Investor presentation 2019 IFRS financial results
March 2020 CAUTIONARY STATEMENT 2
The information contained in this presentation has been This presentation does not constitute an offer to sell, or solicit prepared by the Company. The conclusions presented here are any offer of subscription to, or purchase of any securities. It is based on general information collected at the time of preparation hereby understood that no provision of this presentation shall of the material, and are subject to change without notice. The create the basis of any contract or obligation of any nature. Company relies on information obtained from sources that it The information contained in this presentation should not for any considers reliable; however, it does not guarantee its accuracy or purpose be relied upon as complete, accurate or impartial. The completeness. All indicators in this document are presented with information in this presentation is subject to review, finalization rounding, and therefore the sum of rounded indicators may differ and modification. The content of this presentation has not been from the rounded amount of actual indicators. verified by the Company. Accordingly, we did not and do not give These materials may contain statements regarding future events on behalf of the Company, its shareholders, directors, officers or and explanations representing a forecast of such events. Any employees, or any other persons, any assurances or guarantees, statements in these materials that are not a statement of whether expressed or implied, regarding the accuracy, historical facts are forward-looking statements, with known and completeness or objectivity of the information or opinions unknown risks, uncertainties and other factors, in connection contained herein. None of the directors of the Company, its with which our actual results, results and achievements may shareholders, officers or employees, or any other persons shall differ significantly from any future results, results or be liable for any losses of any kind that may be incurred as a achievements, reflected or implied by such forward-looking result of any use of this presentation or its content, or otherwise statements. The Company does not undertake any obligation to in conjunction with this presentation. update any forward-looking statements contained herein so that The English version of the presentation was translated from the they reflect actual results, changes in assumptions or changes in original version in Russian. In case of any discrepancies, the factors affecting such statements. version in Russian language has priority. COMPANY OVERVIEW 3
Global leader in oil transportation by pipelines Shares outstanding* 51.05 thousand kilometers of oil pipelines, 16.45 thousand Ordinary shares 5,694,468 78.55% kilometers of petroleum products pipelines, more than 24 million Preferred shares 1,554,875 21.45% cubic meters of storage tanks and over 500 pumping stations Total number of shares 7,249,343 Transportation of 83% of crude oil and 29% of light petroleum * Only preferred shares are traded. 100% of products produced in Russia ordinary shares are owned by the Russian Oil pipelines link major Russian oilfields with refineries and export Government. markets in Europe and Asia, either directly or through sea Preferred shares of Transneft are included in the terminals. Petroleum products pipelines link refineries with key tier 1 list of the Moscow Exchange. consumption centers, sea ports, and other domestic and export In accordance with Transneft’s Articles of Association, DPS per 1 preferred share may not be distribution markets less than DPS per 1 ordinary share.
A natural monopoly Credit Ratings Moody’s Baa2 / Stable The monopoly operator of Russian network of oil and petroleum products pipelines S&P ВВB- / Stable Tariffs for services of oil and petroleum products transportation RAEX ruAAA / Stable are set by the Federal Antimonopoly Service (FAS) of Russia KEY INFRASTRUCTURE ASSETS OF TRANSNEFT GROUP 4 Length, thousand km
Oil trunk pipelines 51.05
