Analysis of profit and loss account items

In 2013, Eni’s net sales from operations (€114,722 million) decreased by €12,498 million from 2012 (down by 9.8%) reflecting lower realizations on commodities in dollar terms, negative impact of the appreciation of the euro against the US dollar, lower production and sales, and a marked slowdown in the Engineering & Construction business activity.

Revenues generated by the Exploration & Production Division (€31,268 million) decreased by €4,613 million, or 12.9%, due to lower oil and gas realizations in dollar terms (down by 2.1%), the appreciation of the euro against the US dollar and the extraordinary disruptions in Libya and Nigeria.

Revenues generated by the Gas & Power Division (€32,124 million) decreased by €4,076 million, down by 11.3%, due to continued deterioration in selling prices to large customers in Italy reflecting a weak gas demand and increasing competitive pressure. In addition spot prices at Italian hubs which are the main benchmark for selling prices in short-term supplies to large Italian customers have aligned very rapidly to continental hubs, thus driving a large fall in average realizations. Finally, the segment recorded lower sales to European target markets (down by 7.2%).

Revenues generated by the Refining & Marketing Division (€57,329 million) decreased by €5,327 million, or 8.5%, mainly reflecting lower sales of refined products (down 4.84 mmtonnes; or 10%, from 2012) and the negative impact of the currency.

Revenues generated by Versalis (€5,859 million) decreased by €559 million, down by 8.7% from 2012 mainly due to a decline in volumes sold (down by 4.2%) against the backdrop of the continuing weak commodity demand, impacted by the economic downturn, declining average sales prices (down by 3.2%), mainly in olefin prices (down by 23%), as result of the fall in butadiene’s unit margins.

Revenues generated by the Engineering & Construction business (€11,611 million) decreased by €1.160 million, or 9.1% due to marketing and operating difficulties, mainly in the first half of 2013 and the decline of business activity in onshore and offshore construction segments.

In 2013 operating expenses (€95,477 million) decreased by €4,499 million, or 4.5%, from 2012.

Purchases, services and other costs (€90,213 million) decreased by €5,150 million, or 5.4%, reflecting lower supply costs in euro terms of raw materials and the benefit of renegotiations of long-term gas supply contracts, some of which were retroactive to previous reporting periods. Purchases, services and other costs included special charges of €539 million (€1,154 million in 2012) mainly related to environmental and onerous contracts risk provisions, net of reversal deriving from renegotiations. In 2012 special charges mainly referred to the extraordinary expenses and risk provisions of €945 million incurred in connection with price revisions at long-term gas purchase contracts.

Payroll and related costs (€5,264 million) increased by €651 million from 2012, or 14.1%, due to an higher average number of employees outside Italy, particularly in the Engineering & Construction business and higher provision for redundancy incentives (€270 million), which included Eni’s cost for 2013-2014 redundancy, pursuant to the provisions of Italian Law No. 223/1991.

Depreciation, depletion and amortization (€9,303 million) decreased by €235 million, down by 2.5% from 2012, mainly in the Exploration & Production Division due to lower productions in particular in Libya and Nigeria and the appreciation of the euro against the US dollar. The increase recorded in the Engineering & Construction business (up €38 million, or 5.6%) was due to new vessels and rigs which were brought into operations.

Impairment charges of €2,400 million mainly regarded the goodwill and other intangible assets allocated to the gas Marketing activity and impairment losses of refining and electricity plants driven by a reduced profitability outlook on the back of the ongoing European downturn. In performing the impairment review, management assumed a reduced profitability outlook in those businesses driven by a deteriorating European macroeconomic environment, volatility in commodity prices and margins, and rising competitive pressures. Other impairment losses were incurred at a number of oil&gas properties in the Exploration & Production Division reflecting downward reserve revisions almost completely offset by the reversal of impairment charges made in previous reporting periods due to positive revisions of reserves, as well as marginal lines of business in the Chemical segment due to lack of profitability perspectives.

