These difficulties will be felt more broadly via the increased difficulty in obtaining funding for new projects, which is slowing down many of the initiatives in which we are interested (e.g. in Romania, and in other Eastern European countries). one exception worthy of mention is the start of the construction on the Hinkley Point plant in Britain, which should pave the way for the British Government's major programmes dedicated to replacing the existing fleet of nuclear plants.

OrDerS 2017 (Euro)

The market uncertainty is reflected in considerable pressure upon prices. During the course of the year, your Group also faced difficulties in managing certain projects, and these are reflected in the non-positive economic results of the Italian subsidiary, which were somewhat offset by the good results recorded by the British group. In this regard, during the course of the year the progressive operational integration between the two structures was accelerated.

Commercial activities Orders by geographical area and business line During the course of 2017, the Group acquired orders amounting to Euro 1,333.4, for a decrease of 12.9% with respect to the previous year. This was due to the combined effect of a decrease in the new units segment (-50.3%) and an increase in the service segment (+13.7%), while the nuclear segment showed a marked improvement (+155%). The 2017 orders are shown below by Business Line and by geographical area, and are compared to the same data from 2016 (figures in millions of Euro):

New uNitS

ServiCe

NuClear

tOtal

381.9

801

150,5

1,333.40

3.1

217.3

3.3

223.7

EURoPE

35.4

119.4

146.8

301.6

MIDDLE EAST

25.2

49.5

–

74.7

AFRICA

226

37.9

–

263.9

ASIA

92.2

80.9

–

173.1

–

296

0.4

296.4

New uNitS

ServiCe

NuClear

tOtal

767.5

704.7

59

1,531.2

ITALy

37

90.3

2.8

130.2

EURoPE

0.3

76

50.1

126.4

67.1

176.8

–

243.9

3

20

–

23

660.1

249.7

0.1

909.9

–

91.8

6

97.8

tOtal ITALy

AMERICA

OrDerS 2016 (Euro) tOtal

MIDDLE EAST AFRICA ASIA AMERICA


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New units In 2017, the gas turbine market, the Parent Company Ansaldo Energia's main market, recorded a decrease of 30% with respect to the past five years, thus revealing itself to be in particular difficulty due to the increasing competitiveness of renewable energy sources and the political and economic instability that has impacted many target countries from a commercial standpoint. on the one hand, therefore, the Group has been increasingly orienting itself towards the Chinese market, where it has become an industry leader thanks to its strong partnership with SEC, and on the other hand has continued to explore the possibility of expanding into new markets, such as that of sub-Saharan Africa, with a new logistical presence in Lagos (Nigeria). The market's decline was reflected in the volume of new acquisitions, which for 2017 stood at about Euro 382 million; the main orders acquired during the course of the year are as follows: • the provision of gas turbine models AE94.3A, AE94.2 and AE64.3A for various sites in China; • an open cycle EPC consisting of two TG AE 94.3 models for the site in Mornaguia (Tunisia); • the provision of one TG AE 94.2 model and the relative alternator for the plant in Cote Mateve (Congo); • the provision of two TG AE 64.3A models and the relative alternators for the plant in Pancevo (Serbia); • the provision of a recovery boiler for the plant in Heris (Iran). The tender awarding times have grown considerably longer, as has the period of time that elapses between the assignment of the order and the Notice to Proceed (NTP); projects that were forecast for 2017 will likely be awarded in 2018.

Service Thanks to the expansion of the product portfolio and the local stimuli generated by the new Regional structures, not to mention the technological focus of the Business Lines, the renewed Global Service has achieved its best results ever in terms of new acquisitions, which amounted to Euro 801 million (year-to-year growth of 13.7%), even despite an unfavourable USD/EUR exchange rate. These excellent results

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are the fruits of the efforts made in recent years on both the oEM front (machinery and systems manufactured by the parent company Ansaldo Energia), as well as on the oSP front (machinery and systems manufactured by third party companies), which has reinforced the Group's strategy of offering itself as a single provider of high-tech services for Gas Turbines, Steam Turbines and Electric Generators. In order to better understand the performance dynamics, the main considerations relating to the various areas are provided below: Italy The flexible approach and performance consistency demonstrated over the years have confirmed the Parent Company Ansaldo Energia as the market leader, with the company itself obtaining new orders amounting to Euro 171.6 million, and the entire Group obtaining new orders amounting to Euro 217.3 million. The use of innovative predictive maintenance techniques, combined with the development of digitisation packages, has allowed for the plants’ useful lives to be extended, while at the same time increasing their operational flexibility. Europe The progressive decline of coal, the new clean combined cycle technologies, their increasing operational flexibility, and the innovative digital techniques have allowed the utilities to rediscover a key role for their gas plants. Thanks also to Ansaldo Energia Group's commercial activities, new customers were able to be acquired, and the growth objectives were able to be achieved (Euro 119 million, for an increase of 57.1% with respect to the same figure for 2016). The continuous drive for localisation has led to Russia becoming the old continent's second largest market, after Italy, in terms of volumes. Africa 2017 confirmed how the Group's local presence can generate growth. In fact, through its Field Service Hub, Morocco reported excellent results in terms of new acquisitions, amounting to approximately Euro 37.9 million, for an increase of approximately 89.5% with respect to 2016. We are therefore more convinced than ever that the recent strategic decision to create the company Ansaldo Algerie will provide the momentum necessary to relaunch the service activities in Algeria, which has always been the area's target market thanks to Ansaldo Energia's 4000 MW of installed


power. Special mention must also be made of the MXL2 upgrade order obtained in Congo, which will allow the Pointe Noire site to reach unprecedented levels of efficiency. America Combined with the successful strategy of expanding the service portfolio and the considerable investments in technology, the group's new structure has led the Global Service division to obtain its best results ever in terms of new acquisitions in the USA, amounting to Euro 296 million. Two major LTSA contracts in the United States for GE 7FA machines, where the latest version of the Group's proprietary upgrades in the field of combustion and hot parts will be installed, are the basis for the excellent results obtained. Latin America, on the other hand, continues to be an outlet market for Ansaldo Energia's traditional Steam turbine and Electric Generator technologies. The continued growth of the Hydro business should be noted. Middle East During the course of 2017, this region represented the perfect synthesis of an integrated approach for all the Business Lines, obtaining good results in terms of growth, with a total of Euro 49.5 million in new acquisitions. The

Group's presence in the area and the new MESH Field Service Hub have allowed for relationships with traditional customers to be strengthened and for new major contracts to be acquired, such as the Taweelah site, which represents a perfect combination of oEM and oSP technology. The region also continues to offer ample opportunities for the integrated promotion of all the group's service products. Asia on the one hand, the Group's partnership with Shanghai Electric Corporation has allowed for major new acquisitions to be brought to the Chinese market, while on the other hand it has shifted the focus of the Group's service activities to the East, thus allowing it to gain entry into new markets, which have increased the level of new acquisitions to Euro 80.9 million. It should be noted that the Group has concluded important contracts for (i) a new LTSA in Thailand for V94.3A and (ii) the provision of hot parts for GE 9FA in Japan. Nuclear For the Nuclear Business Line, the 2017 acquisitions and the order backlog respectively amounted to Euro 150.5 million and Euro 152.5 million, broken down as follows:

Order 2017

Order backlog

New units

17.9 Euro million

16.4 Euro million

Decommissioning

30.0 Euro million

32.0 Euro million

Service

82.5 Euro million

89.3 Euro million

Defence

20.1 Euro million

14.8 Euro million

With regard to the breakdown by geographical area, acquisitions in Europe accounted for 97.6% (84.8% in 2016), while those in Italy accounted for 2.2% (4.8% in 2016), with the Americas representing the residual amount. In the new plants segment, the main orders acquired in 2017 were associated with the ITER Vacuum Vessel realisation contract (Euro 15.1 million) and the extension of the specialised support activities at the Mohovce site (for Euro 1.6 million). We continued to trade in these countries with plans to construct plants with greater power ratings on the Argentinian and UK markets, as well as in Romania. In Italy, the Decommissioning segment has seen a slowdown in order acquisitions, the most significant of which was the

takeover of the contract for the construction of the material management station at the site in Latina. It should also be noted that Germany, which has chosen to abandon nuclear production and seems destined to become one of the most important markets in the Decommissioning sector over the next two decades, has launched concrete initiatives. In the UK, again in the Decommissioning sector, one extremely significant order was that for the Sellafield site, which brought the order acquisitions for that particular business line in that country to a total of Euro 26.9 million. In the Service sector, the most significant acquisition consisted of that regarding the realisation of two new safety systems, and the new building that houses them, for the


25

PWR power plant in Krsko, Slovenia. The contract has a total value of Euro 80 million, with a duration of four years. The defence sector in the UK enjoyed excellent results, with new orders amounting to Euro 20.1 million, for a considerable increase with respect to the Euro 13.6 million in 2016.

obtained for TG2 on 28 March 2017, and provisional acceptance (RP) obtained for TG1 on 29 April 2017, for TG2 on 3 May 2017, and for TG3 on 21 May 2017; • Ain Djasser III: parallel of TG 5 carried out on 17 August 2017. Tunisia • Sousse D: RP obtained on 12 July 2017.

production activities New units During the course of 2017, Ansaldo Energia Group continued to operate in various parts of the world, achieving results that were consistent with the expectations; in particular, the main countries in which the Group operates are the following: Egypt, Algeria, Tunisia, Syria, United Arab Emirates, Iran, South Africa, China, Indonesia and oman. The main results achieved in relation to the various projects are indicated below. Middle East • Mirfa (United Arab Emirates): certificate of provisional acceptance (PAC) obtained for the plant on 17 october 2017; • Deir Ali (Syria): PAC obtained for Sec. III on 25 September 2017; • Iran: gas turbogenerators delivered for the Dalahoo and Heris projects; • Ibri and Sohar (oman): the 8 GT26 gas turbogenerators, the 8 recovery boilers, and the 4 steam turbogenerators were delivered. Asia • China: the gas turbines for Fengxian1, Minzhong1, Zhenjiang1, and yuhai 1 and 2 were shipped. The first 2 gas turbines in Sihui were commissioned. • Kamojang (Indonesia): PAC obtained on 15 December 2017. • Grati (Indonesia): the 2 gas turbogenerators were shipped. Italy • Rosignano: commercial operation date (CoD) reached on 31 December 2017. North Africa Algeria • Hassi Messaoud: commercial commissioning (MSI)

26

Egypt • Al Shabab unit 1: construction completion certificate (CCC) obtained in December 2017; • Damietta: CCC obtained in December 2017; • Al Mohamedia: diesel PAC obtained in August 2017; • 6th october Add on: “compensation agreement” for local currency depreciation signed in December 2017. Sub-Saharan Africa • Final acceptance certificate (FAC) obtained for Dedisa.

Service During the course of 2017, the Global Service division recorded economic/financial results that exceeded the expectations, for an increase with respect to 2016. This was possible thanks to the careful planning of resources in terms of both man hours and materials rendered available at the clients’ production sites. 2017 thus resulted in a new record for maintenance interventions (over 450) and hours worked (over 1.7 million), using both the so-called Field Service Network (the totality of all the workers of the various companies that make up your Group) and factory personnel sent out on field assignments, in order to offset the workload. It should be noted that, at the work site in Langage (Great Britain), the team from Baden (assisted by the workers from Genoa for the Steam Turbine and Electric Generator activities) completed the type C review of the two GT26 Gas Turbine units to the client's complete satisfaction. Again on an international level, in accordance with the time requirements and safety/quality standards, the Major Inspections were carried out upon the V94.3A units at the yuzhnouralskaya site (Russia), a new and important acquisition made in late 2016, where the localisation activities continue to be conducted through the local subsidiary. In continuity with the activities of the previous years, the


Global Service division has continued with the on-site introduction and validation of new products and services, such as GToP power and efficiency upgrades, and advanced MXLs from Genoa and Baden, as well as combustion and plant operating flexibility improvements like Flamesheet, Velonox, Autotune and Apex.

Nuclear production activities The revenue for the fiscal year, which amounted to Euro 84.7 million, were mainly obtained from the activities conducted for the completion of the improvement interventions at the Embalse plant in Argentina, and the activities associated with the ITER project. The first, which were broken down into various contracts for the Plant Life Extension of the thermal cycle, the realisation of a new Standby Diesel Generator station, and the upgrading of the Chilled Water system, for a total value of Euro 11 million, mainly consisted of on-site installation work, which led to the completion of the interventions upon the Turbogenerator and the completion of the installation work on the first of the two electrical divisions in which the new station is inserted. The prolongation of these work activities resulted in an increase in financial exposure at the end of the year, which will gradually be reduced in the coming months as the major contractual payment steps are reached. The Vacuum Vessel production activities for ITER have increased considerably with the completion of the material provisions and the start of the production activities themselves, not only at the facilities of the AnsaldoMangiarotti-Waltertosto Consortium's partners, but also at those of the new subcontractors engaged to accelerate the programme, as requested by the Client with the variant approved at the beginning of the year. The design-related activities associated with the conceptual design of the hot cell handling systems and the detailed design of the primary cooling circuit's piping are still in progress. The total revenue from the Fusion business line amounted to Euro 14.1 million for the fiscal year. During the course of the year, the specialised support activities also continued at Slovenske Electrarne for the construction of two VVER 500 units at the Mohovce site in Slovakia, as did the design support activities for the experimental Myrrha plant in Belgium. In fact, at the end of the year, the Client's extension of the deadlines for the

completion the conceptual design, due to difficulties encountered in the licensing process, led to the consensual termination of the contract with Ansaldo and partners for the Front End Engineering & Design aspects. Finally, the activities associated with the Krsko project began during the last quarter of the year, with the design of the civil structures and the definition of the procurement specifications for the main components. In the Decommissioning sector, the work carried out at the Sellafield site continued, bringing the revenue for the sector to about Euro 23.2 million. In the WM&D sector, the main activities were those associated with the SoGIN contracts, for about Euro 7 million. At the end of the year, the cold tests of the LECo plant, for the treatment of the sludge present in Latina, were successfully completed. The preparatory work continues for the recovery of the resin drums in Caorso to be sent for incineration in Slovakia; in particular, the new drum handling machine has been completed and we are awaiting authorisation to carry out the transport operations. Due to the Client's requirements, the activities relating to the mobile Super-compactor have been suspended: the machine has even passed the acceptance tests at the workshop. In general, it should be noted that the management of the contracts with SoGIN continues to pose considerable difficulties, especially with regard to the rapid acknowledgement of additional activities, which, during the course of the year, has had a negative impact upon the Group's operating results. The defence sector, which has been particularly active in the UK, contributed a total of Euro 18.6 million to the revenue for the fiscal year, including the Epure contract for Euro 8.6 million. During the course of the year, the Company's existing competences and those of its subsidiary began to be gradually integrated, with the sales activities being unified within a single integrated structure, and with the standardisation of the engineering procedures and operational structures: all this was done in order to improve the ability to oversee of various markets, to render the operational management more flexible, and to streamline the structure of the Group's nuclear business line.


27

Organisational and process/product developments

Factory The “Cornigliano Lido” plant, which is located near a quay at the port of Genoa, and will allow our products to be loaded directly onto the ships, was inaugurated in June 2017. The plant, which will be used for the assembly of the larger gas turbines, especially the GT 26 and GT 36, was built in less than eleven months, with high safety standards and in full compliance with the environmental sustainability criteria, and is essential as it allows us to have a production cycle carried out in the Genoa area, thus avoiding needless expenditures in terms of time and money.

Energia will develop an industrial R&D plan based on the application of the main digital technologies to the entire manufacturing process, which will require an investment of Euro 14 million over 3 years, in addition to a lump sum contribution to be made by the Ministry of Economic Development and the Region of Liguria, equal to 25% of the investment. In addition to the support of the advisers UNIGE and PoLIMI, and the collaboration of several qualified research centres, the Lighthouse Plant project also involved the participation of several major technology partners In addition to that which is specifically described above, the factory units regularly met the production requirements for manufacturing new machines, for reconditioning used machine parts, and for providing specialised field support for both assembly and service activities.

Service Together with the availability of the new plants for the factory production activities covered by the investments authorised in 2016 (the rotor welding plant, and the rotor balancing and overspeed cell) and development of a production model that has comprehensively integrated the competences of the factory bodies with those of the engineering and supply chain bodies, this new facility made it possible to progressively start the manufacturing activities for the new GT26 and GT36 gas turbines in 2017. Within this context, an innovative milling process for the GT26 model's high pressure processing stage was also introduced.

28

2017 marked an important step in the process of modernising the Service business line by completing the transformation to the current regional bi-dimensional organisation, on the one hand to provide technological/ product support to clients where actually required, and on the other hand to maintain the global outlook and to make the most of the available synergies. From this standpoint, the new subsidiaries' process of integration within the Group can be considered complete.

The new production unit known as the GRC (the Genoa Repair Centre) was also rendered operational, which, within the context of the Group's Global Repair Network, is capable of performing several of the activities most important to the Service business line, such as the reconditioning of the gas turbines' hot blades using high-tech production processes like the laser cladding system, which include additive manufacturing techniques. The gas turbine models upon which this introduction has been completed are the 64.3A and the 94.3A.

Another important step towards the creation of value for our clients is the launch of the new 24/7 Remote Monitoring and Diagnostic (RM&D) System, which is based on the two main Hubs of Genoa (IT) and Jupiter (US), and is capable of seamlessly providing technical support to all of our clients, regardless of the types of Gas Turbine, Steam Turbine, or Electric Generator technologies they have installed at their production sites. This service, which also covers other components of the system, is the basis for the Apex system, to which the first clients enthusiastically adhered in 2017: a modern package of predictive diagnostics solutions that takes full advantage of the potential of big data and neural networks.

Various initiatives to be implemented within the scope of the Lighthouse Plant project, the first selected by the Ministry of Economic Development (MISE) through the Industry 4.0 Plan's Intelligent Factory Cluster, have also been developed. During the course of this project, from 2018 to 2020 Ansaldo

During the course of the year, the Group proceeded with the introduction of the Global Repair Network, which is comprised of the Genoa (IT), Rheden (NL), Abu Dhabi (UAE), and Jupiter (US) workshops, and is intended to provide repair services for the gas turbine hot components used among all


the technologies present within the Group's product portfolio. our Group can now proudly claim to be completely independent in providing the very best repair technologies wherever necessary. Finally, in close collaboration with the innovation and product engineering bodies, the Group continued its development and testing of innovative solutions aimed at improving the performance of its machinery, extending the maintenance intervals, and increasing the flexibility/reliability of its plants, in order to render them fully accessible in terms of “retrofitting” the existing fleet.

engineering During the course of 2017, the product and plant engineers were engaged to complete the integration of the new GT26 and GT36 gas turbine models and to continue the development of the Group's historical products. In particular, the gas turbine engineering team finished updating of the technical documentation and defined the machine configuration for the GT 26 model. The same activities were carried forward for the GT36 model, and will be completed in 2018. Several generator construction projects were also completed. The alternator engineering team accordingly completed the design of the more powerful alternator models to be paired with the new gas turbines. Similarly, the steam turbine engineering team completed the development of the steam turbine models to be used for combined cycle applications with the GT26 and GT36 models, both in a single shaft and multi-shaft configuration. With regard to the activities associated with the engineering of the steam turbines, during the course of 2017 the performance tests on the machines installed at the plants located in Indonesia and the United Arab Emirates were successfully carried out; the provisioning and on-site installation of the steam turbines for the plants in Egypt were also completed. The product and plant engineering teams also carried out the design activities and provided support for the various jobs' installation, start-up, and testing activities during the execution phases.

The results of the functional and performance tests passed with a positive overcome for the following projects are of particular importance: • the gas and steam turbines at the Mirfa plant (UAE); • the Hassi Messaoud open cycle plant (Algeria); • the Sousse D combined cycle plant (Tunisia); • the gas and steam turbines at the Deir Ali II combined cycle plant (Syria); • the Kamojang plant with a geothermal steam turbine (Indonesia); • the re-powering gas turbine at the Rosignano combined cycle plant (Italy). In order to ensure the highest level of competitiveness for the company's products, in 2017 the engineering team was once again engaged in "Design to cost" activities dedicated to optimising costs for the various plant configurations, including those that include the new GT26 and GT36 gas turbines and their combined cycle components.

investments During the course of the 2017 fiscal year, the investments in technical fixed assets were primarily aimed at meeting the production and assembly requirements for the components of the new gas turbine technologies (GT26 and GT36) and the construction of the new facility in the Cornigliano district of Genoa, which is dedicated to the assembly of the large gas turbine range, as well as all aspects relating to the continuous improvement of the work environments. With regard to the production environment, the rotor welding system, which is already present for the older products, was not designed for the production of the new rotors; this resulted in the need to create a new tooling area for the new GT rotor welding process. The investment covered a review of the original area's layout and an increase in the dedicated space in order to accommodate a new welding system and a new rotor tilting system; it is also provided for several upgrades of the existing plants, namely the submerged arc welding system and the oven for the thermal treatments. The Terruzzi autoclave underwent a major overhaul. The intervention involved the complete replacement of the electrical and control system in order to optimise the plant's functionality. The overhaul also involved several auxiliary plants, as well as the upgrading of the safety devices to the current standards.


29

Another major overhaul was carried out upon the AVoG bar testing plant, which involved the complete reconstruction of the alternator coil bar testing station, the improvement of the testing systems, and the reconstruction of the structures separating the testing station itself from the other activities. The blade line was equipped with a three-dimensional measuring machine. This intervention was justified by the increased percentage of checks upon the turbine blades' anchoring elements, which were previously carried out manually, and by the new GT blades, which have more restrictive tolerances than the current ones.

30

Another investment, which was aimed at ensuring compliance with the sanitation and safety standards, involved the upgrading of the canteen at Campi. With regard to the Service business line, the attention was focussed upon renewing the fleet of containers and reintegrating their equipment. In order to improve the organisation's efficiency, a Hub was also created in the Middle East, for which dedicated investments have been launched.

In the field of safety and with the aim of ensuring the continuous improvement of the working conditions, special electrically-ventilated helmets were purchased for carrying out particularly critical tasks that generate copper dust; the number of cooling units in the various areas of the factory were increased due to the need for the production processes to be carried out in a temperature and humidity controlled environment. The riveting booth in the Fegino area was soundproofed in order to reduce the ambient noise during the blade riveting activities.

The IT investments mainly focused upon the SAP AGP Greenfield project, which, within the span of 12 months, was able to ensure the business continuity of the management processes for the new satellite companies (Ansaldo Energia Switzerland and Power System Manufacturing). This implementation represents the first phase of the ERP architecture development plan, and will be carried out for the rest of the Group's companies (including Ansaldo Energia) in the coming months in order to ensure the complete integration of the Business processes, even at the Group level.

Adaptations to ensure compliance with the fire regulations were made in certain areas by creating partitions, installing automatic fire detection systems, creating escape routes and new emergency exits, and ensuring the regulatory compliance of the electrical and emergency lighting systems.

Extra attention was dedicated to strengthening the cluster system; support for Research and Development activities and the need to protect the intellectual property generated for the improvement of our products are key elements of the IT strategy.