Petroleum products trunk 16.45 pipelines Diagnostics and replacement of pipelines, tkm Year Diagnostics Replacement 2018 41.5 1.02 2019 55.4 1.00 Plansfor replacement of pipelines in 2020-2024 At least 1 thousand km per year
*
* Classified as associate (7% - indirect ownership, 24% - held in trust by the Company) TABLE OF CONTENTS 5
01. RECENT DEVELOPMENTS
02. KEY OPERATING AND FINANCIAL RESULTS
03. OUTLOOK FOR 2020
04. NCSP GROUP DEVELOPMENT STRATEGY
05. KEY FACTORS OF INVESTMENT ATTRACTIVENESS
06. ENVIRONMENTAL, SOCIAL AND GOVERNANCE ASPECTS (ESG)
07. APPENDIX. SEGMENT BREAKDOWN OF KEY FINANCIAL RESULTS 01. Recent developments KEY EVENTS 7
2019 February Upgrade of Moody’s credit rating to Baa2, with Stable outlook April Incident involving the injection of organic chloride into Druzhba oil trunk pipeline resulted from unlawful activities of third parties Signing a contract on the sale of Novorossiysk Grain Terminal
June Crude oil transportation was restored in all directions
AGM decision on dividends. 51.2% of normalized consolidated 2018 net profit under IFRS were allocated to dividends (total amount of dividends – RUB 77.6 bln)
July Connection of Komsomolsk refinery to the ESPO pipeline system
September Commissioning of the plant for manufacturing drag reducing agents in the Alabuga Special Economic Zone (the Republic of Tatarstan, Russia)
November Completion of the expansion of the ESPO pipeline system to its maximum capacity
December Approval of Development Strategy for NSCP (entity controlled by Transneft)
2020 February Moody’s and S&P reaffirmed credit ratings for Transneft with a Stable outlook
AGM – Annual General Meeting ESPO – East Siberia – Pacific Ocean SETTLING THE INCIDENT AT THE DRUZHBA OIL PIPELINE 8 MEASURES TAKEN: on the operation side Crude oil transportation resumed at all of the directions Transneft completed the Road Map of the Incident Recovery signed with the Belarus party and completed transportation of nonconforming crude oil out of Belarus Crude oil quality control for organic chloride contents upgraded to a daily procedure on settling the consequences of the incident with shippers (Russian oil companies) On 24 July 2019, Transneft’s Board of Directors approved the compensation procedure for shippers’ losses caused by unlawful actions of third parties resulting in the ingress of nonconforming crude oil into the system and agreed on a payment cap for shippers under oil transportation services contracts on the basis of USD 15 per 1 bbl of nonconforming crude on condition that shippers provide documentary proof of material losses Within the framework of agreements on out-of-court settling of the consequences of the incident, payments were made to the shippers in the amount of RUB 8.2 bln (including RUB 3.3 bln in Q4 2019 and RUB 4.9 bln in Q1 2020). on evaluation of the damage caused by the incident for Transneft and its disclosure in financial statements The IFRS financial statements of Transneft PJSC for 2019 contain the provision for settlement of the consequences of the incident with shippers within the framework of signed contracts for the provision of oil transportation services for 2019, subject to documentary justification of their losses and confirmation of the relevant negative consequences and their size on the legislation improvement side Transneft prepared proposals on measures required for increasing of the quality control over crude oil delivered for transportation to Transneft pipeline system. Transneft’s proposals have been submitted to the Government of the Russian Federation, the Ministry of Energy, the Ministry of Economic Development and other interested authorities and organizations 02. Key operating and financial results KEY FINANCIAL RESULTS 10
4Q19 4Q18 YoY 2019 2018 YoY
RUB bln
Revenue 271 264 ▲3% 1,064 980 ▲9%
EBITDA* 110 119 ▼8% 486 433 ▲12%
Profit attributable to shareholders of Transneft 35 53 ▼34% 179 224 ▼20%
Operating cash flow 127 123 ▲3% 361 346 ▲4%
(minus) CAPEX** -82 -76 ▲8% -268 -268 ►0
Free cash flow 45 47 ▼4% 93 78 ▲19%
Total debt at the end of the period 637 673 ▼5% 637 673 ▼5%
