Management's Discussion and Analysis
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DIRECTORS’ REPORT FOR THE YEAR ENDED 31 DECEMBER 2017 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS AND THE YEAR ENDED 31 DECEMBER 2017 Content Background .......................................................................................................................................................... 3 Nonrecurring and exceptional items ..................................................................................................................... 4 Key financial and operational results ................................................................................................................... 4 Segment information ............................................................................................................................................ 6 Executive overview .............................................................................................................................................. 7 Recent developments and outlook ................................................................................................................. 7 Results of Group operations for the three months and the year ended 31 December 2017 .................................. 8 Sales and other operating revenues on non-banking activities ...................................................................... 9 Costs and other deductions on non-banking activities................................................................................. 12 Other income/ (expenses) ............................................................................................................................ 15 EBITDA reconciliation ............................................................................................................................... 16 Credit ratings ...................................................................................................................................................... 16 Financial Condition Summary Information ........................................................................................................ 18 Liquidity and Capital Resources ........................................................................................................................ 18 Contractual obligations, other contingencies and off balance sheet arrangements ............................................. 20 Certain Macroeconomic and Other Factors Affecting the Group’s Results of Operations ................................ 22 Crude oil and refined products prices .......................................................................................................... 22 Inflation and foreign currency exchange rate fluctuations .......................................................................... 23 Taxation ....................................................................................................................................................... 24 Transportation of crude oil and refined products......................................................................................... 26 Critical accounting policies ................................................................................................................................ 27 Forward-looking statements ............................................................................................................................... 27 Corporate Governance Statement ....................................................................................................................... 28 2 PJSC TATNEFT MD&A for the three months and year ended 31 December 2017 The following discussion should be read in conjunction with the audited consolidated financial statements prepared in accordance with IFRS and the related notes, published simultaneously with this Management’s Discussion and Analysis of financial condition and results of operations (MD&A). This report includes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in the forward- looking statements as a result of numerous factors, including those discussed later in this MD&A. Words such as “believes,” “anticipates,” “expects,” “estimates,” “intends,” “plans,” etc. – that reflect management’s current estimates and beliefs, but are not guarantees of future results. Please see “Forward-looking statements” on page 25 for a discussion of some factors that could cause actual results to differ materially. For financial reporting purposes, Tatneft converts metric tonnes of crude oil to barrels using a conversion factor of 7.123. This factor represents a blend of varying conversion factors specific to each of Tatneft’s fields. Because the proportion of actual production by field varies from period to period, total reserves and production volumes for the Group in barrels converted from tonnes using the blended rate may differ from total reserves and production calculated on a field by field basis. Translations of cubic meters to cubic feet were made at the rate of 35.31 cubic feet per cubic meter. Translations of barrels of crude oil into barrels of oil equivalent (“BOE”) were made at the rate of 1 barrel per BOE and of cubic feet into BOE at the rate of 6 thousand cubic feet per BOE. Background PJSC Tatneft (the “Company”) and its subsidiaries (jointly referred to as the “Group” or “Tatneft”) is one of the largest vertically integrated oil companies in Russia in terms of crude oil production and proved oil reserves. The Company is a public joint-stock company organized under the laws of the Russian Federation with the headquarters located in City of Almetyevsk, Tatarstan. The principal business of the Group is to explore for, develop, produce and market crude oil and refined products. The Group is also involved in petrochemicals’, mainly tires, production and marketing, manufacturing of equipment for the production, treatment and refining of oil and gas, as well as engineering, procurement and construction services for oil, gas and petrochemical projects and, from the fourth quarter of 2016, in banking activities. As of 31 December 2017 and 2016 the government of Tatarstan controls approximately 36% of the Company’s voting stock. Tatarstan also holds a “Golden Share”, a special governmental right, in the Company. The exercise of its powers under the Golden Share enables the Tatarstan government to appoint one representative to the Board of Directors and one representative to the Revision Committee of the Company as well as to veto certain major decisions, including those relating to changes in the share capital, amendments to the Charter, liquidation or reorganization of the Company and “major” and “interested party” transactions as defined under Russian law. The Golden Share currently has an indefinite term. The majority of the Group’s crude oil and gas production, refining capacity and other operations are located in Tatarstan, a republic of the Russian Federation, situated between the Volga River and the Ural Mountains, approximately 750 kilometers southeast of Moscow. The Group currently holds most of the exploration and production licenses and produces substantially all its crude oil in Tatarstan. 3 PJSC TATNEFT MD&A for the three months and year ended 31 December 2017 Nonrecurring and exceptional items The following significant nonrecurring and exceptional one-off items impacted the Group’s results of operations for the year ended 31 December 2017 included in the Loss on impairments of property, plant and equipment and other assets in the Consolidated Statement of Profit or Loss and other Comprehensive Income of the Group (see p. 14): Loss on impairment of some loans initially issued by Bank ZENIT in the amount of RR 7,107 million, subsequently transferred under the cession agreements to other subsidiaries of the Group Loss on impairment of available-for-sale investments into closed mutual investment fund “AK BARS- Gorizont" in the amount RR 6,647 million, as a result of the revaluation by an independent appraiser the fair value of land plots held by the fund The following significant nonrecurring and exceptional one-off item impacted the Group’s results of operations for the year ended 31 December 2016: Loss from deconsolidation of several entities of the Group which were ceased to meet the power criteria for consolidation under IFRS 10 “Consolidated Financial Statements” and therefore were deconsolidated in the respective period due to ceasing of exercising control over those entities. That resulted in one-off non-cash loss on disposal in the amount of RR 8,745 million recorded within the section Gain/ (loss) on disposals of interests in subsidiaries and associates, net (see p. 15). 3 months ended 12 months ended 31 December 30 September 31 December 31 December (RR million) 2017 2017 2017 2016 Loss on impairment of some loans initially issued by Bank ZENIT 6,007 1,100 7,107 - Loss on impairment of available-for-sale investments into closed mutual investment fund “AK BARS- Gorizont" - 6,647 6,647 - Loss from deconsolidation of several entities of the Group (change in the Group structure) - - - 8,745 Total Nonrecurring and exceptional one-off items 6,007 7,747 13,754 8,745 4 PJSC TATNEFT MD&A for the three months and year ended 31 December 2017 Key financial and operational results 3 months ended Chg., 12 months ended Chg., 31 December 30 September % 31 December 31 December % 2017 2017 2017 2016 Financial