Research, development and technological innovation

The scope and the complexity of the Group's Research and Development activities changed and expanded considerably over the course of 2016 and 2017 following the acquisition and capitalisation of the former Alstom's technologies and products. A key part of the new models' integration into the Group's product portfolio was the continued replacement of the design tools previously in use with the Group's proprietary Suite, in order to ensure the continued design, performance improvement, and maintenance of all the models purchased. The adaptation of the design suite for more advanced projects, such as the class H turbine project for the 50 Hz market (GT36 S5), was particularly important, and was largely completed during the course of the year, with the entire organisation being furnished with the tools and the instructions for their proper use. It is extremely important to note that, after having carried out Phases 1 and 2 (Thermal Paint Run) of the model validation upon the class H gas turbine for the 60 Hz market (GT36 S6) at the Test Rig in Birr (CH), the new turbine's design validation will be able to be completed using the data obtained from the tests themselves. It should be noted that the initial assessments of the GT36 S6 revealed machine performance that exceeded the expectations of the project itself. The attention was also focused upon the GT26, another machine featuring technology from the former Alstom, with the development and completion of the GT26 project (2011) and the launch of the MXL3 Project, mainly focused upon hot parts, which is dedicated to the Service fleet in order to support the increased Performance of the turbine itself. An important part of the integration activities involved converting the original Alstom technical documentation (3D

models, specific materials, 2D tables, quality control plans, machinery and instrument control ribbons, etc.) to the systems used by the Group. These activities began in 2016, continued in 2017, are nearly 80% complete, and will be finished by the end of 2018, at which point the components will be able to be manufactured and processed at the Factory in Genoa. Another important aspect of the integration of the new products into the portfolio was the laboratory expansion that was necessary to continue the technological development of the gas turbines' components. These consist of 7 combustion and fluid dynamics laboratories, 2 of which were completed in 2017, and the rest of which will be rendered operational in 2018 and 2019. With regard to the development of gas turbines in 2017, the development of the TG AE94.3A is particularly noteworthy. In fact, it should be noted that the first machine of the latest generation was completed, fitted with instrumentation, and shipped off for design validation, which will be carried out at the Fengxian plant in 2018. During the last quarter of the year, the gas turbine with the 310 MW compressor configuration was activated in Sihui, and a campaign for the acquisition of the operating data was launched, which will be completed in early 2018 and will be extremely important for future developments aimed at improving this model's power rating and efficiency. With regard to the validation of new and increasingly highperformance components with which to equip the TG model, a new Flex Premix burner was installed on a turbine at the Ferrara plant, the control logics and behaviour of which were able to be validated under standard operating conditions during the last quarter of 2017. With regard to


31

operational flexibility, and in order to ensure an increase in the value perceived by the Group's potential clients, the regulating validation tests upon the Blow off system were successfully carried out at the Termini Imerese plant, with a significant lowering of the technical minimum being achieved. With regard to the AE94.2 Class E gas turbine, the comprehensive validation of the new turbine design with 3D blades was completed in 2017 with the commissioning of the new unit at the Rosignano plant, which showed excellent performance in terms of reduced environmental impact thanks to emission levels falling within particularly stringent limits. The new turbine had already been previously installed as an upgrade at the Pointe Noire plant (Congo), to the complete satisfaction of the client in terms of performance and reliability, and totalling over 30,000 equivalent hours of operation at the end of 2017. During the course of 2017, additional instrumentation was installed on the 185 MW AE94.2 unit to be rendered operational in 2018 at the combined cycle Shangzhuang power plant near Beijing (China), which will represent the first unit of this type installed in China. During the course of 2018, this first unit will be followed by two other similar units at the Minzhong site, also in China. The project was completed for the modification of the AE94.2 gas turbine, designed to use low calorific power gas sourced from the steel production processes. The development activities, which are being carried out in collaboration with the Joint Venture Shanghai Electric Gas Turbine, are focused upon the compressor and the new combustion system. The concept design has been reviewed and passed for both components. Also in 2017, after having completed the preparatory phase and the industrialisation of the production process for the ceramic tiles replacing the similar cooled metal tiles in the combustion chamber, the assembly of the first 78MW AE64.3A model gas turbine was concluded, complete with special instrumentation for on-site validation. The activities continued with regard to the development of new burners that will allow for the same performance to be obtained with reduced Nox emissions; the new dedicated rigs for the AE64.3A burners have been built and validated in terms of both atmospheric and pressurised testing. Efforts have continued in the field of innovative manufacturing and repair technologies in support of the production and service business lines, including the construction of axial thread whirlers for the AE64.3A model

32

with Additive Manufacturing technology. Examination of the component manufactured using additive technology showed a perfect reproduction of the characteristics of components produced using investment casting. Activities focussed on product innovation in line with the Group's strategic plan, taking on an increasingly important and centralised role in valorising individual disciplinary skills and providing the full range of engineering and experimental services. These activities also allowed us to extend our technicalscientific collaboration network with leading European research centres and major Italian universities. The technological development in support of the development of the product portfolio and the improvement of the processes has proceeded, and has resulted in projects spanning all the disciplines relating to the Group's products, while the activities already begun in previous years, some of which are in collaboration with JV Shanghai Electric Gas Turbine, have also continued. Within the scope of the Group's international partnerships, the R&D activities envisaged by the EU Grant Agreement awarded to the FLEXTURBINE project under the H2020 Programme have also continued, and are expected to be completed during the course of 2018. As a leader in the design and testing of flutter-free steam blades, the Parent Company was responsible for the Material Models Development section in the part of the project dedicated to improving the life cycle of the gas and steam turbine components. In particular, a "down scaled steam turbine rotor" was built, assembled, and sent to Doosan in 2017 in order to allow for experimentation to begin, while work continued on the testing activities for the creation of a mathematical model capable of representing the unit's behaviour under combined cyclic fatigue. 2017 also saw the continuation of the 36-month R&D Project titled “Development of a gas turbine with reduced greenhouse gas emissions and high operational flexibility using innovative materials and advanced production systems”, funded by the Italian Ministry of Economic development (MISE). During the second half of 2017, another two projects funded by the EU H2020 Programme – LCE 28-2017 were launched, respectively the Turbo Reflex and Pump Heat.


In July of 2017, the project titled Dal BYTE all’Energia ("From ByTES to Energy") was introduced in response to the tender announced by the Italian Ministry of Economic Development (MISE), under the FRI Digital Agenda programme. Another R&D project, titled “The creation of an experimental laboratory for the development of innovative gas turbine burners with environmentally friendly combustion, a high degree of flexibility, and efficient integration with renewable energy sources” was launched during the same period in response to a tender announced by the Italian Ministry of Economic Development (MISE), under the FRI Sustainable Industry programme. The activities required by the Ministry of Economic Development (MISE) Guidelines for the awarding of the financing agreement for the ATREC project titled “Experimental verification and engineering of a resonator for installation upon gas turbines with annular combustion chambers, with the aim of raising the Tiso”, whose Parent Company is taking part as a Large Company, at the invitation of the Environmental Combustion Centre and the National Technology District for Energy (Di.T.N.E.), have also continued. These latest three projects, for which the Ministry of Economic Development (MISE) has approved the economic/financial facilitation measures, are awaiting the final Decree of Approval by the Ministry itself. With regard to the steam turbines, the development programmes focussed upon the need to develop components for combined cycle applications with the new gas turbines in the portfolio. In response to recent market demand, modules are currently being developed for use under high steam temperatures and higher discharge flows in order to boost the overall efficiency of the combined cycle. Work continued on the implementation of the blade portfolio with the completion of the design for the 37” blade's new output flow and its validation in the overspeed cell. We continued to acquire functioning data on the steam turbines currently in use in order to extend our knowledge of complex vibrational phenomena. As part of the development and testing of new insulation materials to be used in alternators, we performed the tests required by law for defining the chemical and physical properties of the insulation tape used for the stators. The

Portfolio of Turbogenerators to be coupled with the aforementioned newly purchased GT models is currently being updated; this update will be finished in 2018, and the drafting of the Design Practices for the turbo alternators' design is also ongoing. With regard to the Ansaldo Energia gas and steam turbine control and protection systems based on the Symphony Plus platform, we completed development on all of the Group's steam and gas turbines, and rendered the prototypes available to the Automation Laboratory where the validations were carried out. We finished developing and testing the new control system platform for the AE94.3A dual fuel gas turbines manufactured using the ovation platform, and the relative prototypes are available for internal use by the Group. Work also began developing the control systems for the GT26, GT36-S5 and GT36-S6 gas turbines, based on the ovation platform. We continued to study innovative instruments for factory use, such as the equipment for carrying out size checks and diagnostics upon the Hirth toothing. Together with the Italian Institute of Technology, the activities were put in place for the joint development of a robotic system for inspecting the Group's Generators, which, in early 2018, will be released for use and for the completion of the feasibility study for the inspection of the gas turbine combustion chambers. As part of the development activities for servicing gas turbines, we developed and released the new calculation method for scheduling gas turbine maintenance activities, which was implemented in the GT control systems during the course of 2017. Significant development activities took place with regard to the repair of hot components, with the perfection of the laser reconstruction process for rotor blades, and the high tensile brazing process for the Rene’80 material, while the brazing process the for IN939 and ECy768 materials was completed during the course of 2017. Testing continues on high performance materials for repairing turbine blades, a new proprietary material is under development, and the AE 94.3A turbine blade repair process has been introduced at the processing centre in Jupiter (Florida).


33

Personnel

In continuity with the previous year, the activities carried out by the Human Resources departments of the Parent Company, Ansaldo Energia, and the various group companies during the course of 2017 were aimed at consolidating integration through the establishment of policies and instruments shared among all the Group's companies, as well as reducing structural and labour costs. In fact, with regard to the Italian businesses, during the course of the year the Group implemented a procedure pursuant to art. 4 of Italian law no. 92/2012, which, over the course of the next two years, will facilitate the early retirement of a number of resources by promoting the necessary adaptation of the professional mix.

There were 4,367 employees on the books at the end of 2017, and the average workforce figure was equal to 4,290.6 units. The workforce increased by 113 resources with respect to the end of 2016. The aim of the placement policy was to continuously improve the professional mix, and to refresh technical skills in order to meet the qualitative and quantitative needs of the various business lines, in keeping with the group's strategic objectives, including a programme designed to improve the digital skills necessary to make the most of the targeted investments. A comparison of the workforce at the end of 2016 and 2017 is shown below.

Blue colalrs: 823

White colalrs: 3,084

Junior managers: 284

Managers: 63

Blue colalrs: 1,043

80%

White colalrs: 2,741

90%

Managers: 78

100%

Junior managers: 505

HEADCOUNT

70%

73% 60%

63%

50% 40% 30% 20%

24% 19%

10% 0

2% 11% 2017

34


1%

7% 2016

training and Development The training activities carried out in 2017, which are planned based on the training needs and evaluated at the end of each course, involved 3,754 participants.

topics, such as teamwork, presentation design and realisation techniques, and time management techniques, as well as on the general topic of employee management.

Client training overall, a total of 45,534 training hours were provided, 19,050 of which were funded using public and interprofessional grants. About 15% of all the training hours were conducted using internal teachers.

Safety and the environment With regard to Safety and the Environment, we remain constantly committed to and continue to invest in the protection of health and safety at the workplace. In recent years the corporate culture and training activities have helped to constantly reduce the accident frequency index. The main training initiatives planned and implemented for the internal management personnel and technicians include: • seminars for the development of managerial skills involving the use of highly experiential methodologies targeting the direct application of the participants; • the pilot edition of the Project Management Fundamentals course for resources belonging to the professional Project Management family recently assigned to this role. The activity offered greater insight into issues of both a technical and behavioural nature. In continuity with the past years, training initiatives aimed improving linguistic skills were held, with a particular focus upon the English language, with new learning methodologies being applied. It should be noted that pathways for the unemployed were also offered, with the aim of training professional figures such as 3D designers, CNC machine tool operators, and construction site technicians. With regard to the Group's consolidated range of comprehensive skill assessment and development tools (Development Centre, Individual Assessment, 360 Evaluation, Integration Monitoring), 2017 saw an increase in the availability of individual and group coaching, both on specific

18 courses were held during the course of 2017, for a total of 1,218 hours of training. The activities involved 170 participants for a total number of 247 days of training. The most significant activities in terms of commitment, duration, and satisfaction were the courses held in Genoa from January to May for the operators and maintenance personnel of the Egyptian power plants. While the theoretical/technical training courses were mainly held in classrooms, several visits were also made to the factory, as well as a number of power plants throughout Italy. The activities mainly involved the use of internal staff from the Product Engineering departments as teachers. Courses were also developed for the management staff of the new omani power plants, for which both internal Italian and Swiss personnel served as teachers.

Organisation The year's activities were focused upon rendering the general organisational design launched in 2016 operational by establishing the specific Business Unit structures and staff functions; for the latter, the orientation and coordination model has been defined, as has the organisational and responsibility allocation model for both the Corporate and local activities. The work continued and was completed upon the development of the “Professional System”: a Group system based on professional families, roles with different levels of seniority, and the relative skill profiles in terms of technical expertise and transverse expectations; the project involved the local HR figures from all the Group's companies, who served as the contact persons for the project itself, as well as the department heads, who served as the owners of the managed processes.


35

Risk management

36

Regarding the international market, careful and rigorous operational and financial risk management and identification is increasingly important.

payments and the financial instruments used, including appropriate insurance cover or helping the customer to obtain financing in more complex cases.

In order to eliminate or minimise credit risk as well as optimising cash flow from orders, commercial transactions are carefully analysed from the outset, checking the payment terms and methods to be offered and subsequently agreed. In particular, based on the contract's amount, the type of client and the importing country, all the necessary precautions are taken to limit the risks in terms of both the

For all the most significant transactions in currencies other than the Euro, which are subject to currency risks, the company stipulates appropriate forward contracts. The first part of the explanatory notes specifically identifies the main risks to which the Group is subject.


Guarantees given as part of the agreement for the sale of the Parent Company's shares

As part of the agreement for the sale of the Parent Company's shares to Fondo Strategico Italiano (now CDP Equity S.p.A.), Finmeccanica (now Leonardo S.p.A.) has issued guarantees for disputes or issues that have required specific accruals to be made for risk provisions in the consolidated financial statements. The sales agreement requires Leonardo to provide compensation for any outlays required to cover the guaranteed issues, using various mechanisms based on the specific circumstances. At the discretion of CDP Equity, this

compensation can be paid directly by either the Parent Company or CDP Equity itself. It should be noted that CDP Equity has come to a formal agreement with the Parent Company, whereby all future compensation relating to the "asbestos" issue shall be paid directly by Leonardo to the Parent Company itself. With regard to all the other issues guaranteed by Leonardo, on the other hand, CDP Equity has not yet determined the recipients of any compensation to be provided.


37

Quality, environment

Occupational health and safety In addition to that which is stated in the personnel section above, in 2017 the Group also carried out other initiatives aimed at significantly reducing the number of accidents, and disseminating a culture of safety among all the personnel involved in the various processes, whether managers, supervisors, workers or subcontractors. Certification Constant supervision of the relevant procedures and guidelines, aiming to ensure compliance with legal requirements, is at the foundation of the Health and Safety in the Workplace Management System, which is designed to British Standard oHSAS 18001. During the visit conducted for the renewal of the certification itself, this approach allowed the relevant body to detect a firmly rooted awareness, among all the resources involved, of the management system's importance and effectiveness for the purpose of pursuing the continuous improvement. The staff of the parent company, Ansaldo Energia, and the other Group companies have adopted an interdependent approach to Health, Safety, and Environment issues, or rather one that's based on individual attention to the safety of oneself and others, thus adopting a proactive and cooperative attitude on these matters. Continuous improvement Prior to introducing any new technological processes, we examined them carefully and got the end users involved in assessing their impact on health and safety at the workplace. In order to improve accident performance, we further developed the methods used to analyse the causes of accidents, and the methods for sharing experiences on a

38

Group-wide level, thus ensuring the correct identification of the best prevention strategies, while at the same time measuring the efficiency and effectiveness of the corrective measures adopted. For the same purpose, various meetings were also held with managers and supervisors in order to discuss the corporate objectives and the technical solutions necessary to resolve any shortcomings detected, above all in light of an analysis of the behaviours and the accidents avoided (so-called "near misses"), and structured processes were put in place in order to ensure that the workers are more directly involved in the prevention and protection activities, with the aim of ensuring continuous improvement. Corporate and group initiatives Ansaldo Group's "Safety Day" was organised once again in 2017, which serves as an important opportunity to discuss safety, health and environmental issues, highlighting different approaches among the Group's companies, as well as a common interest in shared objectives. This provides a concrete basis for ensuring the effectiveness of the current system integration process, by applying the best practices of the various companies and by setting the goal of “Zero accidents”. the Management's Commitment With the active involvement of the Top Management, an EHS Committee (Environment, Health and Safety) has also been set up, which periodically examined the management performance, the objectives assigned, and the results achieved, while at the same time evaluating and validating the improvement measures, the operating mechanisms introduced, and the investments made in the fields of occupational health and safety and the environment, all with


the aim of providing the company and the Group with increasingly efficient and effective management and prevention tools. In addition to the regular meetings and the Management Review meetings, this Committee provides yet another opportunity to hold structured meetings between the company and Group managers, with the participation of the employees' representatives, and other key subjects involved in the management of the operational activities. assessment of risks and results achieved Risk assessment reports were issued for all the external worksites where we operate, whether or not required by law, and we ensured that the Risk Assessment Report and the emergency plans for all the sites where the Group operates (whether permanent or temporary) were applied throughout. Moreover, Interference Risk Assessment and Safety and Coordination plans were drawn up where required for both the Parent Company and outsourcer worksites, requiring the companies involved to provide documentary and substantial evidence of the solutions implemented to protect the environment, and the health and safety of their workers. our efforts at all levels continued to significantly reduce accidents reported to INAIL during 2017, along with the relative frequency index. training In order to promote a culture of safety and respect for the environment, we continued a range of training courses, in compliance with the current legislation, taking into account the individual risks and duties, and the potential impact that the corporate activities could have upon the environment. Communication and information activities were performed through specialised courses for personnel in the Environment and worksite Safety units, including notifications put up on company notice boards; themed leaflets were handed out to personnel; articles were published in the company press; proposals for individual improvement were promoted; the Safety Day was organised; meetings were held with resources in the various companies to discuss the themes of safety and the environment. The training initiatives, supported by the Training School, set goals to raise awareness and inform all personnel on the themes of Safety, Health and the Environment, even with regard to the legislative aspects, and in particular those set out in the relevant laws, providing specific training for personnel directly or indirectly involved in managing operating procedures and guidelines, guaranteeing the necessary skills and qualifications for performing ordinary

activities, and dealing with activities with greater exposure to specific risks. auditing The Environment, Health and Safety unit constantly ensured the implementation of the organisational processes indicated in the Management System, the maintenance of the necessary levels of performance and conduct by the personnel, and compliance with the laws and corporate regulations by the personnel and subcontractors, by conducting periodic audits at the various units. These audits were performed regularly at the Genoa site, at the internal worksites (for ordinary and extraordinary maintenance activities), at the Service and New Constructions worksites, and at the foreign branches. The results were very positive on the whole. The findings of these inspections were, in any case, analysed in detail to identify areas for improvement and guarantee the implementation of corrective measures.

environment location Ansaldo Energia's Italian sites: • are not subject to Integrated Pollution Prevention and Control, nor the provisions of Italian Legislative Decree 334/99, as amended (Major Accident Risk) and are not located within the National Sites of Interest (S.I.N.), as per Law no. 426/98, as amended; • are not subject to environmental remediation activities. Nevertheless, the production unit at 8 Via Lorenzi falls within the scope of Italian Presidential Decree 59 of 13 March 2013 (AUA - Unified Environmental Authorisation), and the sites at no. 8 Via Lorenzi and 118 Corso Perrone in Genoa fall within the scope of the Emission Trading Directive, since, due to the presence of boilers for heating the buildings, they are included in the “11.1 Combustion plants with net heat excess of more than 20 MW (excluding plants for hazardous or urban waste” category. Certification Thanks to the company’s ongoing supervision of the application of the procedures and instructions essential for ISo 14001 environmental certification, this certification has been maintained. The following strengths were highlighted by the certification body during the inspection: involvement


39

and commitment on the part of the management, competence and participation on the part of the personnel, adequate and widespread information to the various departments, robust authorisation process for the use of chemical substances. Moreover, following the maintenance visit, the certification's transition to the new UNI-EN-ISo 14001/2015 standard was carried out. environmental context analysis and continuous improvement The environmental context analysis for the site on Via Lorenzi, with the relative environmental risk analysis, was updated during the course of 2017. This analysis showed a controlled and marginal, and therefore considerably tolerable, environmental impact risk level, and this was also due to the various actions carried out year after year in order to prevent any form of pollution. The significant investments made in 2017 were used to improve the waste management logistics, particularly in the department areas and at the waste platform, as well as the rainwater drainage conditions at the Campi 1 rotor testing room. With regard to environmental protection activities, particular attention was paid to the following issues: • Water and waste management The waters that serve the site at no. 8 Via Lorenzi in Genoa come from the city's aqueduct. In order to monitor consumption, all the tapping points have been equipped with volumetric meters. The water is used for civil, industrial, process, and cooling purposes, and is discharged into different drainage networks based on the type of use and origin; polluted waters from certain types of processes are collected and disposed of as waste materials. The solid waste management at all the Group's sites is carried out in compliance with the current regulations, with an increasing commitment to sorted waste collection, recycling, and the sale of production scraps and obsolete plant infrastructures. In 2017, a new permit was obtained for the waste storage plant at the Via Lorenzi 8 local unit, and several initiatives were implemented, including dedicated training sessions aimed at raising greater and more widespread awareness of the waste sorting requirements and opportunities among the personnel and subcontractors.

40

• Monitoring of energy consumption, CO2 / Emission trading, and other emissions In order to meet its energy requirements for production and civil purposes, the Parent Company uses the following types of resources, the consumption of which is monitored using meters: electricity for industrial and civil uses; methane gas; district heating; diesel fuel for road haulage. The use of district heating requires compliance with the emission trading directive cited above, with variable emissions based on the extent of the boilers' use. In continuity with the previous years, the interventions aimed at saving and recovering energy in order to reduce energy consumption have continued, all while guaranteeing the same service levels to the various corporate users. The solar power systems installed on the roof of the facility on Via Lorenzi and the roof of the new warehouse in Cornigliano have also been kept in excellent operating condition. The initiatives aimed at raising the employees' awareness of the environment include the construction of a car park equipped with electric charging stations for electric cars at the Via Lorenzi site. The area is used by the employees for their personal vehicles, as well as by the company for several vehicles dedicated to internal corporate use. Furthermore, a specific action aimed at promoting the use of car pooling among employees is currently in the works, and will be launched in early 2018. This measure complements others that have already been implemented, which, among other things, are dedicated to facilitating the use of public transport, and providing free shuttle services. All emissions subject to authorisation pursuant to art. 169 of Italian Legislative Decree no. 152/2006 are constantly monitored. In 2017, major changes were communicated to the City due to changes made to the production plants, for which formal Unified Environmental Authorisation is expected to be obtained in early 2018. • Hazardous waste management The Parent Company constantly manages and checks the hazardous products and substances used in its production and worksite activities, checking all new substances for applicability without any hazard to people or the environment, and in compliance with the relevant European regulations, including: – The Reach Regulation - EC Regulation no.1907/2006; – The CLP Regulation - EC regulation no.1272/2008. Simulations of accidental spills and the implementation of the measures envisaged by the corporate emergency plan are also regularly conducted.


• Maintenance of the documentation and procedural system and training The corporate documentation system on environmental issues has been maintained and updated, also thanks to the investments made in that regard. Significant efforts have been made in terms of employee training and professional development, as well as the provision of information to subcontractors. The environmental issues have been analysed, and specific decisions have been taken within the framework of regular

meetings, namely the Management Review and EHS Committee meeting. The supervisory and control measures allowed for the correct application of the corporate procedures to be monitored. As mentioned in the Health and Safety report, a systems integration process is currently underway on a Group-wide level, with the best practices of the various companies being applied.