* Less crude oil sale and purchase operations under contracts with Rosneft and China National United Oil Corporation ** Purchase of property, plant and equipment adjusted for proceeds from sale of property, plant and equipment Key financial results breakdown by Transneft segment and NCSP segment are provided in the appendix (section 7 in the presentation) IMPACT OF NCSP SEGMENT ON TRANSNEFT’S FINANCIALS 11
NCSP consolidation 2018* 2019 . In September 2018 Transneft Key indicators, NCSP Transneft Share of NCSP Transneft Share of Group obtained control over RUB bln segment Group NCSP segment segment Group NCSP segment NCSP PJSC as the result of shares acquisitioning Revenue 15.9 980.0 1.6% 56.1 1,063.8 5.3% . The financial results of NCSP and its subsidiaries have been recognized in the consolidated 2.4% 8.2% figures of the Group starting EBITDA 10.2 433.4 40.0 486.3 from the end of 3Q 2018
. Before obtaining control over Profit attributable to NCSP Group, its share of profit 1.6 224.3 0.7% 23.9 179.4 13.3% shareholders of Transneft in Transneft Group profit was recognized in share of profit from associates and jointly Free cash flow 5.0 78.2 6.4% 18.5 93.0 19.9% controlled entities . In 2Q 2019 NCSP Group sold 99.9968% share in Total debt 69.7 673.0 10.4% 49.9 637.4 7.8% Novorossiysk Grain Terminal at the end of the year (NGT), the terminal carries out transshipment of grain and oil seeds * Figures of NCSP Group for the year 2018 are disclosed starting from the end of 3Q 2018 - the date of its acquisition by Transneft Group NCSP segment includes NCSP PJSC and its subsidiaries. The segment is presented for analytical purposes in addition to segment information disclosed in the IFRS financial statements ANALYSIS OF OIL AND PETROLEUM PRODUCTS TURNOVER 12 Oil turnover, mln tonnes Petroleum products turnover, mln tonnes
27.0% 28.0% 52.0% 50.7%
Domestic market 480.0 +1.0% 485.0 39.2 -3.3% 37.9 MLN TONS MLN TONS MLN TONS MLN TONS Export
48.0% 49.3% 73.0% 72.0%
2018 2019 2018 2019
In 2019 In 2019 Transneft Group transported Transneft Group transported 83 % of oil produced in Russia 29 % of light petroleum products produced in Russia Allocation of oil deliveries by export Petroleum products intake and exports, 2019, mln tonnes destinations in 2019, mln tonnes
Oil export to China Intake of Oil export beyond petroleum products by type the CIS by destination 10 via Kazakhstan Export of petroleum products 220 30 Russia/China border 2.6 via sea ports 2.2 40 2.3 Vysotsk 42 Oil export Jet Kero 4.9 Gasoline Novorossiysk via sea ports 33.2 Gas oil 13.5 Primorsk 138 26 Ust-Luga 33 Kozmino China 31 Novorossiysk Druzhba PS 48 Primorsk Sea ports NCSP GROUP OPERATING RESULTS 13
The normalized* cargo turnover of NCSP Group for the 12 months of NCSP Group structure of 2019/2018 (with the sale of NGT LLC taken into account), thsd tonnes cargo turnover Other cargo categories Change 2018 2019 thsd tonnes % 4.6% 4.2% Containers Cargo turnover, total 132,193 142,500 10,307 7.8% General cargo 11.3% 9.1% Liquid cargo, total 100,541 114,377 13,836 13.8% 6.3% Bulk cargo Crude oil 66,229 78,562 12,333 18.6% 7.5% Petroleum products 33,243 34,690 1,447 4.4% Other 1,069 1,125 56 5.2% 24.3% Petroleum Bulk cargo, total 9,899 8,986 -913 -9.2% 25.1% products Grain 4,800 2,633 -2,167 -45.2% Iron ore 2,473 3,019 546 22.1% Coal 1,444 1,755 311 21.5% Other 1,182 1,579 397 33.6 General cargo, total 14,965 12,983 -1,982 -13.2% Ferrous metals 13,471 11,523 -1,948 -14.5% 55.1% Crude oil 50.1% Other 1,494 1,460 -34 -2.3% Containers 6,121 5,951 -170 -2.8% Containers 6,121 5,951 -170 -2.8% Containers, thsd TEU 620 638 18 2.9% Other cargo 667 203 -464 -69.6% 2018 2019
* The grain turnover through NGT LLC and Berth No. 3 from May 1, 2018 to December 31, 2018 are not taken into account in the transshipment volume TARIFF REGULATION 14
. The tariffs for Transneft oil transportation services are set on Indexation of Transneft’s tariffs for oil transportation the territory of Russia by the state regulatory authority – the services, % * Federal Antimonopoly Service (FAS) and are denominated in rubles
. The company annually submits to the state regulator 6.75% information about its upcoming expenses and investment 5.50% 5.76% 3.6% 3.95% 3.87% 3.42% program for determining tariffs for the next year
