Divisional performance²

In 2013, the Exploration & Production Division recorded an adjusted operating profit of €14,646 million, decreasing by €3,891 million from 2012, down by 21%, due to lower production sold, impacted by extraordinary disruptions mainly in Libya and Nigeria, the appreciation of the euro against the US dollar (approximately €560 million), as well as lower oil and gas realizations in dollar terms (down by 2.1%, on average).

Special charges excluded from adjusted operating profit amounted to €225 million and mainly related to net gains on disposal of marginal assets (€283 million), partly offset by provision for redundancy incentives (€52 million) and by minor impairment losses incurred at a number of oil&gas properties reflecting downward reserve revisions, almost completely offset by the reversal of impairment charges made in previous reporting periods due positive revisions of reserves (net charge of €19 million).

Adjusted net profit decreased by €1,474 million to €5,952 million (down by 19.8%) from 2012, due to lower operating performance and lower income from investments.

In 2013, the Gas & Power Division reported sharply lower adjusted operating loss of €663 million, compared to operating profit of €356 million registered in 2012.

The Marketing business reported a loss of €837 million, compared to break-even results achieved in the previous year (adjusted operating profit of €47 million). This negative trend reflected increasing competition, an ongoing demand downturn and oversupplies, the effects of which were exacerbated by minimum off-take obligations provided by long-term supply contracts. Based on these trends, Eni’s gas business in Italy was impacted by plummeting prices realized on short-term selling contracts to large Italian clients because those prices are benchmarked to Italian spot prices which have been aligning to continental hubs determining negative margins in comparison with oil-linked supply costs. The decline in spot prices has been transferred to long-term selling contracts. Furthermore, Eni’s results were impacted by sharply lower margins in the production and sale of gas-fired electricity due to oversupply and increasing competition from more competitive sources such as coal-fired electricity and renewables. The International transport activity also registered a decline in operating performance (down by 43.7%).

The special charges excluded from adjusted operating loss amounted to €2,138 million related to: (i) impairment losses of €1,685 million recorded mainly in the activity of electricity generation (€919 million) due to the projections of reduced cash flows, impacted by lower electricity demand and the pressures on margins determined by renewable energy and coal competition, as well as impairment losses recorded to write down the book values of goodwill and other intangible assets to their lower value-in-use mainly in the gas marketing business reflecting structural headwinds; (ii) expenses for fair-valued commodity derivatives of €314 million lacking formal prerequisites to be accounted as hedges; (iii) risk provisions of €292 million in 2013.

The Gas & Power Division reported an adjusted net loss of €246 million, representing a decrease of €719 million compared to 2012, also due to reduced results from equity-accounted entities.

Follows a breakdown of the pro-forma adjusted EBITDA by business:

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization charges) on an adjusted basis is calculated by adding amortization and depreciation charges to adjusted operating profit, which is also modified to take into account the impact associated with certain derivatives instruments as detailed below. This performance indicator includes the adjusted EBITDA of Eni’s wholly owned subsidiaries and Eni’s share of adjusted EBITDA generated by certain associates which are accounted for under the equity method for IFRS purposes. Management believes that the EBITDA pro-forma adjusted is an important alternative measure to assess the performance of Eni’s Gas & Power Division, taking into account evidence that this Division is comparable to European utilities in the gas and power generation sector. This measure is provided in order to assist investors and financial analysts in assessing the divisional performance of Eni Gas & Power, as compared to its European peers, as EBITDA is widely used as the main performance indicator for utilities. The EBITDA pro-forma adjusted is a non-GAAP measure under IFRS.

In 2013, the Refining & Marketing Division reported an adjusted operating loss amounting to €482 million, a decline of €161 million compared to the previous year (down by 50.2%) due to plummeting refining margin in the Mediterranean area (the average Brent refining margin decreased to 2.64 $/bbl, down by 45.3% from 2012) reflecting weak demand for oil products, excess of capacity and growing competition from streams of products imported from Russia and Asia. Furthermore, Eni’s realized margins were impacted by narrowing differentials between the light and heavy crudes that negatively impacted the profitability of complex cycles. The negative scenario was partly counteracted by efficiency initiatives, in particular those aimed at reducing energy and operating costs and optimizing refinery utilization rates by reducing the throughput of less competitive plants.

Marketing results registered a decline compared to the previous year, due to lower consumption in retail sales.

Special charges excluded from adjusted operating loss amounted to €814 million, mainly related to impairment losses of refining plants due to the projection of unprofitable refining margins (€633 million), environmental charges (€93 million), and provisions for redundancy incentives (€91 million).

Adjusted net loss was €232 million, down €53 million from 2012 adjusted net loss of €179 million, mainly due to higher operating losses.

In 2013 the adjusted operating loss of €386 million improved by €97 million, or 20.1%, as the benchmark margin on cracking recovered from the particularly depressed level reported in the first half of 2012. This trend was offset by lower volumes due to weakness in commodity demand pressured by the economic downturn and increasing competition from Asian producers which left product margins and sales volumes at depressed levels.

Special charges excluded from adjusted operating loss of €126 million, related mainly to environmental provisions (€61 million), impairment of marginal business lines due to lack of profitability perspectives (€44 million), as well as to provisions for redundancy incentives (€23 million).

Adjusted net loss of €338 million improved by €57 million from the previous year.

In 2013, the Engineering & Construction segment registered a steep contraction in profitability with an adjusted operating loss of €84 million, compared to the operating profit of €1,474 million recorded in 2012. This negative trend was due to marketing and operating difficulties incurred in the first half of 2013 which led management to make sharply lower revision of margin estimates at certain large contracts for the construction of onshore industrial complexes and a slowdown in order acquisitions in Engineering & Construction Onshore and Offshore businesses.

The commercial arbitration with a Group’s subsidiary is ongoing relating to a change order as part of a project to build a gas plant in Algeria. It is worth mentioning that this issue, whichever the outcome, will not produce any impact on Eni’s consolidated results.

Special charges excluded from adjusted operating profit related mainly to the write-off of Saipem’s Perro Negro 6 drilling rig, following the accident which occurred in July 2013 (€107 million), more than offset by relating insurance gain.

The adjusted net loss of 2013 amounting to €253 million (down €1,364 million from the €1,111 million profit reported in 2012) is driven by the above mentioned estimate revisions.