41

Management outlook

Despite the uncertainties on the market in which the Group operates for 2018, there are several positive elements suggesting that results similar to those achieved by Ansaldo Energia Group over the past few years will also be within reach during the next year as well. These factors can be summarised as follows: • the New Unit market, which has felt the impact of the economic crisis more than any other, is not showing any signs of further decline, and should remain fairly stable; • the first machines with Alstom technology, the fruits of a considerable development effort carried out by all the Group's components, should soon enter production and be placed on the market; • the Service business line, on the other hand, shows good growth potential in terms of volumes, which your Group has been able to exploit in the past, as reflected by the latest acquisitions in the USA;

42

• the Group's strategic efforts aimed at developing new markets and expanding its product portfolio will continue; • the Group will continue and will reinforce its strategic partnership with the shareholder Shanghai Electric Hongkong Co. Limited. • the order backlog was at an excellent level at the end of 2017, and amounted to Euro 4,837 thousands. In order to continue in the wake of the positive results achieved in recent years, the profitability and cash flow will need to be closely monitored, and must be protected with specific streamlining actions in order to deal with an increasingly competitive market. Within this context, 2018 appears to have the makings of a difficult fiscal year, in which the expected results, in terms of orders, profitability, and cash flow, should not however deviate significantly from those obtained in 2017.


Consolidated Financial Statements as at 31.12.2017


43

Consolidated income Statement euro Notes

2017

of which related parties

2016


Revenue

32

1,464,053,261

119,907,587

1,253,269,527

(532,132)

other operating income

33

130,930,334

–

29,757,505

–

Purchases

34

648,281,045

4,300,156

474,403,502

4,930,756

Services

34

408,946,979

8,222,772

376,192,522

6,410,396

Personnel expense

35

320,595,166

–

315,971,239

–

Amortisation, depreciation and impairment losses

37

242,421,479

–

100,445,992

–

other operating expense

33

44,769,618

20,681

20,802,583

5,903

Change in finished goods, work-in-progress and semi-finished products

36

34,851,775

–

(11,454,471)

–

(-) Internal work capitalised

38

37,144,913

–

91,783,636

–

Badwill, net of integration costs

39

–

20,448,920

–

1,965,996

–

95,989,279

–

ebit Financial income

40

10,229,246

347

7,668,358

–

Financial expense

40

61,227,930

33,717

45,428,856

31,178

Share of profits (losses) of associates and joint ventures accounted for using equity method

14

(5,262,817)

–

(9,830,431)

–

(54,295,505)

–

48,398,349

–

(59,950,116)

–

(12,046,541)

–

Net result

5,654,611

–

60,444,890

–

- attributable to the owners of the parent

5,679,205

–

60,558,494

–

- attributable to non-controlling interests

(24,592)

–

(113,604)

profit (loss) before taxes and discontinued operations Income taxes

44

41


Consolidated Statement of comprehensive income euro/thousand 2017

2016

5,655

60,445

- Actuarial gains (losses) on defined benefit plans plan measurement

2,166

(1,454)

gains/(losses)

2,166

(1,454)

18,474

(3,343)

19,337

(3,355)

(863)

12

- Tax effect

(4,134)

772

Other comprehensive income, net of tax effect

16,506

(4,025)

total comprehensive income

22,161

56,420

Net reSult other comprehensive income: Items that will not be reclassified to profit (loss):

exchange rate gains (losses) Items that may be reclassified to profit (loss): - Changes in cash flow hedges: - fair value gains (losses) - transfer to profit (loss) of the period


45

Consolidated statement of financial position euro Notes

31.12.2017


31.12.2016


assets Non-current assets Intangible assets Property, plant and equipment Equity investments Receivables Deferred tax assets

12 13 14 15 15

1,539,410,005 261,431,845 39,922,701 668,574 52,470,246 1,893,903,371

– – – – –

1,512,339,170 235,357,092 36,362,824 528,591 20,729,070 1,805,316,747

– – – – –

Current assets Inventories Contract work in progress Trade receivables Tax assets Financial receivables Derivatives other current assets Cash and cash equivalents

16 17 18 20 19 31 21 22

627,503,339 200,208,202 287,062,007 5,299,702 85,004,791 12,156,497 82,734,377 276,299,700 1,576,268,615 3,470,171,986

– – 34,986,079 – 4,791 – 13,990,985 –

534,324,614 119,726,023 277,313,693 2,424,348 185,590,453 3,643,808 82,484,527 250,888,912 1,456,396,378 3,261,713,125

– – 34,044,799 – 1,235,044 – 8,975,028 –

23 23

100,000,000 522,014,372 622,014,372 146,781 621,867,591

– – – –

100,000,000 498,983,223 598,983,224 -122,688 598,860,536

– – – –

24 25 27 26 29 28

10,000,000 780,118,028 34,770,660 132,298,993 151,269,189 78,221,388 1,186,678,258

10,000,000 – – – – –

– 484,643,521 35,639,714 252,089,558 170,578,772 119,133,359 1,062,084,924

– – – – – –

17 30 25 20 26 31 28

802,355,649 556,090,909 166,688,088 1,885,067 15,552,498 1,360,557 117,693,369 1,661,626,137 2,848,304,395 3,470,171,986

– 25,259,789 1,518,783 – – – –

859,857,358 382,790,451 204,469,071 8,598,026 21,765,295 15,322,380 107,965,085 1,600,767,666 2,662,852,590 3,261,713,126

– 7,182,587 1,295,429 – – – –

total assets equity and liabilities Equity Share capital other reserves Equity attributable to the owners of the parent Equity attributable to non-controlling interests total equity Non-current liabilities Non-current liabilities to related parties Loans and borrowings Employee benefits Provisions Deferred tax liabilities other non-current liabilities Current liabilities Progress payments and advances from customers Trade payables Loans and borrowings Tax liabilities Provisions Derivatives other current liabilities total liabilities total liabilities and equity

46


Consolidated statement of Cash Flows euro/thousand Notes

2017

2016

Gross cash flows from operating activities

44

161,962

120,968

Change in working capital

44

(72,515)

52,775

Change in other operating assets and liabilities

44

(68,661)

(12,491)

Net interest paid

(39,925)

(35,254)

Income taxes paid

(16,472)

(10,898)

Cash flows generated from (used in) operating activities

(35,611)

115,100

1,440

1,071

50

43

(151,474)

(122,595)

2,115

2,946

334

457

(291)

(2,922)

(147,826)

(121,000)

(11,008)

(42,524)

(158,834)

(163,524)

222,747

201,179

1

–

222,747

201,179

28,302

152,755

912

232

(3,804)

(357)

Cash and cash equivalents as at 1 January

250,890

98,260

Cash and cash equivalents as at 31 December

276,300

250,890

Cash flows from operating activities:

Cash flows from investing activities: Acquisitions of companies, net of cash acquired Sale of investments Investments in property, plant and equipment and intangible assets Sale of property, plant and equipment and intangible assets Dividends received other investing activities Cash flows generated from (used in) investing activities Cash flows generated from (used in) strategic investing activities Cash flows generated from (used in) investing activities Cash flows from financing activities: Net changes in financial assets/liabilities other financing activities Cash flows generated from (used in) financing activities Net increase (decrease) in cash and cash equivalents other changes Exchange rate gains (losses)


47

Consolidated Statement of Changes in equity euro/thousand

Share capital

retained earnings

Hedging reserve

actuarial reserve

Other reserves

total equity of the group

1 January 2016

100,000

37,511

(5,772)

(7,068)

421,070

545,741

Net result

–

60,558

–

–

–

60,558

other comprehensive income (expense)

–

–

(2,572)

–

(1,454)

(4,026)


–

60,558

(2,572)

–

(1,454)

56,532

(11,707)

19,936

8,229

122,263

122,263

Comprehensive income for the year:

Additions from business combination PPA effect other changes

–

(3,752)

–

–

(130,030)

(133,782)

100,000

94,317

(8,344)

(20,229)

433,239

598,983

Net result

–

5,679

–

–

–

5,679

other comprehensive income (expense)

–

–

14,928

1,578

–

16,506


–

5,679

14,928

1,578

–

22,185

other changes

–

208

864

271

(497)

846

100,000

100,204

7,448

(18,380)

432,742

622,014

31 December 2016 Comprehensive income for the year:

31 December 2017

48


reconciliation of the parent’s equity and net result with consolidated figures as at 31 December 2017 euro/thousand

equity

of which: Net result

parent company equity and net result as at 31 December 2017

504,615

(33,800)

Equity surplus in annual financial statements compared to the carrying amounts of investments in consolideted companies

(81,341)

–

21,476

371

178,283

13,714

- elimination of intercompany profits

–

25,213

- dividends

–

(531)

(1,019)

711

622,015

5,679

(147)

(24)

621,868

5,655

Consolidation adjustments for: - PPA Nuclear Engineering Group - PPA Gastone

- other adjustments equity and net result attributable to the owners as at 31 December 2017 Non-controlling interests total equity and net result as at 31 December 2017


49

Notes to the consolidated financial statements as at 31 December 2017

1. general information Ansaldo Energia S.p.A. (also “Ansaldo Energia”, the “Company” or the “Parent Company”, and, together with its subsidiaries and associates the “Group” or “Ansaldo Energia Group”) is a joint stock company domiciled in Italy, with registered offices at no. 8 Via Nicola Lorenzi, Genoa, and organised according to the legal system of the Italian Republic. The company is jointly owned by Cdp Equity S.p.A. (an Italian investment holding company belonging to Cassa Depositi e Prestiti Group, formerly known as Fondo Strategico Italiano) and by the Chinese company Shanghai Electric Hongkong Co. Limited, which respectively hold 59.94% and 40% of the share capital in Ansaldo Energia. The remaining 0.06% is held by natural persons. The Group’s mission is to perform, in Italy and internationally, industrial, commercial, design, supply, technology assembly, start up and service activities in the power generation Plants and Components service line, as well as in similar service lines, in addition to performing all works connected with the aforementioned activities. Cutting-edge technology, high professional standards, extensive production capacity and competitive projects and products have been constant features of the Group from the outset and will drive it forward into the future.

2. Form, contents and accounting standards applied a) basis for preparation The consolidated financial statements for the fiscal year ended on 31 December 2017 (henceforth also referred to as the “Consolidated Financial Statements”) have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board and adopted by the European Union. The term IFRS is to be understood as the ”International Financial Reporting Standards”, all the “International Accounting Standards” (“IAS”), and all the interpretations of the International Financial Reporting Standards Interpretations Committee (“IFRIC”), previously known as the “Standards Interpretations Committee” (“SIC”), which, as of the date of the Consolidated Financial Statements’ approval, have been approved by the European Union according to the procedure required by EC Regulation no. 1606/2002 of the European Parliament and of the Council of 19 July 2002. In particular, it should be noted that the IFRS have been applied consistently to all the periods presented within this document. These Consolidated Financial Statements have been prepared: • based on the best available knowledge of the IFRS, and taking into account the best interpretations in this field; any future interpretative guidance and updates will be reflected in subsequent fiscal years in accordance with the methods required by the financial reporting standards, on a case-by-case basis; • in accordance with the going concern assumption, as the directors have verified the absence of any financial, managerial, or other indicators that could indicate problems with the Group's ability to cope with its obligations in the foreseeable future and, in particular, over the next 12 months;

50


based on the conventional historical cost criterion, with the exception of the valuation of the assets and liabilities in cases where the application of the fair value criterion is required. In order to assure their comparability with 2017, certain entries on the consolidated financial statements for the 2016 fiscal year have been reclassified, without this having any effect upon the 2016 results and the equity for the fiscal year ended on that date. •

b) Form and content of the financial statements The Consolidated Financial Statements have been prepared in Euro, which corresponds to the currency of the main economic environment in which the entities comprising the Group operate. Unless otherwise specified, all the amounts included in this document are expressed in Euro. The reporting formats and the relative classification criteria adopted by the Group, within the scope of the options provided by IAS 1 “Presentation of financial statements” (“IAS 1”), are indicated below: • the consolidated income statement – the scheme of which maintains a cost and revenue classification based on the nature of the same. This statement contains the net income before taxes and the effects of any discontinued operations, as well as the net income attributable to minority shareholders and the net income attributable to the Group; • the consolidated statement of comprehensive income – shows the changes in equity resulting from transactions other than capital transactions carried out with the company's shareholders; • the consolidated statement of financial position has been prepared by classifying the assets and liabilities based on the “current/non-current” criterion; • the consolidated statement of cash flows was prepared by reporting the cash flows resulting from operating activities according to the “indirect method”; • the consolidated statement of changes in equity contains the total income (expenses) for the fiscal year, transactions with shareholders, and other changes in equity. The reconciliation of the Parent’s equity and net result with consolidated figures as of 31 December 2017 was also included, which, through the classification of the various consolidation adjustments, explains the reconciliation between the data shown on the separate financial statements and those shown on the consolidated financial statements. The templates used are those that best represent the Group's economic, equity, and financial situation. The preparation of the Consolidated Financial Statements required the use of estimates by the management (for more details, please refer to Note 5, titled “Use of estimates”). The Board of Directors' meeting held on 20 March 2018 approved the draft Consolidated Financial Statements as of 31 December 2017 for presentation to the shareholders, authorising its publication and calling a Shareholders' Assembly for 20 April 2018 and 3 May 2018, in first and second call respectively. These Consolidated Financial Statements have been audited by PricewaterhouseCoopers S.p.A..

3. accounting Standards adopted a) basis and scope of consolidation The Consolidated Financial Statements include the economic, equity, and financial situations of the Company and the companies/entities included within the scope of consolidation (henceforth the “consolidated entities”), prepared according to the IFRS. The financial information regarding the consolidated entities has been drafted with reference to the year ended on 31 December 2017, and, where necessary, has been adjusted accordingly in order to render it consistent with the Group's accounting standards. The year-end date of the consolidated entities is aligned with that of the Parent Company; if this does not occur, they prepare special financial statements for the parent company's use. The consolidated entities are listed below, along with the relative percentages of the Group's direct or indirect holdings.


51

Companies consolidated on a line-by-line basis Company name

investments % direct

Ansaldo Nucleare S.p.A.

100%

Ansaldo Russia

100%

Contribution to the group % 100% 100%

100%

Ansaldo Swiss AG

100%

100%

Ansaldo Thomassen B.V.

100%

100%

Asia Power Project Private Ltd

100%

Consorzio Stabile Ansaldo New Clear Ansaldo Energia Holding Italia S.r.l.

100% 100%

100%

100% 18.18%

100%

100%

100%

Nuclear Engineering Group Ltd yeni Aen Insaat Anonim Sirketi

X

1

Ansaldo Sviluppo Energia

Ansaldo Thomassen Gulf

100% 72.73%

90.91%

100%

100%

Ansaldo Energia Holding USA Corp.

100%

100%

Ansaldo Energia IP UK Ltd

100%

100%

Ansaldo Energia Switzerland AG

100%

100%

Niehlgas GmbH

100%

100%

Aliveri Power Unit Maintenance SA

100%

100%

Power System Manufacturing LLC

100%

Ansaldo Energia Muscat LLC

50%

Ansaldo Energia Korea yuhan Heosa

50% 100%

100% X

2

100%

X

3

100%

3

100%

Ansaldo Energia Messico S. DE. R.L. DE C.V.

100%

X

Ansaldo Energa Spain S.L.

100%

X3

100%

Ansaldo Serviços de Energia Brasil LTDA

100%

X3

100%

Ghannouch Maintenance Sarl

100%

X3

100%

Power Systems Manufacturing Japan

100%

X3

100%

1. Company merged into the Parent Company on 1 January 2017 2. Company established in 2017 3. Companies established in 2016, but barely or non-operational as of 31 December 2016

52

indirect

variation of perimeter


Companies accounted for using the equity method Company name

Ansaldo America Latina

investments % direct

indirect

5%

95%

variation of perimeter

Contribution to the group % 100%

Ansaldo Gas Turbine High Technology

60%

60%

A.U, Finance Holdings BV

40%

40%

NNS Societé de Service pour Reacteur R. Polaris S.r.l.

40% 49%

Polaris - Anserv S.r.l. Shanghai Electric Gas Turbine SPVTCCC BV

40% 49%

20% 40%

20% 40%

100%

100% 1

1 Company not fully consolidated because barely or non-operational as of 31 December 2017 and 2016

Changes to the scope of consolidation The following changes took place during the course of the 2017 fiscal year. As shown in the table, during the course of 2017 the conditions arose for the complete consolidation of a number of the Group's subsidiaries, which were also present on 31 December 2016, but were non-operational as of that date. These are the following: • Ansaldo Energia Korea yuhan Heosa • Ansaldo Energia Messico S. DE. R.L. DE C.V. • Ansaldo Energìa Spain S.L. • Ghannouch Maintenance Sarl • Ansaldo Serviços de Energia Brasil LTDA • Power Systems Manufacturing Japan The Company Ansaldo Energia Muscat LLC was established in 2017, while the company Ansaldo Sviluppo Energia S.r.l. was merged into the Parent Company Ansaldo Energia S.p.A. on 1 January 2017. The criteria used by the Group to define the scope of consolidation and the relative consolidation principles are shown below. Subsidiaries An investor controls an entity when: i) it is exposed to, or has the right to participate in, the variability of its economic returns; and ii) it is able to exercise its own decision making power over the relevant activities of the entity itself in order to influence said returns. The existence of control is verified every time events and/or circumstances indicate a change in any of the above indicators of control. The subsidiaries are consolidated using the full consolidation method starting on the date upon which control was acquired, and cease to be consolidated starting on the date upon which control is transferred to another party. The financial statements of all the subsidiaries have closing dates that coincide with that of the Parent Company. The following criteria are adopted for full consolidation: • the assets and liabilities, as well as income and expenses, of the subsidiaries are incorporated line by line by attributing to the minority shareholders, where applicable, the share of equity and net result for the period pertaining to them; this share is recorded separately in the equity and in the statement of comprehensive income; • the profits and losses with relative tax effects resulting from transactions between fully consolidated companies, not yet realised with third parties, are eliminated, if significant, with the exception of losses that are not eliminated where the transaction indicates a reduction in the value of the asset transferred. Reciprocal receivables and payables, costs and revenue, and financial income and expenses are also eliminated;


53

in the presence of shares acquired after the assumption of control (acquisition of non-controlling interests), any difference between the acquisition cost and the corresponding portion of the acquired equity is recorded directly in the equity attributable to the Group; similarly, the effects arising from the disposal of minority interests without loss of control are recorded in the equity. In contrast, any sale of investment shares resulting in loss of control requires the following to be recorded on the statement of comprehensive income: (i) any capital gains/losses calculated as the difference between the consideration received and the corresponding portion of consolidated equity sold; (ii) the effect of the recalculation of any residual investment maintained in order to align it with the relative fair value; (iii) any values reported among the other comprehensive income components relating to the investee company of which control has been lost that are required to be reversed on the statement of comprehensive income, or, if not required to be reversed on the statement of comprehensive income, under the “other reserves” equity item. The value of any investment maintained, aligned with the relative fair value on the date of loss of control, represents the new carrying amount of the investment, which also constitutes the reference value for its subsequent valuation according to the applicable valuation criteria.

•

Joint arrangements A joint arrangement is an arrangement of which two or more parties have joint control. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Joint arrangements are either joint operations or joint ventures. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. A joint operator accounts for the assets, liabilities, revenue and expenses relating to its involvement in a joint operation. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Those parties are called joint ventures. A joint venture recognises its interest in a joint venture as an investment and shall account for that investment using the equity method. associates Associates are companies over which the Group has significant influence, which is presumed to exist when the investment represents 20% to 50% of the voting rights. Associates are accounted for using the equity method and are initially recorded at cost. The equity method is described below: • where necessary, the carrying amount of these investments is aligned with the adjusted equity of the relative company in order to reflect the application of the EU IFRS, and includes the entry of the greater values attributed to the assets and liabilities, as well as any goodwill, identified at the time of acquisition, according to a process similar to that previously described for business combinations; • the Group's share of the profit or loss is recorded starting on the date that the significant influence begins, and up until the date that the significant influence ceases. If, as a result of losses, the company accounted for using the method in question records a negative equity, the carrying amount of the investment is cancelled, and any surplus attributable to the Group, in the event that the latter has made efforts to fulfil legal or implicit obligations of the investee company, or otherwise to cover its losses, is recorded in a special provision; the changes in equity for companies accounted for using the equity method that are not indicated on the income statement are recorded directly on the statement of comprehensive income; • unrealised profits and losses generated on transactions carried out between the Company, its subsidiaries, and the investee company accounted for using the equity method, are eliminated based on the value of the Group's share in the investee company itself, with the exception of losses, if these are representative of the asset's impairment, and dividends, which are eliminated entirely. In the case of objective evidence of impairment, recoverability is verified by comparing the entry value with its relative recoverable amount determined by adopting the criteria indicated in the note titled “Impairment losses on tangible and intangible assets (impairment test)”. When the reasons for the write-downs made no longer subsist, the value of the

54


investments is restored within the limits of the write-downs made, with the effects being recorded on the income statement. Any sale of investment shares resulting in loss of joint control or significant influence over the investee company requires the following to be recorded on the statement of comprehensive income: • any capital gains/losses calculated as the difference between the consideration received and the corresponding portion of the underwritten value sold; • the effect of the recalculation of any residual investment maintained in order to align it with the relative fair value; • any values reported among the other comprehensive income components relating to the investee company that are required to be reclassified on the statement of comprehensive income. The value of any investment maintained, aligned with the relative fair value on the date of loss of joint control or significant influence, represents the new carrying amount and therefore the reference value for subsequent valuation according to the applicable valuation criteria. once an investment accounted for using the equity method, or a share of such an investment, is classified for resale, as it meets the established criteria for such a classification, the investment or investment share in question is no longer accounted for using the equity method. business combinations The business combinations under which control of a business is gained are recorded by applying the so-called acquisition method, in accordance with IFRS 3. In particular, the identifiable assets acquired, and the liabilities and contingent liabilities assumed, are recorded at their current value on the date of acquisition, or rather the date upon which control is acquired (the “Acquisition Date”), with the exception of deferred tax assets and liabilities, assets and liabilities relating to employee benefits, and assets held for sale that are recorded according to the relative financial reporting standards. If positive, the difference between the acquisition cost and the current value of the assets and liabilities is included among the intangible assets, such as goodwill; if negative, after having double checked the correct calculation of the current value of the assets and liabilities acquired and their acquisition cost, this difference is recorded as income directly on the statement of comprehensive income. When the determination of the values of the acquired business’s assets and liabilities is carried out on a temporary basis, it must be concluded within a maximum of twelve months from the date of acquisition, and only taking into account information relating to facts and circumstances that existed as of the Acquisition Date. The temporarily calculated values are recorded with a retrospective effect during the fiscal year in which the determination is completed. The charges ancillary to the transaction are recorded on the statement of comprehensive income at the time in which they are incurred. The acquisition cost is represented by the fair value of the assets transferred, the liabilities assumed, and the capital instruments issued for the purposes of the acquisition as of the Acquisition Date, and also includes the contingent consideration, or rather the portion of the consideration whose amount and disbursement are dependent upon future events. The contingent consideration is recorded based on the relative fair value as of the Acquisition Date, and the subsequent changes in the fair value are recorded on the statement of comprehensive income if the contingent consideration is a financial asset or liability, while contingent considerations classified as equity are recalculated and their subsequent extinction is recorded directly in equity. In the case of acquisition of control at a later stage, the acquisition cost is determined by summing the fair value of the investment previously held in the acquiree, and the amount paid for the additional share. Any difference between the fair value of the investment previously held and its carrying amount is recorded on the statement of comprehensive income. Upon acquisition of control, any amounts previously recorded among the other comprehensive income components are recorded on the statement of comprehensive income, or else in another equity item if its reclassification on the statement of comprehensive income is not required. translation of foreign currency captions and financial statements Translation of foreign currency captions Foreign currency monetary items (cash and cash equivalents, assets and liabilities to be received or settled in established or determinable monetary amounts, etc.), as well as non-monetary items (advances to suppliers of goods and/or services, etc.), are initially recognised at the exchange rate ruling when the transaction is performed. Subsequently, monetary items are