from 11/2012 from 01/2015 from 01/2016 from 01/2017 from 01/2018 from 01/2019 from 01/2020 . In accordance with Transneft’s Strategy, the growth of tariffs for oil transportation services shall not exceed the rate of inflation * Tariff growth rates denominated in roubles Average per-unit oil transportation tariff of Transneft compared to foreign peers (as of December 31, 2019)
USD/100 tkm 4 JANAF (Croatia) 3.42 MERO (the Czech Republic) Caspian Pipeline Consortium 2.87 3 2.73 2.55 Transnafta (the Republic of Serbia) Transpetrol (Slovakia) KazTransOil (Kazakhstan) 2 1.69 Ukrtransnafta (Ukraine) 1.40 1.36 1.35 Median 1.38 MOL (Hungary) 1.05 0.95 1 0.89 0.84 Przyjaźń (Poland) TAL Pipeline (Italy, Austria, Germany) Transneft (Russia) 0 Gomeltransneft Druzhba (Belarus) ANALYSIS OF TRANSNEFT GROUP REVENUE 15
Revenue structure for 2019, % Factor analysis of changes in revenue of Transneft Group, RUB bln
+38.5 +11.1 17.6% +51.5 1,063.8 980.0 -3.9 -13.4
4.9%
5.0% 1,063.8 RUB BLN 6.4%
66.1% +8.6%
Revenue Oil Petroleum Stevedoring, Export sales of Other Revenue 2018 transportation products additional port crude oil revenue** 2019 Oil transportation services transportation services and fleet services* Petroleum products transportation services
Stevedoring, additional port services and fleet services* * Starting from the end of 3Q 2018 Transneft Group consolidates NCSP segment results ** Other revenue includes revenue from domestic oil sales and petroleum products sales, from oil compounding services, oil and Export sales of crude oil petroleum products storage services, communication services, diagnostic services, construction services, services of technological connection to pipeline system, information services related to oil transportation, rent services, resale of goods, organisation of Other revenue** transporting of cargos, revenue from provision of other services FACTOR ANALYSIS OF TRANSNEFT GROUP EBITDA DYNAMICS, RUB BLN 16
+11.1 +38.5 +2.5 -18.1 +47.6 -10.1 486.3 -18.7 433.4
+12.2%
EBITDA Revenue from oil and Revenue from Other revenue Transneft segment NCSP segment Inter-segment Operating expenses EBITDA 2018 petroleum products stevedoring, operating expenses operating expenses transactions in inflation 2019 transportation additional port services (inflated) (inflated)* operating expenses services and fleet services* (inflated)
* Starting from the end of 3Q 2018 Transneft Group consolidates NCSP segment results FACTOR ANALYSIS OF TRANSNEFT GROUP OPERATING EXPENSES* DYNAMICS, RUB BLN 17
+1.7 +20.2 +1.4 +6.8 390.7 365.0 +1.0 -1.9 -3.6
+7.0%
Operating expenses Salaries, insurance Pension Materials Cost of domestic Cost of Taxes (other than Other operating Operating expenses 2018 contributions and expense oil and other goods income tax) expenses 2019 (inflated to 2019) social expenses petroleum for resale sold products sales
* Nеt of export crude oil sales, depreciation and amortisation. The inflation rates used are based on the prepared by the Ministry of Economic Development forecast of social-economic development of the Russian Federation for 2020 and forecast periods of 2021 and 2022 OPEX AND ITS OPTIMIZATION 18
Structure of oil transportation unit costs Structure of petroleum products transportation unit costs 2018 2019 2018 2019 Petroleum products volume Oil turnover, bln tkm -3.3% 1 217.4 +2.5% 1 247.6 turnover, mln tonnes 39.2 37.9
Operating unit costs, Operating unit costs, RUB per 100 tkm 19.95 +0.5% 20.04 RUB per 100 tonnes 790.45 -13.7% 682.49
Salaries, insurance contributions Salaries, insurance contributions 32.4% 33.2% and social expenses and social expenses 37.1% 35.4%
Security services 7.1% 7.2% Security services 12.5% Telecommunication services 12.4% 11.7% 13.0% Telecommunication services 6.5% 8.4% Fuel and energy resources 20.7% 20.9% Fuel and energy resources 10.0% 10.0%
Operating, maintenance 20.7% 23.0% Operating, maintenance 17.2% 17.2% and diagnostics costs and diagnostics costs Other 10.2% 9.8% Other 12.7% 10.7%
2018 2019 2018 2019 (inflated to 2019) (inflated to 2019)