The breakdown of impairment charges by Division is shown in the table below:

The breakdown of the reported operating profit by Division is provided below:

The breakdown of the adjusted operating profit by Division is provided below:

Eni’s adjusted operating profit, calculated by excluding an inventory holding loss which amounted to €716 million and special gains of €3,046 million, amounted to €12,618 million, a decrease of €7,180 million from the previous year (down by 36.3%), reflecting a lower operating performance recorded by the following Divisions:

• Exploration & Production (down €3,891 million, or 21%) driven by lower production sold impacted by geopolitical issues mainly in Libya and Nigeria and the appreciation of the euro against the US dollar (approximately €560 million);
• Gas & Power reported an adjusted operating loss at €663 million, down €1,019 million from an adjusted operating profit of €356 million in 2012. The decline was driven by the continued deterioration in selling prices to large customers in Italy against the backdrop of weak gas demand and increasing competitive pressure, as well as plunging margins on the production and sale of electricity;
• Refining & Marketing reported sharply higher adjusted operating losses (from €321 million in 2012 to €482 million in 2013), reflecting unprecedented decline in refining margins (the average Brent refining margin decreased to 2.64 $/bbl, or by 45.3% from 2012) driven by weak demand for refined products and overcapacity, the effects of which were exacerbated by shrinking price differentials between light and heavy crudes;
• Engineering & Construction reported an adjusted operating loss of €84 million (down €1,558 million from 2012) due to marketing and operating difficulties incurred in the first half of 2013 resulting in sharply lower revision of margin estimates at certain large contracts for the construction of onshore industrial complexes.

Net finance expense decreased by €356 million to €991 million from 2012, reflecting lower financial expense on debt (down €57 million) due to favourable trends in key market benchmarks and gains recognized in fair value evaluation of certain derivative instruments on interest rates (up €128 million) which did not meet the formal criteria to be designated as hedges under IFRS. Negative exchange differences net (down €95 million) were partly offset by lower losses on exchange rate derivatives (up €46 million) recognized through profit as lacking the formal criteria for hedge accounting in accordance with IAS 39. Other financial expense decreased by €98 million from 2012 mainly due to the fact that the 2012 results reflected finance charges accrued on amounts due to certain gas suppliers following the definition of contractual price revisions.

The table below sets forth the breakdown of net income from investments by Division:

Net income from investments amounted to €6,115 million and mainly related to gains on disposal of assets (€3,598 million) referred to the gain recorded on the sale of a 28.57% interest in Eni East Africa, which is the operator of Area 4 in Mozambique, to China National Petroleum Corporation (€3,359 million) and the fair-value revaluation of Eni’s interest in Artic Russia (€1,682 million) due to the loss of joint control at the balance sheet date, following the occurrence of all conditions precedent of the SPA (Sale and Purchase Agreement) with Gazprom. On January 2014, the consideration of the disposal was cashed in. Minor gains were recorded on the divestment of the available-for-sale interests in Snam (€75 million of which €8 million related to the reversal of the evaluation reserve) and Galp (€98 million).

Other income related to: (i) Eni’s share of profit of entities accounted for under the equity-accounting method (€252 million), mainly in the Exploration & Production and Gas & Power Divisions; (ii) dividends received from entities accounted for at cost (€400 million), relating to Nigeria LNG Ltd (€224 million), Snam Spa (€72 million) and Galp Energia SGPS SA (€43 million).

These increases were partly absorbed by the fact that 2012 benefitted from gains relating to the divestment of a 9% stake in Galp (€311 million) and the revaluation of the residual interest (€865 million), as well as a gain recorded on an equity transaction made by Galp’s subsidiary (€835 million).

The table below sets forth a breakdown of net income/loss from investments for 2013:

Income taxes were €9,008 million, down €2,653 million compared to the previous year, mainly reflecting lower income taxes currently payable which were incurred by subsidiaries in the Exploration & Production Division operating outside Italy due to a declining taxable profit.

The reported tax rate was 64.4%, compared to the statutory tax rate of 41.9%, calculated by applying the Italian statutory tax rate on corporate profit of 38% and 3.9% corporate tax rate applicable to net value of production as provided for by Italian laws.

The difference between the statutory and effective tax rate was due to: (i) the higher share of taxable profit reported outside Italy by the Exploration & Production Division; (ii) the write-off of deferred tax assets which were assessed to be no more recoverable due to the projections of lower earnings before income taxes at Italian activities for 8.9 percentage points; (iii) the partially non-taxable gains which were recorded on the sale of Eni’s 28.57% interest in Eni East Africa SpA, the non-taxable gains registered on the sale of on the Galp SGPS and Snam SpA interests, as well as, with an opposite effect, the non-deductable charges relating to the goodwill impairment of the European Market cash generating unit and to intergroup dividend distribution.

Adjusted tax rate, calculated as ratio of income taxes to net profit before taxes on an adjusted basis, was 66.4% and it was higher than in 2012 (59.8%) reflecting the higher share of taxable profit reported by the Exploration & Production Division and the fact that the Company could not recognize any tax-loss carry-forward for Saipem losses.

Non-controlling interest’s share of loss was €188 million and related mainly to Saipem SpA.