55

translated into the functional currency at the closing rate on the reporting date and any exchange rate gains or losses are recorded on the income statement. Non-monetary items are maintained at the exchange rate ruling at the transaction date, unless continuing adverse economic trends affect the rate, in which case exchange rate differences are recorded on the income statement. Translation of financial statements expressed in a currency other than the functional currency Balances expressed in a foreign currency (except for currencies of hyperinflationary economies, which is not currently the case of the Group) are translated into the functional currency as follows: • assets and liabilities are translated at the closing rate; • costs and revenue, income and expense are translated at the average exchange rate of the year or at the rate ruling at the date of the transaction if this varies significantly from the average rate; • exchange rate gains or losses arising from the translation of economic values at a rate that differs from the closing rate and from the translation of opening equity at a rate that differs from the closing rate are taken to the translation reserve. The translation reserve is released to profit or loss when the investment is sold. Goodwill and fair value adjustments relating to the acquisition of foreign operations are recognised as assets and liabilities of the foreign operation and translated at the closing rate. The exchange rates used for the conversion of the aforementioned balances are shown in the following table: exchange rate as at 31 December 2017

exchange average rate as 2017

exchange rate as at 31 December 2016

exchange average rate as 2016

USD - U.S. Dollar

1,1993

1,1293

1,0541

1,1069

IRU - Indian Rupii

76,6055

73,498

71,5935

74,3717

FSV - Swiss Franc

1,1702

1,1115

1,0739

1,09016

AED - U.A.E. Dirham

4,4044

4,1461

3,8696

4,06344

ARS - Peso

22,931

18,726

16,74881

16,342

TyR - Turkey Lira

4,5464

4,1214

3,7072

3,34325

RUB - Russian Ruble

69,392

65,8877

64,3

74,1446

CNy - Renminbi

7,8044

7,6264

7,3202

7,35222

TND -Tunisian Dinar

2,9737

2,7295

N/A

N/A

JPy - Japanese yEN

135,01

126,6545

123,4

120,197

BRL - Real

3,9729

3,6041

3,4305

3,85614

MXN - Mexican Peso

23,6612

21,3278

21,7719

20,6673

KRW - South Korean Won

1.279,61

1.275,83

1.269,36

1.284,18

GBP - Pound Sterling

0,88723

0,87615

0,85618

0,81948

0,4611

0,4342

N/A

N/A

oMR - Rial omani

b) accounting standards and valuation criteria intangible assets Intangible assets consist of clearly identifiable non-monetary assets without physical substance that are controlled by the Group and are capable of generating future economic benefits for the company, as well as the goodwill recorded following business combinations. They are recognised at purchase and/or production cost, including directly related charges incurred to prepare them for use and borrowing costs relating to their acquisition, development or production for those assets that require a long time period before being ready for use or sale. Their carrying amount is net of accumulated amortisation,

56


except for assets with an indefinite useful life, and any impairment losses. Amortisation begins when the asset becomes available for use and is calculated systematically over the residual useful life of each asset. It is calculated considering the actual use of the asset during the fiscal year in which an intangible asset is initially recognised. The following main intangible assets can be identified within the context of the Group: Development expense This item includes the costs incurred to apply the results of research and other knowledge to a plan or project for the production of new or substantially advanced materials, devices, processes, systems or services before commercial production commences or before the assets are used, when the Group can demonstrate that they will generate future economic benefits. It is amortised based on the units of production method over the period in which the expected future economic benefits will be obtained (the “stamp” method). on the other hand, expenditure incurred in a research stage of a project is expensed when incurred. industrial patents and intellectual property rights Industrial patents and intellectual property rights are recognised at acquisition cost, net of accumulated amortisation and impairment losses. Amortisation begins when the title to the right is acquired and the asset is ready for use. Assets are amortised over the shorter of their expected useful life and the title term. Concessions, licences and trademarks This category includes: concessions, i.e., those public administration measures entitling private sector entities to use public assets on an exclusive basis or to manage public services under regulated conditions; licences giving the right to use patents or other intangible assets for a fixed term or a term that can be established; trademarks identifying the origin of products or goods from a specific company and licences to use know how, software or the property of others. The costs, including direct and indirect expenses incurred to obtain these rights, are capitalised after the rights have been acquired and are amortised systematically over the shorter of the period of expected use and the period for which the right has been acquired. goodwill Goodwill recognised as an intangible asset arises from business combinations and reflects an excess in the acquisition cost of the business or business unit over the total fair value at the acquisition date of acquired assets and liabilities. As it has an indefinite useful life, goodwill is not amortised. Instead, it is tested for impairment at least once a year, unless the market and management indicators identified by the Group show that the test has to be conducted when preparing interim financial statements. tangible assets The tangible assets are measured at purchase or production cost, net of accumulated depreciation and any impairment losses. Cost includes direct charges incurred to prepare assets for use and any disposal and removal costs that will be incurred to restore the site to its original conditions and borrowing costs relating to their acquisition, construction or production for those assets that require a long time period before being ready for use or sale. Tangible assets whose carrying amount will mainly be recovered through a sale transaction (rather than the continued use of the asset) are valued at their carrying amount or their fair value less disposal costs, whichever is less. Assets classified as “for sale” must be immediately available for sale, their disposal must be highly probable (meaning that there are already commitments to that effect), and their sale value must be reasonable in relation to their fair value. Assets acquired following business combinations are recorded at their fair value as of the acquisition date, possibly corrected within the next 12 months. This value represents the cost of acquisition. Costs for ordinary and/or routine maintenance and repairs are taken directly to profit or loss when incurred. Costs to expand, upgrade or improve owned or leased assets are capitalised only to the extent they meet the requirements to be classified separately as assets or part of an asset. Grants related to assets are taken as a direct decrease in the cost of the asset to which they relate. The carrying amount of each asset is depreciated on a systematic basis. Depreciation is calculated on a straight-line basis


57

each year over the residual useful lives of assets. It is calculated considering the actual use of the asset in the year in which a tangible asset item is initially recognised. The following table lists the depreciation periods for the various types of assets: Years

Land

indefinite useful life

Industrial buildings

33

Plant and machinery

20 - 5

Equipments

8 - 2,5

Furniture and fittings

8-5

Vehicles

5-4

The estimated useful lives and residual values are regularly reviewed. Depreciation ceases when the asset is sold or reclassified as held for sale. If a depreciable asset is comprised of separately identifiable components with useful lives that differ significantly from the other components comprising the asset, depreciation is calculated separately for each component, using the component approach. This item also includes equipment allocated to specific programmes (tooling), depreciated based on the method of units produced as opposed to the total expected. Profits and losses on the sale of assets or groups of assets are measured by comparing the selling price with the related carrying amount. leased assets The definition of a contractual agreement as a leasing transaction (or containing a leasing transaction) is based on the substance of the agreement, and requires an assessment as to whether the fulfilment of the agreement depends upon the use of one or more specific assets, or whether the agreement transfers the right to the use of such assets. The verification that an agreement contains a leasing transaction is carried out at the start of the agreement itself. Assets owned under financial leasing agreements, or agreements by which all the risks and benefits associated with ownership of the assets are substantially transferred to the Group, are initially recorded as assets at fair value or, if lower, at the actual value of the minimum lease payments, including any applicable fee for exercising the option to purchase. The corresponding liability to the lessor is indicated on the financial statements among the financial liabilities, by applying the amortised cost criterion. After their initial registration, the leased assets are amortised by applying the criterion and the rates indicated above, except under circumstances in which the duration of the lease is less than the useful life represented by these rates, and there is no reasonable assurance of the transfer of the leased assets' ownership upon the agreement's natural expiration date; in this case, the amortisation period will be represented by the duration of the lease agreement itself. Leases in which the lessor substantially retains all the risks and benefits of ownership are classified as operating leases. The fees associated with operating leases are recorded in a linear fashion on the income statement over the term of the lease agreement. impairment losses (a) Goodwill As previously noted, goodwill is subject to verification of recoverability (the so-called impairment test) on an annual basis, or more frequently in the presence of indicators giving the impression that it may have suffered an impairment, in accordance with IAS 36 (Impairment of assets). This verification is normally carried out at the end of each fiscal year, and the reference date for this verification therefore coincides with the closing date of the financial statements. The impairment test, which is described in greater detail under Note 12, is carried out in relation to each of the Cash Generating Units (CGUs) to which goodwill has been allocated, or in the case of Ansaldo Energia Group, to the only CGU identified. Any impairment of goodwill is recorded if the recoverable amount thereof is less than its carrying value on the financial statements. The recoverable value is to be understood as the greater of either the fair value of the CGU, less the disposal costs, or the

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relative value in use, with the latter being understood as the actual value of the future cash flows for that asset. In determining the value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the current market assessments of the cost of money in relation to the period of the investment and risks specific to the asset. If the impairment resulting from the impairment test exceeds the value of the goodwill allocated to the CGU, the remaining surplus is allocated to the assets included in the CGU in proportion to their carrying value. The minimum limit for this allocation is the greater of the following amounts: • the fair value of the asset less cost to sell; • the value in use, as defined above; • zero. The original value of the goodwill cannot be restored if the reasons for the impairment no longer subsist. (b) Tangible and intangible assets with a finite useful life on each of the financial statements' reference dates, checks are carried out to determine whether there are any indicators that tangible and intangible assets have suffered impairment losses. For this purpose, both internal and external sources of information are taken into account. With regard to the former (internal sources), the following are taken into consideration: the obsolescence or physical deterioration of the asset, any significant changes in the use of the asset, and the asset's economic performance in relation to the expectations. With regard to external sources, the following are taken into consideration: the trend of the assets' market prices, any technological, market or regulatory discontinuity, the trend of the market interest rates or the cost of capital used to evaluate the investments. If such indicators are determined to be present, the recoverable value of the aforementioned assets is estimated, with any depreciation with respect to the relative book value being recorded on the statement of comprehensive income. The recoverable value of an asset is represented by the greater of either the fair value, less the ancillary sales costs, or the relative value in use, determined by discounting the estimated future cash flows for the asset in question, including those deriving from its transfer at the end of its useful life, if significant and reasonably ascertainable, and excluding any disposal costs. In determining the value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the current market assessments of the cost of money in relation to the period of the investment and risks specific to the asset. For an asset that does not generate largely independent cash flows, the recoverable value is determined in relation to the cash generating unit to which the asset belongs. An impairment loss is recorded on the statement of comprehensive income whenever the carrying amount of the asset, or of the CGU to which it is allocated, exceeds the relative recoverable value. The impairment losses of a CGU are first recorded as a reduction of the carrying amount of any goodwill attributed to the same, and then as a reduction of the other assets, in proportion to their carrying values, and within the limits of their recoverable values. If the conditions for a write-down previously carried out no longer subsist, the carrying amount of the asset is restored through registration on the income statement, within the limits of the carrying value that the asset in question would have had if the write-down had never been done and the relative amortisations had been carried out. equity investments in other companies Equity investments in other companies (other than those in subsidiaries, associates and joint ventures) are evaluated at fair value; any changes in the value of such investments are registered in an equity reserve by attributing them to the other comprehensive income components that will be reclassified on the separate consolidated income statement at the time of sale or in the presence of an impairment deemed to be definitive. other unlisted equity investments for which the fair value cannot be reliably determined are stated at cost and adjusted for the impairments to be recorded on the separate consolidated income statement, in accordance with the provisions of IAS 39 (Financial instruments: recording and valuation). Impairments of other investments classified among the “financial assets available for sale" cannot be subsequently reversed.

inventories Inventories are measured at the lower of cost and net realisable value. Cost is calculated using the weighted average cost method. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of


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completion and the estimated costs necessary to make the sale. Produced raw materials are measured at standard cost, which is reviewed half-yearly. Work-in-progress and semi-finished products are measured at production cost, excluding borrowing costs and overheads. Contract work in progress Contract work in progress is recognised in accordance with the percentage of completion method whereby contract cost, revenue and profits (losses) are recognised using the percentage of completion method. The stage of completion is calculated on the basis of the ratio of costs incurred at the measurement date and the expected overall costs for the contract. The measurement reflects the best estimate of the stage of completion at the reporting date. The Group periodically updates the assumptions underlying these measurements. Any profits or losses are recognised in the year in which the adjustments are made. The expected loss on a contract affecting operating profit is recognised entirely under operating expense when it becomes reasonably foreseeable. Similarly, any reversal thereof is recognised under other operating income, if related to internal costs. External costs are covered directly through utilisation of the provision for expected losses to complete contracts. Contract work in progress is recognised net of any allowances, expected losses and progress payments and advances relating to contracts in progress. This analysis is performed individually for each contract, recognising the positive difference (work in progress in excess of progress payments and advances) under contract work in progress and the negative difference under “progress billings”. If the amount recognised under progress billings is not collected at the preparation date of the annual and/or interim financial statements, a balancing entry is recognised under trade receivables. Contracts with consideration in a currency other than the functional currency (Euro in this case) are measured by translating the portion of consideration accrued, as per the percentage of completion method, at the closing rate. However, under the Group’s policy governing currency risk, all contracts whose cash inflows and outflows are significantly exposed to exchange rate fluctuations are adequately hedged: In this case, the recognition procedures set out below.

Financial assets The Group classifies its financial assets as follows: • financial assets at fair value through profit or loss; • loans and receivables; • held-to-maturity investments; • available-for-sale financial assets. Financial assets are classified by management upon initial recognition. Financial assets at fair value through profit or loss This category includes financial assets acquired for the purpose of trading in the short term or designated as such by management, in addition to derivative instruments, in relation to which reference should be made to the paragraph below. The fair value of these instruments is based on the bid price at the reporting date. In the case of unlisted instruments, the fair value is calculated using common financial valuation techniques. Variations in fair value gains or losses on the financial instruments included in this category are recognised immediately on the income statement. Classification as current or non-current reflects management expectations about trading: they are included under current assets when they are expected to be traded within 12 months of the reporting date or when they are recognised as held for trading. loans and receivables This category includes non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value and are subsequently measured at amortised cost, using the effective interest method. If there is objective evidence of impairment, the carrying amount of the asset is reduced to that of the current expected future cash flows: impairment losses identified by means of impairment tests are recognised in profit or loss. If, in subsequent years, the reasons underlying the impairment loss cease to exist, the impairment loss is reversed to the extent of

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the carrying amount the asset would have had based on amortised cost had the impairment not been recognised. The assets are classified as current, except for the portion due after 12 months, which is included under non-current assets. Held-to-maturity investments These are non-derivative financial assets with fixed maturity that the Group has the positive intention and ability to hold to maturity. They are classified under current assets when their contractual maturity is within 12 months. If there is objective evidence of impairment, the carrying amount of the asset is reduced to that of the expected discounted future cash flows: impairment losses identified by means of impairment tests are recognised in profit or loss. If, in subsequent years, the reasons underlying the impairment loss cease to exist, the impairment loss is reversed to the extent of the carrying amount the asset would have had based on amortised cost had the impairment not been recognised. Financial assets available for sale These are non-derivative financial assets that are designated as available for sale or are not classified under any of the above categories. They are measured at fair value, calculated on the basis of market prices at the reporting date or using valuation techniques, and fair value gains or losses are taken to equity (to the “fair value reserve”). They are only reclassified to the income statement when the financial asset is actually sold or, in the case of cumulative losses, when it is clear that the loss recognised in equity will not be recovered. Classification under current or non-current assets depends on management intentions and the asset’s actual trading possibilities. Assets that are expected to be realised within 12 months are recognised as current assets. If there is objective evidence of impairment, the carrying amount of the asset is reduced to that of the expected discounted future cash flows: impairment losses previously in profit or loss are recorded in the income statement. The impairment loss is reversed if the underlying reasons cease to exist.

Derivatives Derivatives are always classified as assets held for trading and measured at fair value on the income statement, unless they qualify for hedge accounting and are effective in hedging the underlying assets, liabilities or commitments of the Group. Specifically, the Group uses derivatives exclusively as part of its strategies of hedging the risk of fluctuations in the fair value of recognised assets or liabilities or due to contractual commitments (fair value hedges), or in the expected cash flows of contractually-defined or highly probable future transactions (cash flow hedges). For details on the recognition of currency risk hedges on long-term contracts, reference should be made to the section titled “Estimated costs to complete long-term contracts.” The effectiveness of hedges is documented at the inception of the transaction, as well as periodically at each annual or interim reporting date. Hedge effectiveness is measured by comparing the variations in the fair value of the hedging instrument with those of the hedged item, or, for more complex instruments, using statistical analysis based on risk variations. Hedging construction contracts against currency risk To avoid the risk of fluctuations in foreign currency cash inflows and outflows on construction contracts, the Group specifically hedges the individual cash flows expected on the contract. Hedges are made on finalising the contracts, unless previous framework agreements exist that make contract acquisition highly likely. Currency risk is usually hedged using plain vanilla (forward) instruments. If the hedge is not deemed effective, fair value gains or losses on these instruments are immediately expensed as financial items and the related underlying item is measured as if it were not hedged, hence it is exposed to the currency risk. Hedges which fall under the first type of instrument are recognised as cash flow hedges, considering the premium or the discount as the ineffective portion in the case of forwards, or time value in the case of options. The ineffective portion is recognised under financial items. Fair value Hedges Changes in the fair value of derivatives designated as fair value hedges and which qualify as such are recognised in profit or loss, as are changes in the fair value of the underlying assets or liabilities attributable to the risk eliminated by the hedging transaction.


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Cash flow hedges Changes in the fair value of derivatives designated as cash flow hedges and which qualify as such are recognised to the extent of the portion determined to be “effective”, in a specific equity reserve (“hedging reserve”). This is subsequently reclassified on the income statement when the forecast transaction affects profit or loss. The change in the fair value of the ineffective portion is recognised immediately in profit or loss. If the forecast transaction is no longer highly probable, the relevant portion of the “hedging reserve” is released immediately to profit or loss. If the hedging instrument is sold or no longer effectively hedges the risk for which it was agreed, the relevant portion of the “hedging reserve” is retained in equity until the underlying transaction affects profit or loss. Fair value measurement The Fair value valuations of the financial instruments are carried out by applying IFRS 13 “Fair value measurement” (“IFRS 13”). The fair value represents the price that would be received for the sale of an asset or paid for the transfer of a liability within the context of an ordinary transaction carried out between market operators on the measurement date. The fair value measurement is based on the assumption that the sale of the asset or the transfer of the liability takes place on the main market, or rather the market with the greatest volume and level of transactions for the asset or liability in question. In the absence of a main market, it is assumed that the transaction takes place on the most advantageous market to which the Group has access, or rather the market most likely to maximise the results of the asset's sale, or minimise the amount to be paid for the transfer of the liability. The fair value of an asset or liability is determined in consideration of the assumptions that market participants would use to define the price of the asset or liability in question, with the presumption that they are acting in their best economic interests. The market participants are independent and informed buyers and sellers who are capable of entering into a transaction for an asset or liability, and are motivated, but are not obliged or induced, to carry out the transaction. In carrying out the fair value measurement, the Group takes into account the characteristics of the specific asset or liability, and namely, for non-financial assets, the ability of a market participant to generate economic benefits by employing the asset for its greatest and best possible use, or by selling it to another market participant capable of using it for its greatest and best possible use. The fair value measurement of the assets and liabilities is carried out using techniques appropriate for the circumstances, and for which sufficient data are available, maximising the use of observable inputs. IFRS 13 identifies the following hierarchy of fair value levels, which reflects the significance of the inputs used in the relative determination: • Level 1 - Quoted price (active market): the data used in the measurements are prices quoted on markets where the same assets and liabilities in question are exchanged. • Level 2 - Use of parameters observable on the market (e.g. for derivatives, the exchange rates used by the Bank of Italy, market rate curves, volatility provided by qualified providers, credit spreads calculated based on the CDS, etc.) other than the quoted prices referred to in level 1. • Level 3 - Use of unobservable market parameters (e.g. internal assumptions, cash flows, risk-adjusted spreads, etc.).

Cash and cash equivalents This item includes cash on hand, deposits and accounts with banks or other credit institutions available for current transactions, post office current accounts and other cash equivalents as well as investments maturing within three months of the acquisition date. They are recognised at fair value.

payables and other financial liabilities They are initially recognised at fair value, less any transaction costs, and subsequently measured at amortised cost, using the effective interest method. They are classified under current liabilities, unless the Group has the contractual right to settle its obligations after at least 12 months of the interim or annual reporting date.

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Derecognition of financial assets and liabilities A financial asset (or, where applicable, part of a financial asset or part of a group of similar financial assets) is eliminated from the financial statements when: • the rights to receive cash flows from the asset are extinguished; • the Group retains the right to receive cash flows from the asset, but has assumed the contractual obligation to promptly pay them entirely to a third party; • the Group has transferred the right to receive cash flows from the asset and (a) has substantially transferred all the risks and benefits of the financial asset's ownership, or (b) has neither transferred nor substantially retained all the risks and benefits of the asset's ownership, but has transferred control of the same. A financial liability is eliminated from the financial statements when the obligation underlying the liability is extinguished, cancelled or fulfilled.

equity Share capital Share capital is comprised of the parent’s subscribed and paid-in share capital. Any costs closely related to the issue of shares are classified as a decrease in share capital when they are directly related to such operation, net of any deferred taxation.

employee benefits post-employment benefits Several pension (or supplementary) schemes are in place. They can be analysed as follows: • Defined contribution plans under which the Group pays fixed contributions into a separate entity (e.g. a fund) and has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay employees benefits relating to employee service. Contributions payable to a defined contribution plan are recognised only when employees have rendered service in exchange for such contributions; • Defined benefit plans whereby the Group has an obligation to provide the agreed benefits to current and former employees and bears the actuarial and investment risks of the plan. The cost of this plan is therefore not defined in terms of the contributions due for the fiscal year, but is rather recalculated based on the dynamics of the wages and certain demographic and statistical assumptions. The method utilised is defined as the "projected unit credit method". The Group recognises this type of plan using the equity option method, whereby the carrying amount of the recognised liability reflects that of the relevant actuarial valuation, fully and immediately recognising actuarial gains and losses when they arise in other comprehensive income through equity in the “actuarial reserve”. Other long-term employee benefits and post-employment benefits Some Group employees are granted certain benefits such as jubilee benefits and seniority bonuses which are sometimes paid after retirement (such as medical benefits). The accounting treatment is the same as that applied to defined benefit plans, hence the “projected unit credit method” is used. However, with respect to “other long-term benefits”, any actuarial gains and losses are recognised immediately and entirely in profit or loss when they arise. termination benefits Termination benefits are recognised as a liability and an expense when the Company is demonstrably committed to terminating the employment of an employee or Group of employees before the normal retirement date or providing termination benefits as a result of an offer made in order to encourage voluntary redundancy. Termination benefits do not generate future economic benefits for the Company and, accordingly, are immediately expensed.