For more than 10 years Transneft has been actively working to control operating costs in the company’s main business lines Unit costs are calculated using operating expenses indicator based on aggregated RAS data (excluding depreciation, tax expenses and new facilities expenditure) which considers the previous year data adjusted for conditions of the reporting period ANALYSIS OF CHANGES IN PROFIT GENERATED BY TRANSNEFT GROUP, RUB BLN 19
+24.6 +9.4 224.3 +5.8 -22.0 -23.3
-25.4 +22.3 +1.9 179.4
-26.1 +0.8 -13.1
Transneft segment
-20.0%
Profit attributable EBITDA Depreciation and Income tax Net finance Share of results Fair value Provision for Other income/ Non-controlling Factors related to Inter-segment Profit attributable to shareholders of amortisation expense costs from associates revaluation reimbursement to expenses, net interests NCSP segment** transactions to shareholders of Transneft and jointly of NCSP share consignors of Transneft 2018 controlled entities at the date material losses* 2019 of acquisition
* Provision presents the management’s estimate of probable expenditure for settlement of the incident related to the ingress of oil not complying with the GOST standards into the Druzhba oil trunk pipeline in April 2019 ** Factors related to NCSP segment includes EBITDA in the amount of RUB 29.8 billion, profit from disposal of NGT LLC in the amount of RUB 16.2 billion, income tax expense in the amount of RUB 4.8 billion, non-controlling interests in the amount of RUB 17.8 billion and other items ANALYSIS OF CASH FLOW GENERATED BY TRANSNEFT GROUP, RUB BLN 20
361.2
+44.7
93.0 -268.2 +7.4 -71.4
-82.9 -3.5 -12.7 Operating CAPEX Free Proceeds from Repayment of Received Paid out Other investment Net cash flow cash flow loans and loans and dividends dividends* and financing cash flow 2019 2019 borrowings borrowings activities 2019
Transneft Group 361.2 -268.2 93.0 +44.7 -71.4 +7.4 -82.9 -3.5 -12.7
Transneft segment 337.1 -263.2 73.9 +44.7 -58.7 +15.1 -77.6 -25.5 -28.1
NCSP segment 23.6 -5.1 18.5 - -12.7 - -13.1 +22.6 15.4 Inter-segment 0.5 - 0.6 - - -7.7 +7.7 -0.6 - transactions
* Including dividends paid out to non-controlling interests KEY DEBT METRICS OF TRANSNEFT GROUP 21
Debt breakdown by maturity*, RUB bln Total debt / EBITDA ** 2 1.8 1.6 1.4 1.2
270.0 1 0.8 87.7 1.4 1.4 1.4 1.3 1.3 75.6 72.0 0.6 65.6 65.6 0.4 0.2 0 2020 2021 2022 2023 2024 2025 - 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019 2028
Cost of debt (weighted-average rates), % FX structure of principal debt*,%
8.29 8.29 8.28 7.87 7.85 6.78 6.60 6.38 6.05 5.83 88% 89% 90% 89% 91% RUB debt Russian ruble FX debt US dollar*** 12% 11% 10% 11% 9% 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019
* Net of IFRS adjustments ** EBITDA in the ratio is calculated for the last 12 months before the reporting date including the figures of NCSP Group *** Foreign currency debt formed due to the consolidation of NCSP Group 03. Outlook for 2020 KEY PRODUCTION AND FINANCIAL METRICS 23 Oil volume turnover, bln tkm Transportation turnover, mln tonnes
1,247.6 1,255.2 523 528 38 39
485 489
2019 2020E 2019 2020E Oil transportation Petroleum products transportation
Planned for 2020, allocation of deliveries to Revenue, RUB bln export and domestic market, % 1,064 1,082
277 47% 26% 292 68 76 (*)
OIL PETROLEUM 53% PRODUCTS 703 730
74% Export 2019 2020E Domestic market Oil transportation Petroleum products transportation Other
* Starting from 2020, revenue of Novorossiysk Fuel Oil Terminal LLC is included CAPEX ANALYSIS OF TRANSNEFT GROUP (EXCL. NCSP GROUP) 24
CAPEX, RUB bln Structure of CAPEX into technical upgrading and revamping, %
Linear Mechanical- Technical upgrading Period New projects Period sections of Storage tanks process and Other* and revamping pipelines power equipment
2018 63.8 194.8 2018 44% 13% 18% 25% 2019 38.1 244.5 2019 52% 14% 16% 18% 2020 (plan) 3.6 236.8 2020 г. (plan) 48% 12% 19% 21% 2021–2024 (plan) 8.8 917.5 2021-2024 (plan) 49% 9% 21% 21% 2019 New projects: over 80% of new projects CAPEX was allocated for the ESPO expansion, the rest is planned for the projects of the Reconstruction of Trunk Oil Pipelines for Oil Transportation to the Refineries of Krasnodar Territory, the Development of a Corporate Data Network for Building a Unified Information System of Transneft and other projects.