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provisions for risks and charges Provisions for risks and charges are recognised if, at the reporting date, as a result of a past event, there is a legal or constructive obligation that will lead to an outflow of resources which can be estimated reliably. The amount recognised as a provision is the best estimate of the discounted outlay required to settle the obligation. The discount rate used reflects current market assessments and the additional effects of the risk specific to the liability. Changes in estimates are recognised in profit or loss when they take place. estimated costs to complete long-term construction contracts The Group operates in extremely complex business areas and with complex contractual arrangements which are recognised using the percentage of completion method. The margins recorded on the income statement depend on both the order and the margins forecast from the entire project on completion. Consequently, for the purposes of correctly recognising work in progress and profits related to works yet to be completed, management is required to make an accurate estimate of expected costs to complete, expected increases and delays, additional costs and penalties which could have an impact on the expected profit. In order to better assist the management’s estimates, contract risk management and analysis procedures have been introduced to identify, monitor and quantify the risks related to contract performance (for more details, please refer to Note 5 “Use of estimates”). The carrying amounts reflect the management’s best estimate at that time, assisted by the above procedural tools. Moreover, the Group operates in markets where disputes tend to take a long time to settle especially when state bodies are involved. This requires that management predicts the outcome of such disputes.

revenue Revenue is measured at the fair value of the consideration received, net of any discounts and volume rebates. The revenue also include changes in work in progress, with respect to which reference should be made to the previous note. Revenue relating to the sale of goods is recognised when the Group has transferred to the buyer the significant risks and rewards of ownership of the goods which generally coincides with transfer of title or possession to the buyer, or when the revenue can be measured reliably. Revenue from the rendering of services is recognised based on the percentage of completion method, provided that it can be estimated reliably.

grants Grants are recognised on an accruals basis and in direct correlation with costs incurred when their allocation has been formally approved. Specifically, grants related to assets are recognised in profit or loss directly in line with the depreciation/amortisation of the assets/projects to which they relate and are recognised as a direct reduction in depreciation/amortisation. In the statement of financial position, they are recognised as a direct reduction of the capitalised asset to the extent of the residual amount not yet recognised in profit or loss.

expenses Costs are recognised if they are pertinent to the Group’s business and on an accruals basis.

Financial income and expenses Interest income and expense are recognised on an accruals basis using the effective interest method, i.e., at the interest rate that makes all cash inflows and outflows (including any premiums, discounts, commissions, etc.) comprising the transaction financially equivalent. Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes

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a substantial period of time to get ready for its intended use or sale (qualifying assets) are capitalised as part of the cost of that asset.

Dividends Dividends are recognised when the right to receive payment is established. This usually coincides with the shareholders’ resolution approving their distribution. Dividends paid to the shareholders are considered as a change in equity and recognised as a liability in the year in which the distribution was approved by the parent’s shareholders.

taxes The Group’s tax expense includes current and deferred taxes. When they refer to income and expense recognised in equity through other comprehensive income, they are offset against the same item. Current taxes are calculated on the basis of the tax legislation applicable in the countries where the Group operates, enacted at the reporting date. Any risks arising from different interpretations of income and expense, as well as pending litigation with the tax authorities are assessed at least quarterly in order to adjust the relevant provisions. Deferred taxes are recognised in respect of temporary differences between the carrying amounts of assets and liabilities and their tax base. Deferred tax assets and liabilities are measured at the tax rates that are expected to be enacted when realising assets and settling liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable profits will be available in the years the related temporary differences reverse against which the deductible temporary differences can be utilised.

earnings per Share a) earnings per Share - basic The basic earnings per share is calculated by dividing the profit attributable to the Group by the weighted average number of ordinary shares outstanding during the fiscal year, excluding treasury shares. b) earnings per Share - diluted The diluted earnings per share is calculated by dividing the profit attributable to the Group by the weighted average number of ordinary shares outstanding during the fiscal year, excluding treasury shares. In order to calculate the diluted earnings per share, the weighted average number of shares outstanding is adjusted by assuming all the owners will exercise rights that will have a potentially dilutive effect, while the profit attributable to the Group is adjusted so as to take into account any of these potential effects, excluding taxes.

related party transactions Related parties are to be understood as companies that have the same parent company as the Group, companies that directly or indirectly control or are subject to joint control by the Group, and those in which the Group holds a share that allows it to exercise significant influence. The definition of related parties also covers members of the Company's Board of Directors and managers with strategic responsibilities. Managers with strategic responsibilities are those who have direct or indirect power and responsibility in relation to the planning, management, and/or monitoring of the Group's activities.


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4. recently issued accounting standards 4.1. accounting standards not yet applicable, since not yet approved by the european union As of the date of this document, the relevant bodies of the European Union had not yet concluded the approval process necessary for the adoption of the following accounting standards and amendments: amendments to iFrS 2 “Classification and Measurement of Share-based payment transactions” This amendment, which was published by the IASB on 20 June 2016, clarifies the basis of measurement for cash-settled sharebased payments, and the accounting treatment of the changes to an incentive plan that switches from being settled with cash to being settled with capital instruments. The document also introduces an exception to IFRS 2 that will result in an incentive plan being fully accounted for as a plan settled with capital instruments whenever the employer is obliged to pay the tax authority a withholding tax arising from the plan itself and charged to the relative employee beneficiaries. The changes will apply starting with the fiscal year that begins on 1 January 2018. Early adoption is permitted. The Group does not believe that the provisions arising from this standard's entry into force will have any impact upon its economic or equity situation. amendments to iaS 40 “transfers of investment property” These amendments, which were published by the IASB on 8 December 2016, make it clear that the transfer to or from an investment property must be justified by a change in its intended use. In order to determine whether an investment property's intended use has changed, it is necessary to verify whether the investment meets or has ceased to meet the definition of an investment property. This change must be supported by evidence. The changes will apply starting with the fiscal year that begins on 1 January 2018. The Group does not believe that the provisions arising from this standard's entry into force will have any impact upon its economic or equity situation. annual improvements 2014-2016 The changes introduced by this document, which was published by the IASB on 8 December 2016, will affect: • IFRS 1 “First-time adoption of the International Financial Reporting Standards”, starting with the fiscal year that begins on 1 January 2018; • IAS 28 “Investments in associates and joint ventures”, starting with the fiscal year that begins on 1 January 2018. The Group does not believe that the provisions arising from this standard's entry into force will have any impact upon its economic or equity situation. iFriC 22 “Foreign currency transactions and advance consideration” This interpretation, which was published by the IASB on 8 December 2016, addresses the accounting treatment of transactions denominated in foreign currencies, or portions of transactions whose amounts are denominated in foreign currencies. The interpretation provides a guide for the circumstances in which a single payment/collection is envisaged, as well as the cases in which multiple payments/collections are made. The interpretation aims to reduce the inconsistent conduct taking place in practice. The changes will apply starting with the fiscal year that begins on 1 January 2018. The Group does not believe that the provisions arising from this standard's entry into force will have any impact upon its economic or equity situation. iFriC 23 “uncertainty over income tax treatments” on 7 June 2017, the IASB issued IFRIC 23 “Uncertainty over Income Tax Treatments”, which contains indications on the accounting of income tax related tax assets and liabilities (current and/or deferred) in the presence of uncertainties regarding the application of the tax legislation. The provisions of IFRIC 23 are effective starting with the fiscal years beginning on or after 1 January 2019. amendment to iFrS 9 “prepayment Features with Negative Compensation” on 12 october 2017, the IASB issued an amendment to IFRS 9 in order to address several issues concerning the applicability and classification of IFRS 9 “Financial Instruments” in relation to certain financial assets with the possibility of early repayment. The IASB also clarifies certain aspects regarding the accounting of financial liabilities following changes in the same. The provisions of the Amendment to IFRS 9 are effective starting with the fiscal years beginning on or after 1 January 2019.

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amendment to iaS 28 “long-term interests in associates and Joint ventures” on 12 october 2017, the IASB issued an amendment to IAS 28 in order to clarify the application of IFRS 9 “Financial Instruments” for long-term interests in subsidiaries or joint ventures included in investments in such entities for which the equity method is not applied. The provisions of the Amendment to IAS 28 are effective starting with the fiscal years beginning on or after 1 January 2019. iFrS 17 “insurance Contracts” on 18 November 2017, the IASB issued IFRS 17 “Insurance contracts”, which lays down the principles for the recognition, measurement, presentation, and representation of the insurance contracts covered by the standard. The goal of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents the contracts in question, in order to provide the reader of the financial statements with a basis for evaluating the effects of such contracts upon the entity's equity and financial position, earnings, and cash flows. The provisions of IFRS 17 are effective starting with the fiscal years beginning on or after 1 January 2021. 4.2. accounting standards, amendments and interpretations not yet adopted but applicable in advance With regard to the adoption of IFRS 15, IFRS 9, and IFRS 16, the first two of which become effective as of 1 January 2018, and the third of which becomes effective as of 1 January 2019, it should be noted that specific projects are underway on a Group-wide level, and it will therefore only be possible to have an accurate estimate of these principles' quantitative effects once these projects have been completed. As of the date of this document, the relevant bodies of the European Union have approved the adoption of the following accounting standards and amendments, which have not yet adopted by the Group iFrS 15 “revenue from contracts with customers” on 28 may 2014, the IASB published IFRS 15 “Revenue from contracts with customers” (henceforth IFRS 15), which governs the time profile and the amount of revenue recognition arising from contracts with customers, including contracts relating to work in progress. In particular, IFRS 15 requires revenue recognition to be based on the following five steps: 1) identification of the contract with the customer; 2) identification of the contractual commitments to transfer goods and/or services to a customer (so-called “performance obligations”); 3) pricing of the transaction; 4) allocation of the transaction price to the identified performance obligations based on the standalone sale price of each good or service; and 5) recognition of the revenue when the relative performance obligation is met. IFRS 15 also includes the financial statement disclosures to be provided with regard to the nature, amount, timing and uncertainty of the revenue and the relative cash flows. The new standard, adopted by the European Commission with EU Regulation No. 2016/1905 of 22 September 2016, is effective starting with the fiscal years beginning on or after 1 January 18. Early adoption is permitted. Any impacts that the new standards/interpretations might have upon the Group's consolidated financial statements are still being evaluated; in particular with regard to the adoption of IFRS 15, it should be noted that specific projects are underway on a Group-wide level, and it will therefore only be possible to have an accurate estimate of these principles' quantitative effects once these projects have been completed. “Clarifications to iFrS 15 revenue from Contracts with Customers” The document, which was published by the IASB on 12 April 2016, contains clarifications on certain aspects relevant to the implementation of IFRS 15 “Revenue from contracts with customers” (henceforth “IFRS 15”). The changes to IFRS 15 are effective starting with the fiscal years beginning on or after 1 January 2018. The changes in question were approved by the European Union on 31 october 2017. For the analysis carried out by the Group, please refer to that which is already indicated in the section titled IFRS 15 “Revenue from contracts with customers”.


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iFrS 9 “Financial instruments” on 24 July 2014, the IASB completed the draft revision of the standard concerning financial instruments with the release of the full version of IFRS 9 “Financial instruments” (henceforth “IFRS 9”). The new provisions of IFRS 9: – modify the classification and measurement model for financial assets; – introduce a new financial asset depreciation method that takes into account the expected loss (so-called expected credit losses); and – modify the provisions concerning hedge accounting. The provisions of IFRS 9, adopted by the European Commission with EU Regulation No. 2016/2067 of 22 November 2016, are effective starting with the fiscal years beginning on or after 1 January 18. iFrS 16 “leases” on 13 January 2016, the IASB published IFRS 16 “Leases” (henceforth “IFRS 16”), which replaces IAS 17 “Leasing” and the relative interpretations. IFRS 16 eliminates the distinction between operating and financial leases for the purposes of preparing the lessees' financial statements; for all leasing contracts with durations greater than 12 months, it is necessary to recognise an asset representing the right of use, and a liability representing the obligation to make the payments envisaged under the contract. For the purposes of preparing the lessors' financial statements, on the other hand, the distinction between operating and financial leases is maintained. IFRS 16 consolidates the financial reporting for lessees and lessors alike. The provisions of IFRS 16 are effective starting on 1 January 2019. Early adoption is permitted, subject to the early adoption of IFRS 15. The provisions of IFRS 16 were approved by the European Union on 31 october 2017. The standard will mainly affect the accounting of the Company's operating leases. The impact of the new Principles/Interpretations on the Group's consolidated financial statements is still being assessed. amendment to iFrS 4 “applying iFrS 9 Financial instruments with iFrS 4 insurance Contracts” on 12 September 2016, the IASB issued an amendment to IFRS 4 in order to address certain issues concerning the application of IFRS 9 “Financial Instruments” in relation to the issuers of insurance contracts. The changes are effective starting on 1 January 2018. The changes were approved by the European Union on 4 November 2017. The Group does not believe that the provisions arising from this standard's entry into force will have any impact upon its economic or equity situation.

5. accounting estimates The preparation of the financial statements requires the directors to apply accounting standards and methodologies which, under certain circumstances, are based on difficult and subjective evaluations and estimates, historical experience, and assumptions that are considered to be reasonable and realistic in light of the relative circumstances. The application of these estimates and assumptions affects the amounts reported on the financial statements, the statement of financial position, the income statement, the comprehensive income statement, the statement of cash flows, and the disclosures provided. Due to the uncertainty that characterises the assumptions and the conditions upon which the estimates are based, the final results of the items on the financial statements for which these estimates and assumptions have been utilised may differ, even considerably, from those contained in the financial statements showing the effects of the estimated items. Even if not all of the estimated accounting entries are significant on an individual basis, they are significant collectively. For this reason, the areas that need to be evaluated more subjectively by the directors during the preparation of the estimates, and for which any changes in the conditions underlying the assumptions could have a significant impact upon the Group's financial results, are summarised below. Deferred tax assets The deferred tax assets are recognised against the temporary deductible differences between the values of the assets and liabilities indicated on the financial statements with respect to the corresponding value for tax purposes. A discretional assessment must be made in order for the directors to determine the amount of the deferred tax assets that can be accounted for, which depends on the estimate of the probable timing and the amount of the future taxable profits.

68


provision for doubtful debts The recoverability of the receivables is assessed taking into account the risk of their inability to be collected, their age, and the impairment losses on receivables recorded in the past for similar types of receivables. provisions for risks and charges Provisions representing the risk of negative outcomes have been recorded for the legal and tax risks. The value of the provisions recorded on the financial statements for these risks represents the best estimate to date made by the directors. This estimate involves certain assumptions dependent upon factors that can change over time, and which could therefore have a significant effect in relation to the current estimates made by the directors during the preparation of the Group's consolidated financial statements. impairment of assets Goodwill and other tangible and intangible assets with finite useful lives are checked for impairment, which are recorded through write-downs whenever the indicators reveal the likelihood of difficulty in recovering the relative net carrying amount through use. The verification of the existence of these indicators requires the directors to make subjective assessments based on the information available within the Group and on the market, as well as from historical experience. Moreover, if it is determined that a potential impairment may have been generated, the Group proceeds with the determination of the same using appropriate valuation techniques. The correct identification of the elements indicating a potential impairment of tangible and intangible assets, and the estimates for the determination of the same, depend upon factors that can change over time, thus affecting the evaluations and estimates made by the directors themselves. amortisation and depreciation The costs of the tangible and intangible assets with finite useful lives are amortised at constant rates over the course of the estimated useful lives of the relative assets themselves. The useful economic lives of such assets are determined by the directors at the time of their acquisition, based on historical experience for similar assets, market conditions, and anticipated future events that could have an impact on the useful lives of the assets, including changes in technology. Their actual economic lives may therefore differ from their estimated useful lives. As required by section 10 of IAS 8 (Accounting policies, changes in accounting estimates and errors), in the absence of a Standard or Interpretation specifically applicable to a particular transaction, the Management shall make use of weighted subjective evaluations to determine the accounting methodologies to be adopted in order to provide consolidated financial statements that faithfully represent the Group's financial position, operating results, and cash flows, reflect the economic substance of the transactions, are neutral, are prepared according to the principle of prudence, and are complete in all of the relevant aspects. recognition of revenue and costs relating to contract work in progress The group uses the percentage of completion method to account for long-term contracts. The margins recorded on the income statement depend on both the order and the margins forecast from the entire project on completion. Consequently, for the purposes of correctly recognising work in progress and profits related to works yet to be completed, the directors are required to make an accurate estimate of expected costs to complete, expected increases and delays, additional costs and penalties which could have an impact on the expected profit. Using the percentage of completion method requires the Group to estimate the costs of completion, which in turn requires estimates to be made that depend upon factors that can change over time, and could therefore have a significant effect upon the current values. If the actual cost is different from the estimated cost, this change will have an impact on the results in future fiscal years.

6. risk management The group is exposed to a series of business and financial risks associated with its operations. The main business risks consist of the following:


69

Economic crisis: the continuation of the economic crisis could compromise the Group’s profitability and its ability to generate cash flows, including by its core businesses. In order to counteract this risk, the Group pursues its goal of increasing production efficiency and improving contract execution capacity while concurrently cutting structural costs. • Long term fixed price contracts: the Group's response to this risk consists of following the established procedures during the preparation and approval of its main sales offers, with the main financial and performance indicators, including Economic Value Added (EVA), one of the reference indicators, being continuously checked right from the first sale offer. The Group also checks the estimated contract costs regularly, at least every three months. It identifies, monitors and evaluates risks and uncertainties inherent in contract performance using the “Contract management” directive, as well as two procedures (Lifecycle Management and Risk Assessment) designed to reduce the probability that risks or their negative consequences will materialise, and ensure that the appropriate mitigation measures are promptly applied. This procedure involves senior management, the program managers and the quality, production and finance functions (the so-called “phase review”). • Customer liability: the Group is exposed to risks of customer or third party liability linked to the proper execution of the contracts, which it addresses by stipulating standard insurance policies available on the market to cover any damages caused. However, damage could arise that is not covered by insurance policies, or that exceed the sum insured, or else the insurance premiums, which are nevertheless constantly monitored by the management, could increase in the future. • Legislative compliance: The Group ensures its constant compliance with the relevant legislation through specific procedures, subordinating the start of any commercial actions to checking compliance with limits and attainment of the necessary authorisations. The risks of a financial nature consist of: • Liquidity risks, which consist of the risk that the available financial resources will not be sufficient to meet the obligations under the agreed terms and deadlines; • Market risks, related to the Group’s exposure to interest-bearing financial instruments (interest rate risks) and to operations in areas that use currencies other than the Group’s functional currency (currency risk); • Credit risk, arising from normal trading transactions or financing activities. The Group specifically monitors each of these financial risks and acts promptly to contain them including via hedging derivatives. The potential impact of hypothetical fluctuations in the reference parameters on actual results is described below, including using sensitivity analyses. As set out in IFRS 7, these analyses are based on simplified scenarios applied to the actual figures of the reference years. However, because of their nature, they cannot be considered as indicators of the real effects of future changes in reference parameters when a different financial position and different market conditions are considered. Moreover, they do not reflect the interrelations and complexities of the reference markets. •

liquidity risk Liquidity risk consists of the risk that, due to the inability to raise new funds or liquidate assets on the market, the Group is unable to meet its payment obligations, resulting in a negative impact upon the operating result if it were to be forced to incur additional costs to meet its commitments or a situation of insolvency. The Group's aim is to establish a financial structure that, in keeping with its business objectives and the defined limits, i) ensures an adequate level of liquidity, minimising the relative opportunity cost, and ii) maintains a balance in terms of the debt composition and duration. The following table shows a maturity analysis based on the contractual repayment obligations in relation to the capitalised values of the bond, the trade payables, and other liabilities held as of 31 December 2016 and 2017. The first column shows the year end balance, while the next columns show the foreseen cash outs at the indicated deadlines, including interest.

70


euro/thousand

amount as at 31 december 2017

whitin 1 year

between 1 and 5 years

Over 5 years

total

Bonds

617,562

17,124

323,970

359,625

700,719

other current and non-current financial liabilities

440,196

280,757

152,070

19,396

452,224

Trade payables

433,434

433,434

–

–

433,434

other current and non-current liabilities

102,692

35,877

66,815

–

102,692

euro/thousand

amount as at 31 december 2016

whitin 1 year

between 1 and 5 years

Over 5 years

total

Bonds

426,474

12,075

456,225

–

468,300

other current and non-current financial liabilities

390,029

158,288

116,167

–

664,484

Trade payables

282,914

282,914

–

–

282,914

other current and non-current liabilities

120,883

41,290

79,593

–

120,883

interest rate risk The Group is exposed to interest rate variations in relation to the use of its liquidity. The interest rate risks were measured by means of a sensitivity analysis, as required by IFRS 7, conducted upon the exposed part at risk of changes to the interest rate not covered by derivatives. Had the reference rates been higher (lower) by 50 basis points as of 31 December 2017, the profit for the year and equity would have had a negligible impact. Currency risk The Group’s procedures require that revenue in foreign currency exposed to the currency risk be hedged on acquisition of the related contract. With respect to expenses, the Group’s policy provides that supply agreements are mainly contracted in Euro. Any foreign currency purchases are usually hedged by a corresponding amount of revenue in the same currency. The notional amount in Euro of all items hedged by sell-side derivatives totalled Euro 219,761, thousands and Euro 35,364 thousands for buy-side derivatives as of 31 December 2017. In view of the above, and, in particular, excluding the effect of the policy of hedging transactions in currencies other than the Euro, the sensitivity analysis on the variations in foreign exchange rates is insignificant. Credit risk The Group is exposed to credit risk in terms of both its trading counterparties and its financing and investing activities, in addition to the guarantees given for third party liabilities or commitments. In order to remove or contain the credit risk from trading transactions, especially with foreign counterparties, the Group has implemented a careful hedging policy that provides for hedging trading transactions since inception and carefully monitoring the conditions and payment terms to propose in its commercial offers, that may subsequently be included in sales agreements. Specifically, depending on the contractual amount, the type of customer and importing country, specific measures are taken to contain credit risk, in terms of payment terms and related financial means required, such as stand-by or irrevocable and confirmed letters of credit or, where this is not possible and if the country/customer is specifically at risk, the Group considers whether to request an adequate insurance policy through the dedicated export credit agencies, like SACE, or international banks, in the case of contracts that require financing of supply. The following table provides a breakdown of the trade receivables, grouped by maturity and by geographical region, net of the provision for doubtful debts:


71

euro/thousand

area europe

Other customers area uS Others

total

as at 31.12.2017 - Retentions

–

–

203

203

81,656

25,151

71,102

177,909

- overdue by less than six months

9,875

4,551

54,057

68,483

- overdue between six months and one year

5,991

(33)

13,538

19,496

- overdue between one and five years

3,067

994

3,537

7,598

- overdue more than five years

3,991

2,925

6,458

13,374

104,580

33,588

148,895

287,063

- Not yet due

total

There are no risks of credit concentration, whether geographic, sectoral, or by customer type.

7. Capital management The management of the Group's capital is aimed at ensuring a solid credit rating and adequate capital indicator levels to support the investment plans, in accordance with the contractual obligations assumed with lenders. The Group obtains the capital necessary to finance the development needs of its businesses and operational activities; the funding sources consist of a balanced mix of risk capital and debt capital, in order to ensure a balanced financial structure and to minimise the overall cost of capital, with consequent benefits for all the “stakeholders.” The return on the risk capital is monitored based on the market trend and business performance, once all the other obligations have been met, including debt servicing; therefore, in order to ensure an adequate return on the capital, the protection of business continuity, and the development of the businesses, the Group constantly monitors the changes in the level of debt in relation to equity, the business trend, and the cash flow forecasts, over both the short and medium/long term.

8. Financial assets and liabilities by category The following tables detail the Group's financial assets and liabilities as required by IFRS 7, in accordance with the categories identified by IAS 39, as of 31 December 2016 and 2017. It should be noted that the Group does not have any assets and liabilities measured at fair value with changes recorded on the income statement, nor any financial assets available for sale.

72


euro/thousand

Current and non-current financial assets Trade receivables

as at 31.12.2017 loans and Financial liabilities receivables at amortized cost 85,005

85,005

287,062

287,062

5,300

5,300

85,351

85,351

276,300

276,300

Tax assets other current and non-current assets Cash and Cash equivalent

total

Bonds

617,562

617,562

Current and non-current financial liabilities

329,244

329,244

Trade payables

556,091

556,091

1,885

1,885

211,366

211,366

1,716,148

2,455,167

as at 31.12.2016 loans and Financial liabilities receivables at amortized cost

total

Tax liabilities other current and non-current liabilities total euro/thousand

739,018

Current and non-current financial assets

185,590

185,590

Trade receivables

277,314

277,314

2,424

2,424

83,013

83,013

250,889

250,889

Tax assets other current and non-current assets Cash and Cash equivalent Bonds

426,474

426,474

Current and non-current financial liabilities

262,639

262,639

Trade payables

382,790

382,790

8,598

8,598

236,386

236,386

1,316,888

2,116,118

Tax liabilities other current and non-current liabilities total

799,231

The reconciliation table for the net financial debt from 1 January 2016 to 31 December 2017, which highlights the financial changes and changes that did not involve cash flow (non-cash changes), is provided below: euro/thousand

Cash and cash equivalent

Financial receivables

Short term loans

Medium/long term loans

total

250,890

185,590

(204,468)

(484,644)

(252,632)

Cash Flow of the period

28,302

38,044

37,780

(295,474)

(191,348)

Exchange rate gains (losses)

(3,804)

–

–

–

(3,804)

912

(138,629)

–

–

(137,717)

276,300

85,005

(166,688)

(780,118)

(585,501)

Net financial debt as at 31 december 2016

other changes Net financial debt as at 31 december 2017


73

9. Fair value measurement The following table summarises the assets and liabilities measured at fair value as of 31 December 2016 and 2017, based on the level that reflects the inputs used to determine their fair value:

as at 31 December euro/thousand

2017

2016

Derivatives assets (level 2)

12,157

3,644

Derivatives liabilities (level 2)

(1,342)

(11,771)

(19)

(3,551)

Financial Assets/Liabilities at fair value

IRS

The Group makes use of internal evaluation models generally used in financial practice. There were no transfers between the various levels of the fair value hierarchy during the periods in question.

10. Segment reporting For the purposes of IFRS 8 - Operating segments, the Group's activities belong to a single operating segment, namely that of energy. Moreover, while noting the heavily transversal nature of its activities, on a managerial level the Group has further based its organisation on a structure that, in turn, is divided into service lines and geographical areas. The Group has thus identified the following service lines: plants and components, service, and nuclear. The geographical area scheme, on the other hand, in which the risks and benefits are also significantly influenced by the fact that the company operates in different countries or different geographical areas, has been evaluated as secondary. For a more detailed analysis of each service line, please refer to the Report on operations. In order to complete the disclosures, the following table shows the breakdown of the revenue by service line and by geographical area, as well as the detail of the gross margin (defined as the difference between revenue and cost of production) for each service line, both of which are compared to the values for the same period last year. revenue by service line as at 31 December euro/thousand

2017

2016

Ansaldo Energia Group - New Units operation

747,286

574,883

Ansaldo Energia Group - Service operation

632,077

595,313

84,690

83,074

1,464,053

1,253,270

Ansaldo Energia Group - Nuclear total revenue by service line

74


gross Margin by service line as at 31 December euro/thousand

2017

2016

Ansaldo Energia Group - New Units operation

105,938

91,793

Ansaldo Energia Group - Service operation

201,834

178,005

12,012

10,601

319,784

280,399

Ansaldo Energia Group - Nuclear total gross Margin

Furthermore, the following table shows the revenue by geographical area (or rather allocated based on the countries in where the customers are based) and the fixed assets by geographical area (which instead are allocated based on their specific locations): revenue by geographical area revenue euro/thousand

31 December 2017

31 December 2016

Italy

215,475

196,372

Europe/CIS*/Africa/ Middle East

944,391

615,757

America

145,142

172,058

Asia/ Australia

159,045

269,083

1,464,053

1,253,270

*CIS : Commonwealth of Independent States Non-current assets by geographical area as at 31 December euro/thousand Italy Europe/CIS*/Africa/ Middle East America Asia/ Australia total non current assets

2017

20166

1,647,910

1,583,749

220,620

165,204

19,833

21,674

5,540

34,690

1,893,903

1,805,317

*CIS : Commonwealth of Independent States

11. business combinations on 25 February 2016 the Group completed the “Gastone Project” operation, involving the purchase by General Electric Company (GE) of hi-tech essential parts for the heavy duty gas turbine sector from the ex-Alstom Power Group (Alstom), along with key personnel for further development. This operation mainly led to the purchase of: • the intellectual property rights for the latest GT 26 and GT 36 Alstom gas turbines, the current upgrades and the technology for future upgrades;


75

•

•

Ansaldo Energia Switzerland AG (“AES”), based in Baden (Switzerland), with around 400 employees and 19 service contracts for GT 26 turbines sold by Alstom in recent years. These contracts relate to plants located mostly in Europe, with two exceptions: the first in Thailand and the second in Tunisia; Power Systems Manufacturing LLC (“PSM”), based in Jupiter, Florida (USA), which services plants and parts by other manufacturers. The company has 15 service contracts, mainly in the US, but also in Mexico, South Korea and Brazil.

It was purchased for Euro 120 million, to be paid in three equal instalments due at the end of 2018, 2019 and 2020; the contract specifies that the price may be updated to take account of adjustments, in particular to cash flow acquired (Euro 34.5 million), and was finally set at Euro 161.2 million. The price adjustment was paid in full to the seller during 2016 (Euro 41.2 million). As required by the applicable accounting standards (IFRS 3 – Business Combinations), the Group arranged for the determination of the so-called purchase price allocation (“PPA”). The purchase was valued using MEEM, Multi-period Excess Earnings Method, which is usually applied for evaluating individual assets. The Group identified the intrinsic value of the assets acquired above all in the backlog, customer relations and the technology acquired. The analysis, based on the company's approved business plans, which on the cost side commit the Group to developing future technology and products, showed the total value of the assets acquired to be higher than the price paid by around Euro 69.5 million, net of the theoretical taxes associated. This value was recorded on the consolidated income statement for the 2016 fiscal year as badwill, under "badwill net of integration costs". Total integration costs are therefore shown net of the economic advantage that the Group gained from the purchase. The financial information of the acquired companies on the acquisition date was first realigned with the accounting standards adopted by the Group, and showed an adjusted net equity amounting to a total of Euro 11.7 million. The effects of the PPA as of 31 December 2016 can therefore be summarised as follows:

euro/thousand Purchase price of intellectual property rights (2018-19-20)

(20,0)

Purchase price of AES and PSM (2018-19-20)

(100,0)

Price Adjustment (2016)

(41,2 )

Price actualization on the transaction date aCtualiZeD priCe Adjusted Equity Provisional goodwill

9,3 (151,8) 11,7 (140,1)

ppa Backlog Customer relation

19,2

Technology acquired

139,0

Deferred tax

(83,6)

Provisions

(5,9)

Badwill

69,5

The Group did not conclude any business combinations during the course of 2017.

76

141,0


12. intangible assets This item and the relative change can be detailed as follows: euro/thousand

goodwill

Develpment expenses

patent Concessions, and licenses and similar trademarks rights

intangible Other assets assets acquired under through develop. business combin. (ppa)

total

807,273

72,022

367

93,739

358,520

21,427

1,353,348

(482)

(32,567)

(367)

(7,466)

(138,599)

(18,873)

(198,354)

806,791

39,455

–

86,273

219,921

2,554

1,154,994

Investments

–

65,368

–

24,059

–

41,454

130,881

Additions from business combination

–

5,410

–

–

–

28,126

33,536

Amortisation and impairment

(1,038)

18,593

–

18,260

49,854

3,769

89,438

Reclassifications

(1,038)

6,623

–

10,652

–

(16,236)

1

(13)

217

–

(18,152)

229,148

1,195

212,395

806,222

241,231

367

114,161

657,668

71,929

1,891,578

(556)

(142,751)

(367)

(29,619)

(188,453)

(18,605)

(379,239)

806,791

98,480

–

84,542

469,215

53,324

1,512,352

83,601

83,601

1 January 2016, broken down as follows Cost Accumulated amortisation and impairment Carrying amount

other changes 31 December 2016, broken down as follows: Cost Accumulated amortisation and impairment Carrying amount Investments Sales

–

–

–

–

–

445

445

Amortisation and impairment

(971)

5,499

–

2,904

53,069

304

60,805

Reclassifications

(971)

(53,427)

–

11,802

42,596

–

–

(1,695)

–

597

5,819

4,721

805,967

186,032

367

130,338

657,669

173,270

1,953,643

(811)

(148,173)

(367)

(36,301)

(241,523)

(11,320)

(414,233)

806,778

37,859

–

94,037

416,146

184,590

1,539,410

other changes 31 December 2017, broken down as follows: Cost Accumulated amortisation and impairment Carrying amount

During the course of the 2017 fiscal year, the Group continued to develop new technologies relating to the GT26 and GT36 turbines. The main development project regarded the prototype of the GT36 turbine, which was carried out jointly by the Italian and Swiss teams.


77

As described below, Euro 1,222,924 thousands (of which Euro 806,778 thousands were for “goodwill”) were derived from the application of the purchase price allocation process, as required by IFRS 3, in relation to the merger that took place in 2012 with Ansaldo Energia Holding S.p.A. and the acquisition of the British group. The additional intangible assets acquired as a result of the business combinations refer to General Electric Company's acquisition of a part of Alstom's business in the field of gas turbines (the so-called Gastone Project), and amounted to Euro 253,616 thousands. goodwill The “Goodwill” item, which amounted to Euro 806,778 thousands as of 31 December 2017, can be attributed as follows: – Euro 781 million to the reverse merger operation carried out in 2012 between Ansaldo Energia S.p.A. and its parent company Ansaldo Holding S.p.A., after which Euro 305 million of the merger deficit was allocated to the net assets valued at fair value and Euro 780 million was allocated to goodwill; – Euro 26 million for the acquisition of Nuclear Engineering Services. The cash-generating unit (CGU) to which the goodwill is allocated, which represents the level at which the same is monitored by the Company's management, coincides with the operating segment into which all the products and services provided by the Group converge — or rather the Energy segment (for more details, please refer to Note 10 “Segment reporting”). In line with the requirements of the international accounting standards, the impairment test to ascertain any impairment of goodwill had already been conducted by the reference date of these financial statements. The impairment test was performed by comparing the carrying amount of the goodwill with the value in use of the relative CGU (for a description of the methodology used for the impairment test, please refer to the indications contained in Note 3 above, “Accounting standards adopted”, with regard to the accounting treatment of Goodwill). The value in use was calculated using the Discounted Cash Flow (“DCF”) method, by discounting the operational cash flows generated by the asset itself (net of taxation) at a discount rate representing the weighted average cost of capital. The main assumptions adopted to calculate the recoverable amount are the discount rate (WACC), the annual terminal growth rate, and the forecast cash flows during the period of reference. The WACC used to discount the future cash flows is equal to 8.2%, and includes an additional market risk premium. This rate represents the financial structure of the entity to which the cash-generating units belong and the cost of the financial means used, including both debt and equity. The annual terminal growth rate is 1.4%, estimated also considering the fast growing markets in which the Group mainly operates. The value in use was obtained by discounting the explicit and implicit cash flows (terminal value) included in the 2018/2022 Plan approved by the Company's Board of Directors on 21 December 2017, which were estimated based on past economic and income performance and future expectations. The resulting value was compared with adjusted net invested capital. The results of the impairment test performed show that the estimated recoverable amount for the CGU exceeds the relative carrying amount as of the reference date. We also performed a sensitivity analysis in order to verify the effects of the variation of certain parameters considered to be significant (i.e. WACC, EBITDA growth rate) upon the results of the impairment test, with the other parameters remaining constant: this analysis also did not reveal the need to make any write-downs on the values of the consolidated assets subjected to impairment tests. The results obtained are as follows: SeNSitivitY aNalYSiS variable

Increase of WACC Decrease in growth rate (g) Decrease in EBITDA

78


variation

impact on recoverable value

1%

(239) M€

(1%)

(186) M€

(10%)

(181) M€

Therefore, in view of all the above scenarios, the recoverable amount of the CGU has not been found to be lower than its carrying amount. A similar test was performed upon the other intangible assets with indefinite useful lives subject to impairment testing, namely the intangible assets in progress relating to GT36 technology, whose carrying value as at 31 December 2017 amount to Euro 259 million. With regard to all the other intangible assets subject to amortisation, analyses were performed in order to identify any presumptions of impairment, as a result of which the performance of any specific impairment tests was deemed to be unnecessary.

13. tangible assets This item and the relative change can be detailed as follows: euro/thousand

land and buildings

buildings machinery

equipments

Others

asset under construction and payments on account

total

Cost

181,350

262,517

68,456

29,736

19,253

561,312

Accumulated depreciation and impairment

(63,034)

(194,245)

(58,328)

(22,180)

–

(337,787)

Carrying amount

118,316

68,271

10,128

7,557

19,253

223,525

18

3,279

236

735

26,304

30,572

2,787

10,927

172

448

160

14,495

99

1,165

1

82

1,888

3,235

5,837

17,175

4,646

2,504

Reclassifications

860

13,141

10,020

1,416

(25,437)

0

other changes

142

(29)

(94)

(84)

229

164

Cost

190,110

351,705

79,024

34,248

18,621

673,709


(73,926)

(274,456)

(63,209)

(26,761)

–

(438,352)

Carrying amount

116,185

77,249

15,815

7,487

18,621

235,357

Investments

72

2,193

4,702

906

60,001

67,873

Sales

48

–

5

4

1,614

1,670

5,984

17,161

6,471

2,549

–

32,165

10,644

15,643

9,753

1,877

(37,917)

0

(694)

(872)

(54)

(163)

(6,180)

(7,964)

198,996

335,771

118,206

36,475

32,911

722,358


(78,820)

(258,718)

(94,467)

(28,921)

–

(460,926)

Carrying amount

120,176

77,053

23,739

7,554

32,911

261,432

1 January 2016, broken down as follows:

Investments Additions from business combinations Sales Depreciation and impairment

30,162

31 December 2016, broken down as follows:

Depreciation and impairment Reclassifications other changes 31 December 2017, broken down as follows: Cost Revaluation


79

The tangible fixed assets are net of accumulated depreciation. The land and buildings mainly consist of the Genoa-Campi and Genoa Cornigliano industrial sites, and the building in Tehran that houses the Iranian branch. In particular, the main investments regarded: • the construction and interior outfitting of the new facility in Cornigliano (Euro 13,168 thousands), for the assembly of gas turbines and their shipment by sea from Genoa; • the new rotor welding plant (Euro 6,087 thousands) for welding the new GT rotors; • the adaptation of the overspeed cell (Euro 5,127 thousands) for testing the new machines; • the acquisition of a new packing machine (Euro 1,767 thousands) capable of producing both TR and TH electric machines; • the overhaul of the Terruzzi autoclave (Euro 1,409 thousands) to improve its performance; • the SAP AGP project (Euro 3,345 thousands) implemented among the Swiss and American companies to standardize the corporate IT platform; • the toolings for the blade castings on the GT26 2011 (Euro 5,515 thousands) and the GT36 (Euro 3,432 thousands), in order to render them technologically independent; • equipment for Service activities (Euro 2,250 thousands), mainly for field interventions on the new fleet; • IT infrastructures and equipment Euro 1,296 thousands); • structural adaptations to buildings (Euro 3,333, thousands), with particular regard to the roofs of the buildings and the safety of the workers; • a new vacuum oven for repair activities (Euro 955 thousands). The depreciation for the fiscal year amounted to Euro 32,064 thousands, and was calculated based on the residual life of the assets and their level of utilisation.

14. equity investments The value of the “equity investments” amounted to Euro 39,923 thousands, for an increase of Euro 3,560 thousands with respect to 31 December 2016. The main changes that led to the variation in the “Equity investments” are highlighted below:

euro/thousand

31.12.2017

31.12.2016

1 January

36,363

10,438

Acquisitions/subscriptions and capital increases

11,292

34,765

Share of profits (losses) of associates and joint ventures accounted for using equity method

(5,263)

(9,798)

(334)

(457)

(50)

(43)

–

1,626

(148)

–

other changes

(1,937)

(168)

31 December

39,923

36,363

Dividends received Capital reimboursement Additions from business combinations Change in consolidation area

80


The changes for the fiscal year essentially refer to: • the establishment of the project company Cogenerazione Rosignano together with two joint partners, with one third being held by each of the three shareholders. The investment's value amounts to approximately Euro 50 million over two years, with a maximum investment amount of Euro 5 million being borne by the Group. The project has been described in the management report. As of 31 December 2017, the Group's investment amounted to Euro 5,008 thousands; • the acquisition of a minority shareholding consisting of 10% of the share capital of the company AC Boilers S.p.A., which manufactures and sells thermal plants and combustion systems. The investment for your Group amounted to Euro 6 million; • the establishment of the wholly-owned company Ansaldo Algerie Sarl for the amount of Euro 77 thousands, which at the current time is barely operational; • the devaluation of the two Chinese JVs, as later described, for a total amount of Euro 5,935 thousands, which was partially offset by the revaluation of certain investments using the equity method, for the amount of Euro 672 thousands. list of equity investments as of 31 December 2017 euro/thousand Name

investment %

investment amount

5%

31

Ansaldo Algerie Sarl

49%

76

Ansaldo Gas Turbine Technology Co LTD

60%

9,575

AU Finance Holding B.V.

40%

5

NNS Societè de service pour reacteur

40%

427

Polaris Srl

49%

643

Polaris-Anserv

20%

44

Shanghai Electric Gas Turbine Co LTD

40%

14,918

100%

1,726

66%

68

5%

3

Consorzio CREATE

16%

5

Consorzio CRIS

48%

1,166

Consorzio Energie Rinnovabili

51%

10

Consorzio SIRE in liquidazione

29%

25

Euroimpresa Legnano in liquidation

10%

155

Cogenerazione Rosignano S.p.A

33%

5,008

Santa Radegonda

19%

6

SIET S.p.A.

2%

15

SIIT Distretto Tecnologico Ligure

2%

14

AC Boilers S.p.A.

10%

6,000

other companies

0%

3

Subsidiaries and associates Ansaldo America Latina SA

SPVTCCC BV Other equity investments and consortia Consorzio CISA in liquidation Consorzio CoRIBA in liquidation

total equity investments (net of impairment losses)

39,923


81

The main effects of the valuation of the associates using the equity method upon the consolidated financial statements as of 31 December 2017 was the devaluation of investments in the two Chinese Joint Ventures AGT (Ansaldo Gas Turbine High Technology Co. Ltd.) and SEGT (Shanghai Electric Gas Turbine Co. Ltd) respectively for Euro 1,796 thousands and Euro 4,139 thousands. The most significant data regarding these two investments are provided below: euro/thousand

ansaldo gas turbine technology Co

Shanghai electric gas turbine Co

22,493

332,592

6,535

295,298

total equity

15,958

37,294

equity as at 1 January

18,884

47,405

Net Result

(2,926)

(10,111)

equity as at 31 December

15,958

37,294

Total Revenue

1,897

82,971

Ammortisation, depreciation, accrual and impairment

(663)

(326)

(30)

(1,262)

other amount comprised in income statement

(4,130)

(91,494)

Net result

(2,926)

(10,111)

31 December 2017 total assets total liabilities

Net financial expenses

The two investments referred to above resulted from the cooperation project with the Ansaldo Energia shareholder Shanghai Electric Hong Kong Co. Limited, with the goals of penetrating into the Chinese market and implementing energy-related Research and Development projects; during the course of the fiscal year, the two JVs respectively accumulated losses of Euro 2,926 thousands and Euro 10,111 thousands. The effects of the valuation of the investments using the equity method during the two fiscal years under review are indicated below: euro/thousand

2017

2016

Valuation Ansaldo America Latina

–

14

Valuation Ansaldo Brasile

–

(17)

Valuation Ansaldo Energia Spain

–

(3)

(1,796)

(2,049)

–

(46)

396

334

6

–

Valuation Polaris S.r.l.

270

(174)

Valuation PSM Japan

–

5

(4,139)

(7,894)

(5,263)

(9,830)

Valuation Ansaldo Gas Turbine Technology Co. LTD Valuation Ghannouch Valuation NNS Valuation Polaris Anserv

Valuation Shanghai Electric Gas Turbine Co LTD

82


15. receivables and other non-current assets This item can be detailed as follows: euro/thousand

31.12.2017

31.12.2016

Guarantee deposits

552

464

other

117

65

Non-current receivables

669

529

Deferred tax assets

52,470

20,729

Other non-current assets

52,470

20,729

The analysis and the change in the deferred tax assets are provided in Note 29.

16. inventories This item can be detailed as follows: euro/thousand

31.12.2017

31.12.2016

Raw materials, consumables and supplies

268,499

199,002

Work-in-progress and semi-finished products

248,179

174,587

Finished goods

80,178

129,253

Advances to suppliers

30,647

31,483

627,503

534,325

The overall increase in inventory is mainly due to the expansion of the Group's product portfolio, which is linked to the development of the new GT 26 and GT 36 technologies, as well as the production of spare parts to be provided for jobs in Switzerland. raw materials, consumables and supplies They are stated net of the allowance for inventory write-down of Euro 17,000 thousands. The increase in inventory during the course of the fiscal year amounted to a total of Euro 137,320 thousands, which is considered appropriate for the volume of orders currently being executed. work in progress and semi-finished products The semi-finished products, which increased by Euro 117,733, relate to highly standard parts which will only be allocated to sales contracts when customised. Finished goods These mainly refer to blades and combustors, as well as other residual products. These products are necessary for the proper execution of the LTSA contracts in the United States. The item is shown net of a write-down provision of Euro 40,594 thousands. As of 31 December 2016, this provision amounted to Euro 47,775 at the USD/EUR exchange rate on 31 December 2017.


83

advances to suppliers These items decreased by Euro 835 thousands. The variation is mainly due to the normal life of orders associated with production.

17. Contract work in progress and advances from customers This item can be detailed as follows: euro/thousand Contract work in progress (gross) Progress payments and advances from customers Contract work in progress Progress payments and advances from customers (gross) Contract work in progress progress payments and advances from customers

31.12.2017

31.12.2016

1,435,153

1,367,369

(1,234,945)

(1,247,644)

200,208

119,725

3,601,568

3,535,967

(2,799,212)

(2,676,110)

802,356

859,857

The main contracts comprising the contract work in progress balance are listed below:

plant Description

Customer

euro/thousand DALAHoo - 2TG + 1TV + 3AT 800MW

FARAB INTERNATIoNAL FZE

AIN DJASSER III - CICLo APERTo N.2 UNITÀ SoCIETE ALGERIENNE DE PRoDUCTIoN DE L'ELECTRICITE

gross wip progress as at payments 31.12.2017 and advances from customers as at 31.12.2017

Net wip as at 31.12.2017

79,869

(49,448)

30,421

143,997

(132,307)

11,690

96,754

(88,330)

8,424

AL SHABAB - 2TV + 2AT - 520MW

EAST DELTA ELECTRICITy

LANGAGE LTSA

EP LANGAGE LTD

6,003

–

6,003

PLAQUEMINE 7FA DLN2.6

DoW

5,785

–

5,785

ZHENGJIANG - 2TG 94.3A

SHANGHAI ELECTRIC HoNGKoNG Co LTD

34,757

(29,472)

5,285

yULCHoN PoWER PLANT LTSA

CGN

42,080

(37,736)

4,344

EDIPoWER PIACENZA LTSA

A2A GENCoGAS S.P.A.