Technical upgrading and revamping: sectional replacement of 1,002 km of trunk pipelines, construction and reconstruction of 80 tanks and other activities
2020 New projects: about 70% of new projects CAPEX is planned for development of a Corporate Data Network aimed to establish a (plan) Unified Information System of Transneft and paying off accounts payable for the facilities related to the ESPO expansion, the rest is planned for the reconstruction of Trunk Pipelines for oil transportation to Krasnodar Territory refineries and other projects
Technical upgrading and revamping: sectional replacement of 1,005 km of trunk pipelines, construction and reconstruction of 75 tanks and other activities
* Automated control systems for technology of production, oil quality measurement systems, etc. RESILIENCE DURING PERIODS OF INSTABILITY 25 Business strength Most of Transneft PJSC clients are large Russian oil and gas companies The main part of revenue is received at regulated tariffs denominated in rubles, indexed within the limits of inflation The prevailing part of operating expenses and capital expenditures is denominated in rubles Since the beginning of 2020 oil transportation to key export destinations has been carried out in full Financial stability High level of financial stability (total debt / EBITDA 1.3), sufficient liquid assets A balanced currency position. The share of FX-nominated debt in total debt is 9% (belonging to NCSP PJSC). The amount of foreign currency assets exceeds the amount of foreign currency liabilities Additional security measures in connection with the COVID-19 coronavirus pandemic Strengthening of sanitary control at Transneft Group facilities Daily monitoring of the health status of employees and compliance with the self-isolation regime (when required by appropriate regulations or resulted from medical examination) Transferring employees who are not directly involved in operational activities to remote work Extending the duration of shifts Suspension of employees' business trips to the regions of the Russian Federation and abroad Oil fields
Port
04. NCSP Group Development Strategy MARKET POSITION OF NCSP GROUP 27
Leader in cargo turnover Cargo turnover of largest
• Ranking 3rd among the largest ports European ports, MMT St. Petersburg Port of Primorsk 0 200 400 600 Hamburg Kaliningrad Port of of Europe Rotterdam Antwerp Baltiysk MarseilleConstanta Rotterdam 469 Novorossiysk • the largest port operator in Russia 469 Valencia Busan * Haifa Tokyo 17% of the total cargo turnover 235 Algeria Port Said Shanghai Antwerp Dubai 238 Hong Mumbai Calcutta of Russian ports Kong NCSP Group Dakar * 132 31% of the Russian Azov-Black (normalized)** 143 Douala Colomb Singapor Mombasa o Sea basin turnover Hamburg 135 e 137 2018 Djakarta 22%* of the Russian Baltic 2019 Lobito Algeciras 107 109 Brisban turnover Cape Town e Perth Adelaide Access to key markets of freight Sydney export, import and transit: Cargo turnover of the largest Market share of NCSP Group in cargo • Baltic Sea basin: Russian ports, MMT turnover at Russian seaports in 2019 - North-West Europe, 0 30 60 90 120 150 0% 50% 100% - North America NCSP Group 132 Cargo turnover, total 17% (142.5 MMT) • Azov-Black Sea basin: (normalized)** 143 Ferrous metals 43% (11.5 MMT) - Mediterranean Ust-Luga 99 104 - India Iron ore raw materials 34% (3.0 MMT) Vostochniy 69 - South-East Asia 74 Crude oil 28% (78.6 MMT) - Middle East Murmansk 61 62 Petroleum products 23% (34.7 MMT) - Africa 2018 Saint-Petersburg 59 Containers 11% (6 MMT) - Central and South America 60 2019 NCSP Group Other ports Only major cargo categories represented * In 2019 ** Normalized indicators of NCSP Group's cargo turnover for 2018-2019: the grain turnover through NGT LLC and Berth No. 3 from May 1, 2018 to December 31, 2018 are not taken into account in the transshipment volume STRATEGIC POSITION OF NCSP GROUP 28