3,333

677

4,010

CoTE MATEVE 1 TG + 1 AT

CENTRALE ELECTRIQUE DU CoNGo S.A.

17,744

(13,835)

3,909

The net progress payments and advances from customers fell by Euro 57,501 thousands and are related to contracts of a prevailing plant engineering nature, whose billing conditions are not strictly correlated to progress on production. The main contracts making up the progress payments and advances from customers balance are listed below:

84


plant Description

Customer

gross wip progress as at payments 31.12.2017 and advances from customers as at 31.12.2017

euro/thousand

Net wip as at 31.12.2017

trade receivables as at 31.12.2017

FRAME AGREEMENT RoSELECTRA

ENGIE PRoDUZIoNE S.P.A.

11,925

(30,830)

(18,905)

608



20,462

(32,432)

(11,970)

–

SoRGENIA PoWER S.P.A.

SoRGENIA PoWER S.P.A.

28,887

(40,447)

(11,560)

216



29,044

(42,139)

(13,095)

–

ENIPoWER S.P.A.

ENIPoWER S.P.A.

39,890

(57,149)

(17,259)

291

AES BALLyLUMPFoRD

AES BALLyLUMPFoRD

55,485

(67,142)

(11,657)

67

TIRRENo PoWER/VADo LIG.-LTSA TG+REL.ALT.

TIRRENo PoWER S.P.A.

60,099

(79,755)

(19,656)

1,332

RIZZICoNI - GARANZIA ToT FUNZIoNAMENTo

AXPo SERVIZI PRoDUZIoNE ITALIA S.P.A. 79,110

(115,693)

(36,583)

(312)

CALENIA EN./SPARANISE (CE)-GTF 2X12 ANNI

CALENIA ENERGIA S.P.A.

(158,184)

(26,721)

7,099

131,463

We ascertained the costs still to be incurred in relation to closed orders after completing the works, setting up a specific provision for risks and charges. As required by IAS 11, construction contracts are measured using the cost to cost method, i.e., by calculating the percentage of completion as the ratio of costs incurred and total expected costs. Contract work in progress at the reporting date is calculated by applying the percentage of completion to contract revenue. The contract profits for the year resulting from the application of this method totalled Euro 320,051 thousands.

18. trade receivables This item can be detailed as follows: euro/thousand

31.12.2017

31.12.2016

Trade receivables

260,579

252,032

(Impairment)

(8,503)

(8,763)

Receivables to related parties

34,986

34,045

287,062

277,314

The provision for doubtful debts underwent the following change in 2017:

opening balance Accrual Utilization

8,763 58 (84)

other movements

(234)

Closing balance

8,503


85

With regard to legal disputes and judicial or insolvency proceedings, the trade receivables in dispute are recorded at nominal value and written down in a specific provision for doubtful debts. The receivables recorded are not supported by promissory notes or similar securities. The analysis of the receivables past due and the considerations on the methods for managing the credit risk are provided in Note 6. During the course of the fiscal year, the Group factored certain trade receivables without recourse amounting to Euro 167,345 thousands, of which Euro 106,681 were still outstanding as of 31 December 2017.

19. Financial receivables euro/thousand Financial receivables (Impairment) Financial receivables to related parties

31.12.2017

31.12.2016

233,868

184,355

(148,868)

-

5

1,235

85,005

185,590

The financial receivables amounted to Euro 85,000 thousands and refer to the receivable owed by Unit NV, which is broadly discussed in the management report. During the course of the fiscal year, the prospects of recovering the receivable in question, which increased by Euro 49,653 thousands in 2017, resulting in a gross amount of Euro 233,868 thousands, deteriorated considerably. A prudent assessment of this receivable, which was rendered further necessary due to the facts mentioned above, was carried out by the Group's Directors through an analysis of the estimated recoverability of the asset, the possibility of its sale, and the geopolitical situation in Turkey, and this resulted in the write down of that receivable by approximately Euro 148,868 thousands, bringing its net value to Euro 85,000 thousands, which is believed to be recoverable under the guarantees received by the Group and several collections recorded in early 2018. This assessment was also supported by the findings of the verification regarding the recoverable amount of the financial receivable held in relation to Unit NV, entrusted to a leading consulting firm, which, in relation to the worst case scenario, fully confirmed the assessments made by the Directors for the item in question.

20. tax assets and liabilities This item can be detailed as follows: euro/thousand

31.12.2017

31.12.2016

Current tax assets

5,300

2,424

Current tax liabitities

1,885

8,598

Current tax assets These mainly refer to advance payments and taxes paid in excess. Current tax liabilities The composition of the balance mainly relates to provisions for income taxes made by the Parent Company.

86


21. Other current assets The breakdown of the item is provided below: euro/thousand

31.12.2017

31.12.2016

Prepayments - current portion

4,931

7,208

Employees and pension institution

2,193

1,287

other tax assets

21,991

27,836

other assets

39,629

37,179

other receivables to related parties

13,991

8,975

82,735

82,485

The prepayments mainly regard the portion of insurance premiums for assembly pertaining to future years and allocated to the contracts on a percentage of completion basis. The other tax receivables mainly include: • receivables held by the Branches amounting to Euro 11,775 thousands, of which Euro 5,723 thousands are receivables resulting from the Neyveli dispute; • an indirect tax receivable in Turkey amounting to Euro 4,077 thousands. The other assets mainly include: • an amount due from the customer NLC Neyveli for interest on the late payment of withholding taxes of Euro 3,949 thousands, which was unduly withheld and with respect to which formal litigation is underway in India; • VAT receivables for Euro 14,457 thousands; • security deposits for Euro 3,929 thousands. The other related-party receivables include: • a receivable from Finmeccanica (now Leonardo S.p.A.) for Euro 8,840 thousands for the asbestos risk guaranteed by the Parent Company following the sale of a stake to FSI (now CDP Equity); the change in the receivable is due to an Euro 8,500 thousands increase in relation to the debt exposures for the subsequent periods, and a Euro 3,490 thousands decrease for the refunds obtained by Leonardo S.p.A. in relation to the payments sustained by the Parent Company on the closed cases; • a receivable from Leonardo S.p.A. amounting to Euro 4,814 thousands as reimbursement for an Irap deduction from Ires (Monti Decree).

22. Cash and cash equivalents This item can be detailed as follows: euro/thousand Bank deposits

31.12.2017

31.12.2016

276,300

250,889

276,300

250,889

The composition of the bank deposits can be attributed to ordinary accounts amounting to Euro 204,350 thousands (Euro 10,000 thousands of which are secured), amounts held in local currencies, following collections on contracts for on-site activities, amounting to Euro 33,205 thousands, and foreign currency accounts amounting to Euro 38,745 thousands.


87

23. equity The equity as of 31 December 2017 amounted to Euro 621,868 thousands. Share capital No. of ordinary shares

Carrying amount

10,000,000

€ 10

outstanding shares

treasury shares

total

100,000,000

Treasury shares 31 December 2017

10,000,000

100,000,000

The Parent Company's share capital can be broken down as follows: • 5,993,750 shares held by CDP Equity S.p.A., equal to 59.94%; • 4,000,000 shares held by Shanghai Electric Hongkong Co. Limited, equal to 40.0%; • 6,250 shares held by the Key Management, equal to 0.06% With respect to 31 December 2016, on 31 July 2017 Leonardo S.p.A. (formerly Finmeccanica S.p.A.) relinquished ownership of its shares in the Parent Company to CDP Equity S.p.A. The Parent Company does not hold any treasury shares. Other reserves The changes in the other reserves are listed below. euro/thousand

retained earnings

Hedging reserve

actuarial reserve

Other reserves

total

1 January 2016

37,511

(5,772)

(7,068)

421,070

445,741

Net result

60,558

–

–

–

60,558

other changes

(2,178)

–

– (130,030)

(132,208)

Fair value adjustements

–

(3,356)

(1,454)

–

(4,810)

Additions from business combinations

–

–

(11,707)

19,936

8,229

Transfers to profit and loss

–

12

–

–

12

PPA effect

–

–

–

122,263

122,263

Deferred taxes

–

772

–

–

772

Exchange rate gains (losses)

(1,574)

–

–

–

(1,574)

31 December 2016

94,317

(8,344)

(20,229)

433,239

498,983

Net result

5,679

other changes

8,460

Fair value adjustements

5,679 864

271

19,337

2,166

Consolidation adjustement (863)

Deferred taxes 31 December 2017

88

(3,546)


1,109 (863)

(588)

(4,134)

(8,252) 100,204

7,989 21,503

1,109

Transfers to profit and loss Exchange rate gains (losses)

(1,606)

(8,252) 7,448

(18,380)

432,742

522,014

Minority interests The minority interests are representative of the non-controlling interests in the Group's subsidiaries, The relative changes are shown in the schemes contained within these financial statements

24, Non-current liabilities to related parties This payable refers entirely to the share of the Ansaldo Energia Switzerland capital increase subscribed by the company Simest S.p.A. (Cassa Depositi e Prestiti Group). With regard to this share, the Parent Company has a call with five-year maturity, such that the share currently in the possession of Simest S.p.A. is considered, in every effect, a de facto investment by the Group in return for a non-current payable from Simest S.p.A.

25. loans and borrowings This item can be detailed as follows: euro/thousand Current

31.12.2017 Non current

total

Current

31.12.2016 Non current

total

10,718

606,844

617,562

8,171

418,303

426,474

147,633

173,274

320,907

191,474

66,275

257,749

98

–

98

226

66

292

other loans and borrowings

6,720

–

6,720

3,303

–

3,303


1,519

–

1,519

1,295

–

1,295

166,688

780,118

946,806

204,469

484,644

689,113

Bonds Bank loans and borrowings Finance lease obligations

Changes in loans and borrowings, which are broadly discussed in the management report, are indicated below. euro/thousand

31.12.2016

increase

Bonds

426,474

350,000

158,912

–

617,562

Bank loans and borrowings

257,749

190,006

126,848

–

320,907

292

–

188

(6)

98

other loans and borrowings

3,303

3,417

–

–

6,720


1,295

224

–

–

1,519

689,113

543,647

285,948

(6)

946,806

Finance lease obligations

release Other business movements

31.12.2017

Euro 12,501 thousands was paid in interest on the bond, and a further Euro 10,718 thousands in interest is due for the period. The characteristics of the other financing relationships, other than Bonds mentioned in the “Management report”, as of 31 December 2017 can be summarised as follows:


89

Credit line

Description

revolving Facility

Line undersigned by the Parent Company with a pool of banks for a nominal value of € 400 million at the Euribor 1/2/3/6 months + spread rate, based on the Leverage ratio of Energia Group. Granted on 27/04/2015. The original contract was amended on 10/07/2017. The amount was reduced to € 360 million. Maturity 30/06/2022. The line had not been utilised as of 31/12/2017.

SaCe Facility agreement

Loan undersigned by the Parent Company with BNP Paribas for a nominal value of € 26.1 million, with a constant capital repayment plan, backed by SACE. Euribor 6 months + spread interest rate equal to 1.2%. Granted on 06/08/2015 Maturity 31/01/2021. In order to eliminate the volatility associate with the Euribor, an Interest Rate Swap contract was stipulated with an annual fixed rate of 0.415%.

european investment bank (eib)

Loan undersigned on 6-7/08/2015 by the Parent Company with European Investment Bank (EIB) for a nominal value of € 50 million, with a constant capital repayment plan. Fixed rate of 1.53% per annum for the amount of € 25 million not Guaranteed by Cdp; fixed rate of 0.492% for the amount of € 25 million Guaranteed by Cdp. This loan is based on the presentation of a multi-year R&D plan. Maturity 16/08/2022.

european investment bank (eib)

Loan undersigned on 15-19/12/2016 by the Parent Company with European Investment Bank (EIB) for a nominal value of € 80 million, with a bi-annual and constant capital repayment plan starting on 31 July 2018. Annual fixed rate of 1.551%. This loan is based on the presentation of a multi-year R&D plan. Maturity 31/01/2024.

ubi loans

Loan undersigned on 27/10/2017 by the Parent Company with UBI Banca for a nominal value of € 60 million, with a bi-annual capital repayment plan starting on 30 April 2020. Euribor 6 months + Spread interest rate equal to 2.3%. Maturity 30/10/2024. Interest Rate Swap Contract stipulated with a fixed interest rate of 0.3050% per annum.

All the loans listed in the table require compliance with two indicators: the “Leverage Ratio” (Net Borrowing/Adjusted EBITDA) and the “Interest Cover Ratio” (Adjusted EBITDA/Net Interest Payable). The Leverage ratio must never exceed parameter 4, while the Interest Cover Ratio must never be less than 4: as of 31 December 2016 and 2017, the aforementioned financial indicators were both respected. Finally, the financial liabilities include Euro 5,226 thousands for a receivable without recourse collected from the customer during the final days of the fiscal year and not yet returned to the factor.

90


Net financial debt The financial information required under section 127 of the recommendations contained in the document prepared by ESMA, no. 319 of 2013, has already been laid out in the first part of the management report. The details of the financial indebtedness as of 31 December 2016 and 2017 are provided below:

euro/thousand

31.12.2017


31.12.2016

Bank accounts

276,300

250,889

CaSH aND CaSH eQuivaleNtS

276,300

250,889

CurreNt FiNaNCial reCeivableS Current bank loans and borrowings Current finance lease liabilities other current loans and borrowings CurreNt FiNaNCial Debt

85,005

5

185,590

158,351

199,646

98

226

8,239

1,519

4,596

166,688

204,468

Net CurreNt FiNaNCial (pOSitiON) Debt (194,617)

(232,011)

Non-current bank loans and borrowings

780,118

484,578

Non-current finance lease liabilities

-

66

NON-CurreNt FiNaNCial Debt

780,118

484,644

Net FiNaNCial Debt (pOSitiON)

585,501

252,633


1,235

1,295


91

26. provisions for risks and charges This item can be detailed as follows: euro/thousand

restructuring

product warranty

pending litigation

tax provision

Other provision

total

1 January 2016 Current

721

–

4,386

–

10,430

15,537

–

17,533

–

60,274

192,765

270,572

721

17,533

4,386

60,274

203,195

286,109

Accruals

–

–

–

200

16

216

Utilisation

–

13,897

781

1,414

13,052

29,144

Non-current

Addition from business combination

15,187

15,187

Reversals

–

432

–

12,994

–

13,426

other changes

–

327

–

–

5,298

5,625

Reclassifications

–

–

–

–

9,288

9,288

721

18,718

3,605

46,066

204,745

273,855

–

–

–

–

–

721

–

3,605

–

17,439

21,765

–

18,718

–

46,066

187,306

252,090

721

18,718

3,605

46,066

204,745

273,855

–

7,520

533

–

8,504

16,557

282

4,000

193

–

22,813

27,288

Reversals

–

4,757

–

13,716

94,968

113,441

other changes

–

(1,281)

–

–

–

(1,281)

Reclassifications

–

(8)

–

–

(543)

(551)

439

16,192

3,945

32,350

94,925

147,851

439

–

3,945

–

11,168

15,552

–

16,192

–

32,350

83,757

132,299

439

16,192

3,945

32,350

94,925

147,851

31 December 2016 Broken down as follows: Current Non-current Accruals Utilisation

31 December 2017 Broken down as follows: Current Non-current

restructuring costs The provision includes the residual amounts accrued by the parent in previous years to cover the risks related to the discontinuance of operations. product warranty This provision is set up to cover direct and indirect damage covered by warranties granted (contractually guaranteed performance and the guarantee period contractually provided for). Based on past history, indirect damage attributable to the Group product performances may arise from the total products installed.

92


pending litigation This provision represents our best estimate of our liability in relation to arbitration and legal proceedings with third parties both in Italy and abroad relating to orders and sale of assets in previous years. tax provision The tax provision represents our best estimate of tax risk in Italy and abroad (relating to branches) and amounts to Euro 32,250 thousands. The tax fund is mainly used for: • a dispute with the Indian tax authorities about the taxability of materials sold FoB to customers (Euro 13,700 thousands, partially already paid). The parent company Ansaldo Energia believes that the materials are exempt from local taxes by virtue of the double tax treaty in force between the two countries. In order to strength its position, in addition to defending the case at all levels in India, it has also commenced the out-of-court settlement procedure provided for by the treaty; • Euro 7,500 thousands in taxes due following the sentence passed by the Greek Appeal Court for the 1995-1996 tax periods; • Euro 5,500 thousands in taxes at risk in Algeria for a unsettled account relating to the years 2004-2007; • Euro 600 thousands in indirect taxes due in Turkey; • Euro 800 thousands in direct taxes due in Pakistan; • Euro 450 thousands in indirect taxes due in Indonesia; • Euro 360 thousands in sales tax due in Egypt; • Euro 2,407 thousands in taxes not yet calculated in Italy. Tax funds amounting to Euro 13,716 thousands were released to the income statement, as they were deemed to be in excess with respect to the requirements. Other provisions These mainly consist of: • costs to be incurred after the completion of contracts for warranties or contractual commitments (Euro 78,305 thousands). The provision changed due to net utilisations totalling Euro 22,813 thousands; • asbestos risk costs for Euro 9,817 thousands, classified in the current risk provision. The provision is the best estimate based on past figures and consolidated scientific practice, which show that latency times may exceed 15 to 40 years. Past events mainly involved the Legnano and Genoa plants. Any future outlays for the asbestos issue covered by this provision will be reimbursed by Finmeccanica (now Leonardo S.p.A.), as per its specific guarantee included in the agreements between it and Fondo Strategico Italiano (now CDP Equity) as part of the transaction involving the parent’s ownership (S.p.A. ) structure. CDP Equity also formally agreed that all future compensation for any litigation arising in the context of the asbestos issue will be paid directly to the Parent Company by Finmeccanica (now Leonardo S.p.A.). As broadly discussed within the management report, in late November of 2017 the Milan Court of Appeals declared the Parent Company not guilty on all charges for alleged irregularities committed by the company Enipower within the context of certain procurement contracts. Following this judgement, the risk provision previously set aside, amounting to a total of Euro 90,745 thousands, was released.


93

27. employee benefits This item can be detailed as follows: euro/thousand

31.12.2017

31.12.2016

TFR

18,802

20,785

Defined benefit pension plans

13,607

12,644

other provisions for personnel

2,362

2,211

34,771

35,640

This amount mainly includes the liability relating to the Group's defined Benefit Plan. This liability is determined taking into account the employees' years of service and remuneration, and is subject to an actuarial valuation. The item in question also includes severance indemnities (TFR) for the Italian companies, and represents the remainder of the debt as of the date upon which the reform became effective, net of the payments up until the reference dates, and, being comparable to a liability resulting from a defined benefit plan according to IAS 19, was subject to actuarial valuation. The change in the item “Defined Benefits of obligation (DBo)” is indicated below:

euro/thousand

present value of obligation

opening balance

868

868

Service costs

212

212

Benefits paid

(148)

(148)

932

932

Closing balance

31.12.2016 present value of asset

Net liability of defined benefit plans

euro/thousand

present value of obligation

opening balance

788

788

Service costs

131

131

Benefits paid

(51)

(51)

Closing balance

868

868

euro/thousand Opening balance Interest cost Actuarial (gains) losses on equity Decreases due to sales Additions from business combinations other changes Closing balance

94

31.12.2017 present value of asset


Net liability of defined benefit plans

31.12.2017

31.12.2016

20,785

23,075

150

244

(3,065)

1,454

3,128

6,110

–

2,121

4,060

1

18,802

20,785

The details of the main economic and demographic assumptions used for the purposes of the actuarial valuations are provided below: tFr 31.12.1017

31.12.2016

Discount rate

0.75%

0.95%

Wage increase rate

2.46%

2.46%

Inflation rate

1.50%

1.50%

Defined benefit pension plans 31.12.1017 31.12.2016 Discount rate

0.85%

0.80%

Wage increase rate

1.50%

1.50%

–

–

Inflation rate

The assumptions taken into consideration for the calculation during the two years under review are expressed in the following table: tFr and Defined benefit pension plans 31.12.2017

tFr and Defined benefit pension plans 31.12.2016

R.G. 48

R.G. 48

6.1

6.2

Frequency of advances on TFR

2.34

2.34

Frequency of turnover

2.94

2.93

Death Retirement Annual frequency of Turnover and Advances on TFR


95

28. Other current and non-current liabilities This item can be detailed as follows:

euro/thousand Employees

NON CurreNt 31.12.2017 31.12.2016

CurreNt 31.12.2017 31.12.2016

3,192

2,979

18,635

37,148

Deferred income

–

–

–

12

Social security institutions

–

–

12,166

10,192

other

75,030

116,154

79,987

51,193

Related parties

10,000

–

–

–

total other liabilities

88,222

119,133

110,788

98,545

–

–

6,906

9,420

other current tax liabilities

151,269

170,576

–

–

total other non current liabilities

239,491

289,709

117,694

107,965

Deferred tax liabilities

liabilities to employees The “Liabilities to employees” refer to the payables for additional monthly payments, vacation time, and paid leave accrued but not utilised, and settled in the following fiscal year. The significant reduction in the item is mainly attributable to the nonachievement of the objectives that would have resulted in performance bonuses for the 2017 fiscal year. The non-current amount refers to the seniority bonuses set aside and measured at fair value. liabilities to social security and welfare institutions They relate to the contributions to be borne by the Group and by employees due to these institutions on the December wages and salaries paid in January and on the remuneration of the year whose contributions are paid quarterly or yearly. Other liabilities The “other liabilities” item mainly includes accrued liabilities relating to insurance on assembly and multi-year order risks, amounts due to Partners in A.T.I. for works performed, payments to consultants and other minor amounts. In view of the fact that the Euro 40 million payable to General Electric for the Gastone operation matures by the end of 2018, the relative amount was reclassified from medium/long term to short term as of 31 December 2017. The non-current portion represents the current value of the long-term payable to G.E. incurred following the Gastone Project and reimbursable by 2020.

96


29. Deferred tax liabilities and deferred tax assets The changes in the “Deferred tax liabilities” and “Deferred tax assets” items are shown below: euro/thousand

values as at 31.12.2016

income statement accruals

income statement releases

Provision taxed

6,064

2,297

(6,064)

Heding researve

1,829

releases / accruals on equity

value as at 31.12.2017

Deferred tax assets (1,829)

MBo and other personnel incentives

854

Impairment of receivables

729

35,822

Employee benefits

6,335

3,110

other deductible temporary differences

4,918

1,409

(1,613)

20,729

42,638

(8,347)

total deferred tax assets

2,297

(670)

– 184 36,551

(721)

8,724 4,714

(2,550)

52,470

Deferred tax liabilities Purchase price allocation

170,579

(21,743)

Heding researve Employee benefits total Deferred tax liabilities

121 170,579

121

(21,743)

148,836 1,724

1,724

588

709

2,312

151,269

The deferred tax assets as of 31 December 2017 mainly refer to: • allocations to asbestos risk provisions amounting to Euro 2,297 thousands, recorded during the fiscal year; • the devaluation of the Unit NV receivable for the amount of Euro 35,728, recorded during the fiscal year; • employee benefits for Euro 8,724 thousands. The deferred tax liabilities as of 31 December 2017 (Euro 148,786 thousands) mainly refer to the effects of the PPAs that involved the Parent Company in 2011 and regarded the Gastone operation of 2016. The change in the item resulted from the release of Euro 15,729 thousands in 2017 due to the effect of the depreciations, and the Euro 6,014 thousands decrease in U.S. taxes starting in 2018.

30. trade payables The trade payables increased by Euro 173,301 thousands. This increase was attributable to the production trend and, above all, to the prudent payment policy applied. The “maturity factoring” payables included herein amounted to Euro 58,750 thousands as of 31 December 2017. Through these transactions, the Group allows its suppliers to factor their receivables for goods supplied or services provided to the Group, whereby they collect their receivables and the Group may avail of a further deferment of its trade payables, bearing the related interest. The latter approximated Euro 387 thousands during the year and are recorded under “other operating expenses” in the income statement.


97

31. Derivatives This item can be detailed as follows:

euro/thousand

assets

2017 liabilities

assets

2016 liabilities

Currency forwards

12,156

(123)

3,644

11,771

–

1,484

–

3,551

12,156

1,361

3,644

15,322

IRS hedging on non-current loan

In keeping with the corporate policy, the Group arranged to cover its foreign currency assets and liabilities with derivatives called “forward foreign exchange tools” and with a medium and long term IRS loan.

32. revenue euro/thousand

31.12.2017

31.12.2016

Sales

785,698

900,196

Services

129,746

556,561

915,444

1,456,757

Change in work in progress

428,701

(202,955)

Related parties revenue

119,908

(532)

1,464,053

1,253,270

total revenue

Revenue from sales and services is detailed in the table presented in the “Segment reporting” section. In addition to the operating revenue for the period, the revenue also include the amounts acquired upon obtaining the Provisional Acceptance Certificate (PAC) attesting to the completed plants’ transfer of ownership to the customer. The following table shows the main revenue by order. euro/thousand plant decription

Customer

amount

HASSI MESSAoUD - CICLo APERTo N. 3 UNITÀ

SoCIETE ALGERIENNE DE PRoDUCTIoN DE L'ELECTRICITE

247,711

SoUSSE D - 1TG + 1TV + 1AT - 400MW

S.T.E.G. SoCIETE' TUNISIENNE DE L'ELECTRICITE

208,469

SoHAR III

SEPCo III – ELECTRIC PoWER CoNSTRUCTIoN CoRP.

134,177

IBRI

SEPCo III – ELECTRIC PoWER CoNSTRUCTIoN CoRP.

129,267

FUJAIRAH 2 - LTMA oFF SHoRE

FAPCo

21,414

AD 250

DooSAN

18,478

EP LANGAGE LTD

LANGAGE

16,573

ALGECIRAS SPAGNA - UPGRADE TV

ENEL PRoDUZIoNE S.P.A.

13,885

MAPNA - SET PALETTE IRAN FoRNITURA 2008

MAPNA INTERNATIoNAL FZE

13,734

PUENTE NUEVo SPAGNA - RICAMBI TV+PREST.

ENEL PRoDUZIoNE S.P.A.

12,360

DRoGENBoS E HERDERSBRUG-RIC.LTE TG V94.2 ELECTRABEL NV/SA

98


8,858

33. Other operating income and expense 2017 euro/thousand

2016

income

expense

income

expense

365

–

416

–

5

6

73

362

Accruals/reversals to/of provisions

99,810

16,557

432

16

Exchange rate gains (losses) on operating activities

13,717

7,645

5,333

7,695

5,939

14,659

3,263

7,305

–

387

–

455

8,891

–

17,983

–

Restructuring costs

–

81

–

–

Indirect taxes

–

3,117

–

2,797

2,203

2,297

2,258

2,166

–

21

–

7

130,930

44,770

29,758

20,803

other grants related to income Gains/losses on sales of property, plant and equipment and intangible assets

Unrealised exchange rate gains and losses Financial income/expenses on trade receivables/payables Insurance compensation

other operating income/expense other related parties operating income/expense

Grants related to income were mainly in relation to personnel training. The “reversals of provisions for risks and charges” item essentially refers to the release of the Enipower Provision for the amount of Euro 90,745 thousands, which is already discussed in the relative note, and the release of the product warranty provision for the amount of Euro 4,981 thousands. The insurance claims are mainly due to damage sustained at various power plants (Euro 8,891 thousands), including 6TH october (Euro 4,400 thousands), Avon (Euro 2,189 thousands) and AMP (Euro 1,063 thousands), in relation to an accident in the United States. The indirect taxes consist of property taxes (Euro 1,083 thousands), taxes on waste (Euro 210 thousands), and other taxes (Euro 1,813 thousands). The other costs are primarily attributable to membership fees (Euro 866 thousands), donations (Euro 47 thousands), and gifts (Euro 175 thousands).

34. purchases and services euro/thousand

2017

2016

Materials from third parties

713,724

468,504

Change in inventories

(69,743)

969

4,300

4,931

total purchases

648,281

474,404

Services from third parties

385,507

354,417

Services from related parties

8,223

6,410

Rentals and operating leases

12,752

8,914

2,465

6,452

408,947

376,193

Purchases from related parties

Hire expense total services


99

The costs for purchases of materials from third parties amounted to Euro 713,724 thousands, for an increase of Euro 245,220 thousands with respect to the previous year, which is partially reflected in the increase in inventories. The costs for third party services amounted to Euro 385,693 thousands, for an increase of Euro 31,276 thousands with respect to the previous year. The increase in costs is mainly due to an increase in stock purchases to meet the production requirements associated with the new GT 26 and GT 36 technologies, and the increase in third-party services relating to the advancement of the service orders, as already previously discussed. For a better understanding of the service costs (including Euro 8,223 thousands for unconsolidated related parties), the following details are provided: miscellaneous services (Euro 313,005 thousands), customs charges and transportation costs (Euro 28,340 thousands), travel and transfers (Euro 22,404 thousands), canteen and other personnel costs (Euro 8,419 thousands), ordinary maintenance costs (Euro 2,060 thousands), fees for directors and auditors (Euro 1,970 thousands). The costs for fees, rents, and operating leases to third parties, including the rental costs for buildings and storage and processing areas (Euro 12,066 thousands), rentals of photocopiers, computer equipment, and other leases (Euro 813 thousands).

35. personnel expense euro/thousand

2017

2016

245,508

241,132

–

3,051

55,281

53,304

Costs related to other defined benefit plans

212

131

Costs related to defined contribution plans

15,618

10,857

–

4,023

Early retirements incentives

2,563

2,047

other costs

1,413

1,426

320,595

315,971

Wages and salaries Incentive plan for Key Management personnel Social security and pension contributions


At the end of the 2017, the resources listed amounted to 4,367 units, for an increase of 113 units with respect to the end of 2016 (+2.7%). The table below shows employees by category and average number: 2017

2016

Changes

76

61

15

503

277

226

White collars

2,666

3,074

(408)

Blue collars

1,046

815

231

4,291

4,227

64

Managers Junior managers

The personnel expenses of Euro 320,595 thousands consist of monthly and deferred pay, social security contributions and employee severance indemnities accrued as of 31 December 2017, and include the portion relating to foreign permanent establishments (Euro 12,807 thousands). The increase of Euro 4,624 thousands is mainly due to the increase in the number of employees.

100


36. Change in finished goods, work-in-progress and semi-finished products euro/thousand Change in finished goods, work-in-progress and semi-finished products

2017

2016

(34,852)

(11,454)

The Euro 46,306 thousands increase is attributable to the increase in purchases to meet the production requirements associated with the new GT 26 and GT 36 technologies, and the increase in services due to the advancement of the service orders.

37. amortisation, depreciation and impairment losses euro/thousand

2017

2016

- intangible assets

61,330

53,759

- property, plant and equipment

32,064

30,163

93,394

83,922

101

15,242

148,927

1,282

149,028

16,524

242,422

100,446

Amortisation and depreciation:

Impairment losses: - intangible assets - other assets total amortisation, depreciation and impairment losses

The depreciation trend reflects the depreciation of the tangible and intangible fixed assets based on their estimated useful lives. For more details, please refer to Note 12 “Intangible assets” and Note 13 “Tangible assets.” The “Impairment – other assets” item includes the previously discussed devaluation of the Unit receivable for the amount of 148,868 thousands.

38. internal work capitalised The increases in fixed assets for internal work are related to the cost of labour and materials, and include intangible assets relating to the development of the Parent Company's technologies (Euro 7,643 thousands), costs for the prototype and development of the GT36 (Euro 27,784 thousands), and the improvement of the repair processes (Euro 1,718 thousands). euro/thousand

2017

2016

34,001

40,352

Materials

1,426

22,269

others

1,718

29,163

37,145

91,784

Personnel expenses


101

39. badwill net of integration costs The badwill recorded on the income statement for the 2016 fiscal year, which amounted to Euro 69,590 thousands, refers to the effect resulting from the PPA process for the Gastone Project. The integration costs and other non-recurring charges for 2016 amounted to Euro 49,141 thousands. The net item therefore had a positive balance of Euro 20,449 thousands for the 2016 fiscal year. For more details, please refer to that which is described in the management report and in Note 11 “Business combinations.”

40. Financial income and expense The “financial income” item can be detailed as follows: euro/thousand income

2017 expense

Net

income

2016 expense

Net

–

150

(150)

–

244

(244)

–

2,353

(2,353)

–

–

1,587

19,394

(17,807)

2,067

16,256

(14,189)

–

7,124

(7,124)

–

7,022

(7,022)

155

3,572

(3,417)

222

120

102

8,478

17,603

(9,125)

5,276

19,342

(14,066)

Fair value gains and losses

–

1,123

(1,123)

–

2,087

(2,087)

other financial income and expenses

9

9,875

(9,866)

103

327

(224)

Related parties financial income/expenses

–

34

(34)

–

31

(31)

61,228 (50,999)

7,668

45,429

(37,761)

Interest cost on defined benefit plans Dividents Interest on discounted value Interests Commissions Premiums paid/collected on forwards Exchange rate gains and losses

10,229

The financial income mainly includes interest income, which basically consists of the balances held in ordinary and foreign currency bank accounts, and the exchange rate differences on the amounts in foreign currencies, above all those deriving from the U.S. dollar area. The “financial charges” item can be detailed as follows: The financial charges are adequately laid out in the tables above. The interests have increased due to the increase in the bonds and the overall debt. The other item, which has increased by Euro 11,902 thousands with respect to 2016, includes discount charges on the payable to General Electric for Euro 2,353 thousands and the capital loss for the repurchase of the bond for Euro 9,868 thousands.

102


41. income taxes The income taxes item consists of the following: euro/thousand Tax provision reversals

2017

2016

(13,716)

IRES

6,389

6,844

IRAP

2,706

3,389

other income taxes

1,852

13,708

Prior year taxes

(556)

(15,882)

Income from national fiscal consolidation

(712)

Provisions for tax risks Net deferred tax

–

200

(55,913)

(20,306)

(59,950)

(12,047)

42. earnings per share The values utilised to calculate the basic and diluted earnings per share are shown below. as at 31 December euro/thousand

2017

2018

Profit/(Loss) attributable to the Group

5,655

60,445

Weighted avarage numbers of shares (in thousand)

10,000

10,000

earning per share

0.5655

6.0445

Since no financial instruments with potential dilutive effects were issued, the diluted earnings per share is the same as the basic earnings per share.


103

43. impact of related party transactions 43.1. impact of related party transactions on assets and liabilities Related party transactions fall under ordinary management, and are conducted at market value (when not governed by specific contractual conditions), in the same way as interest bearing debts and loans. They mainly comprise the exchange of goods, provision of services and financing from and to the parent and subsidiaries, associates, joint ventures and consortia. The amounts of the related party receivables are highlighted below: euro/thousand receivables as at 31.12.2017

Current financial receivables

trade receivables

Other current receivables

total

Companies that exercise joint control Shanghai Electric Hong Kong

16,358

16,358

16,358

16,358

Subsidiaries SPVTCCCC BV

5

5

5

5

Associates and Joint Venture Ansaldo Gas Turbine Technology

151

151

NNS Societè pour reacteur

118

118

1,840

1,840

2,109

2,109

others

1,157

1,157

Eni

3,290

3,290

4,447

4,447

1

1

1

1

8,150

8,150

Shanghai Electric Gas Turbine Group companies and others

Consortia Consortium CRIS Entities under MEF control and significant influence Enel Leonardo

878

Sogin total

104


13,991

3,044 5

14,868 3,044

12,072

13,991

26,063

34,986

13,991

48,982

euro/thousand receivables as at 31.12.2016

Current financial receivables

trade receivables

Other current receivables

total

Companies that exercise joint control Shangai Electric Hong Kong

20,855

20,855

20,855

20,855

14

1,245

Subsidiaries Gannouche Maintenance

1,231

SPVTCCC BV

4 1,235

4 14

1,249

146

146

1,157

1,157

198

198

1,501

1,501

816

816

816

816

8,991

8,991

Associates and Joint Venture Ansaldo Gas Turbine Technology Shanghai Electric Gas Turbine NNS Societé pour reacteur Group companies and others Eni Entities under MEF control and significant influence Enel Leonardo (ex Finmeccanica)

345

Sogin total

8,975

1,523 1,235

9,320 1,523

10,859

8,975

19,834

34,045

8,975

44,255


105

The amounts of the related party payables are highlighted below: euro/thousand

trade payables

total

Cassa Depositi e Prestiti Equity

352

352

Shanghai Electric Group

527

527

879

879

142

142

68

68

580

580

790

790

Boilers

18,564

18,564

others

(830)

(830)

17,734

17,734

payables as at 31.12.2017

Other non-current liabilities


Companies that exercise joint controll

Associates and Joint Venture Ansaldo Gas Turbine Technology Co. LTD Polaris -Anserv Shanghai Electric Gas Turbine Co. LTD Group companies and others

Consortia Consorzio CRIS

10,000

1,519

11,519

10,000

1,519

11,519

Entities under MEF control and significant influence Enel Leonardo total

106

10,000


1,519

328

328

5,529

5,529

5,857

5,857

25,260

36,779

euro/thousand payables as at 31.12.2016


trade payables

Other current payables

total

Companies that exercise joint controll Shanghai Electric Group

347

347

347

347

989

989

989

989

Subsidiaries Ansaldo Energia Mexico Consortia Consorzio CRIS

1,295

1,295

1,295

1,295

Associates and Joint Venture Ansaldo Gas Turbine High Technology

45

45

Polaris -Anserv

65

65

164

164

274

274

71

71

71

71

414

414

5,088

5,088

5,502

5,502

7,183

8,478

Shanghai Electric Gas Turbine Group companies and others Eni Entities under MEF control and significant influence Enel Leonardo (ex Finmeccanica) total

1,295

43.2. impact of related party transactions on profit or loss The impact of related party transactions on profit or loss in 2017 and 2016 is summarised below:


107

euro/thousand

revenue

Costs

2017

Other Financial operating expense expense

Companies that exercise joint control Cassa Depositi e prestiti Equity

134

Shanghai Electric Group

180 314

18 18

Parent Company Ansaldo Energia

662 662

Subsidiaries Aliveri Power Units Maintenance Ansaldo Energia Korea

(570)

4,144

(1,655)

186

Ansaldo Energia Switzerland

3,076

Ansaldo Nucleare

2,794

Ansaldo Russia

(6,186)

Ansaldo Thomassen

(329)


(648)

Gannouche Maintenance

(476)

Niehlgas GMBH

(384)

Power System Manifacturing yeni AEN Anonim Sirketi

971 16,831 13,423

4,330

Associates, Joint Venture and Others others Ansaldo Gas Turbine Technology Co.

162 1,015

Polaris Anserv Shanghai Electric Gas Turbine Co.

432 85,904 86,919

594

Group companies Eni

2,053 2,053

Consortia Cons. Stabile Ansaldo New Clear

(4,604)

Consortium Cris

34 (4,604)

34

Entities under MEF control and significant influence Leonardo

7,154

Enel

16,335

Sogin

5,120

Ferrovie dello Stato total

108


2

89 42

21,455

7,285

2

119,908

12,523

21

34

euro/thousand

revenue

Costs

2016

Other Financial operating expense expense

Companies that exercise joint control Ansaldo Energia Shanghai Electric Group Co LTD

(611) 437

108

(174)

108

Subsidiaries Ansaldo Energia Switzerland

736

Ansaldo Nucleare

117

Ansaldo Russia

638

Ansaldo Swiss

(9)

Ansaldo Thomassen

(472)


107

yeni AEN Anonim Sirketi

(20,736) (19,619)

Consortia Consortium CRIS Consortium Stabile Ansaldo New Clear

31 (2,794) (2,794)

31

Associates and Joint Venture Ansaldo Gas Turbine Technology

458

Polaris Anserv Shanghai Electric Gas Turbine Co.

290 6,349

23

6,807

313

3,269

83

6

3,269

83

6

8,697

4,625

Group companies and others Eni Entities under MEF control and significant influence Enel Ferrovie dello Stato

2

Leonardo (ex Finmeccanica) Sogin total

6,211 3,282 11,979

10,838

(532)

11,341

6

31

Financial income relates to the investment of cash during the year, including with temporary time constraints, always in line with best market conditions. Expense paid to subsidiaries related to services received, net of fees for those rendered. Financial income and expense arise from financial transactions carried out at the market rates adopted by the Group. Related party transactions mainly relate to the provision of materials and services for specific contracts or general services.


109

44. Cash flows from operating activities as at 31 December euro/thousand

2017

2016

Net result

5.655

60.445

Amortisation, depreciation and impairment losses

243,036

94,565

Income taxes

(59,950)

(12,047)

Provision accruals

(83,169)

(416)

212

131

–

289

Impairment losses on equity investments cost measured

5,263

9,830

Financial income and expense, net of impairment losses on measured cost equity investments

50,999

37,760

(84)

(69,589)

161,962

120,968

2017

2016

Inventories

(112,348)

4,156

Work in progress and progress payments and advances from customers

(169,625)

36,710

Trade receivables and payables

209,458

11,909

Changes in working capital

(72,515)

52,775

2017

2016

(3,276)

(6,162)

Change in provisions for risks

(27,287)

(29,311)

Changes in other operating items

(38,098)

22,982

(68,661)

(12,491)

31.12.2017

31.12.2016

735,092

614,715

Third parties sureties

1,107,348

1,235,825

personal guarantees issued

1,842,440

1,850,540

Defined benefit pension and stock grant plan costs Gains on the sale of non-current assets

other non-monetary items

euro/thousand

euro/thousand Pension fund and stock grant payments

45. guarantees and other commitments guarantees given The Company has the following guarantees in place as of 31 December 2017: euro/thousand Parent Company to third parties

110


They relate to sureties issued by banks and insurance companies to: • customers for participation in tenders (Euro 33,874 thousands); • customers for advances received and as performance bonds (Euro 996,526 thousands); • others, including: financial backers, customs and tax offices and lessors (Euro 5,490 thousands); • a guarantee from the Deposits and Loans Fund relating to Euro 21,429 thousands in loans from the EBI; • Parent Company issued to third parties on behalf of PSM and Ansaldo Energia Switzerland AG (Euro 735,092 thousands); • equity commitment in the case of debt service shortfall on the part of yeni Elektrik on a several basis for Euro 46,693 thousands (originally USD 56 million); • joint and several guarantee with Unit NV given against a loan in favour of yeni Elektrik for a Working Capital Facility totalling Euro 16,676 thousands (originally USD 20 million); • guarantee of Euro 81,714 thousands (originally USD 98 million) in favour of Nomura Bank for the loan for the original amount of USD 120 million described in the first part of the management report. guarantees received euro/thousand

31.12.2017

31.12.2016

Third parties sureties

145,983

131,363

Indemnities

315,803

298,223

68,789

87,577

530,575

517,163

others personal guarantees received

These relate to: • performance bonds received from suppliers (Euro 115,983 thousands); • the guarantee given by Belfius Bank for the Gebze contract to guarantee payment of equity and shareholder loans (Euro 30,000 thousands); • indemnity paid against the guarantees issued to customers for the good execution of the orders on the Parent Company's credit lines (Euro 285,785 thousands); • letters of credit received by the parent from customers guaranteeing payment (Euro 68,789 thousands). It should be noted that, in addition to that which is indicated in the table above, the Parent Company also received counter guarantees on all the guarantees given for the Gebze operation and the Nomura loan, for an amount of Euro 145,083 thousands. Contingent liabilities We are not aware of any further litigation or proceedings that could have a significant impact upon the Group's financial position.

46. Other information remuneration to directors, auditors and strategic managers Remuneration paid to those who have the power and responsibility for planning, managing and controlling the Group companies, including executive and non-executive directors, amount to:


111

euro/thousand

31.12.2017

31.12.2016

5,370

5,925

Post-employment benefits

–

–

other long-term benefits

–

–

Remuneration


58

Stock Grant total

5,428

5,925

The above table also includes the fees for the Parent Company's directors who perform similar functions within the consolidated companies. The remuneration for the Parent Company's Directors, not included in the table above, amounted to Euro 100 thousands for the 2017 fiscal year. These amounts include fees and any other type of remuneration and social security sums due for serving as a Director. The remuneration for the Parent Company's Auditors and the Supervisory Board amounted to Euro 114 thousands. remuneration to the independent auditing firm These consolidated financial statements have been audited by PricewaterhouseCoopers S.p.A., which was appointed by the Parent Company's shareholders on 19 April 2017 for the three-year period from for 2017 to 2019. For the fiscal years ended on 31 December 2016 and 2017, the remuneration paid to the Parent Company's independent auditing firm for auditing services and other services amounted to Euro 640 thousands and Euro 690 thousands respectively. These values also include the remuneration received by the same auditing firm among the other companies included within the scope of consolidation where it has assignments.

47. key events that took place after the reporting period on 28 February 2018, the Parent Company's Board of Directors took note of Eng. Filippo Abbà's resignation from his position as Chief Executive officer and Board Member. At the proposal of the shareholders of CDP Equity and Shanghai Electric Hongkong Co. Limited, the Board of Directors proceeded to assign the relative powers of attorney to Eng. Giuseppe Zampini, who assumed the position of Chief Executive officer. Eng. Zampini resigned from the position of President, which was assumed by Eng. Guido Rivolta, who had been a member of the Parent Company's Board of Directors since 2014. The Board co-opted Attorney Fabio Niccoli as a new Board Member. In this composition, the Board of Directors has maintained the original deadline established with the Shareholders' Meeting for the approval the Financial Statements for the 2018 fiscal year.

112


Parent Company Corporate Bodies

bOarD OF DireCtOrS for the 2017/2018 period

Guido Rivolta (*) Chairman

Cao Min Vice Chairman

Giuseppe Zampini (*) Chief Executive officer Directors:

Laura Cioli Umberto Della Sala yuan Jianhua Fabio Niccoli (**) Hans Rauber Zheng Xiaohong (*) Elected by the Board of Directors of 28 february 2018 (**) Co-opted by the Board of Directors of 28 february 2018

bOarD OF StatutOrY auDitOrS for the 2016/2018 period

Michele Casò Chairman Statutory auditors:

Luigi Emilio Garavaglia Pier Vittorio Vietti Alternate auditors:

Barbara Aloisi Pietro Michele Villa iNDepeNDeNt auDitOr for the 2017/2019 period

PricewaterhouseCoopers S.p.A.


113

Independent Auditor’s Report

114



115

116



117

118


Edited by: Ansaldo Energia S.p.A.

Consolidated financial statements - Ansaldo Energia

Consolidated financial statements - Ansaldo Energia

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