NCSP Group is the leading Russian stevedore As a provider of universal dry cargo handling NCSP Group is in the field of oil and petroleum products essential for exporters of a wide range of high-value-added handling, providing export of Russian energy products. No other port facilities have been created for such products exports in the Russian Federation. Otherwise due to insufficient volumes of cargo flow the exporters cannot create their own port handling facilities
UNIQUE VALUES CREATED BY NCSP GROUP FOR ITS CLIENTS:
The infrastructure allowing to handle nearly any cargo giving clients an opportunity to expand the range of exported goods to the world market
A wide range of shiploads available for handling provides possibilities for fleet costs optimization
The ability to accumulate shiploads and load containers from the port warehouse ensures the flexible client’s adjustment to the trading conjuncture
Possibility of delivering goods to the port by road, rail, pipeline and coastal fleet
Availability & accessibility to port infrastructure facilities with equal conditions to all clients
A huge and diverse fleet of handling equipment provides a selection of technological solutions for specific cargoes
A wide range of advanced cargo handling options STRATEGY OF NCSP GROUP 29
VERSATILITY abandonment of the single- purpose approach in favor of a broad range of cargoes MICRO-SPECIALIZATION “One company – tailoring general capacities to all solutions” handle particular cargoes Satisfying the multitude of clients’ needs in ALL TYPES OF PORT CARGO- stevedoring services with respect to their HANDLING SERVICES particularities* All kinds of stevedore services for all types of clients’ cargoes
EQUAL ACCESS port capacities are equally accessible for all clients
PORT-AGGREGATOR aggregating small cargo flows in order to boost capacities
* NCSP Group transships more than 80 freight items for 300 customers NCSP GROUP INVESTMENT PROGRAMME UNTIL 2029 (1/2) 30 MAJOR CARGOES BY 2024 ORES, HOT-BRIQUETTED IRON, CRUDE OIL IRON ORE RAW MATERIALS PETROLEUM PRODUCTS MINERAL FERTILIZERS COAL, PETROLEUM COKE CONTAINERS FERROUS METALS NICHE FREIGHT TURNOVER
MAJOR INVESTMENT PROJECTS*: DRY BULK AND GENERAL CARGOES TERMINAL CONTAINER TERMINAL AT THE PORT OF NOVOROSSIYSK (on the territory of JSC Novorossiysk Shiprepair Yard) Capacity – 1 mln TEU / year Waterfront > 1 km Capacity – 12 mln tonnes / year Waterfront > 1 km Post Panamax and New Panamax Rear warehouse and sites for Capesize handling Car dumpers for bulk cargoes containerization and decontainerization handling Draft up to 18 m Careful transshipment Draft up to 15.6 m Automation High level of services
MINERAL FERTILIZERS TERMINAL VEGETABLE OILS TERMINAL Capacity – 5 mln tonnes / year Waterfront > 0.5 km Capacity – 2.4 mln tonnes / year Separated oil storing Post Panamax handling Possibility for containerization and Handling of vessels with deadweight up to 50 thsd tonnes 300 thousand tonnes warehouse loading into big bags
* Investment decisions on each of the projects will be made on an individual basis in the framework of updating the Long-Term Development Programme and consideration of business plans NCSP GROUP INVESTMENT PROGRAMME UNTIL 2029 (2/2) 31
The basic scenario envisages development within the port of Novorossiysk INVESTMENTS, ₽ 108.4 bln CAPACITY Technical upgrading and revamping of existing GROWTH capacities 63.3 bln Business projects 45.1 bln +21.8 MMT
FINANCIAL MODEL ASSUMPTIONS Stable positive NPV of projects in sensitivity analysis
IRR on projects over 19%
The Group’s revenue CAGR over 6% per year till 2029
Dividends not less than 50% of the previous period’s net profit according to IFRS. The volume of free cash flow will be considered among other factors in decision-making process for dividends calculation
ADDITIONAL GROWTH FACTORS
AUXILIARY FLEET ADDITIONAL SERVICES SHIP REPAIR tug boats, fuel vessels, passenger launches, containerization and emergency repair, regular repair, environmental fleet, fire-fighting vessels packaging examination 05. Key factors of investment attractiveness PREFERRED SHARES OF TRANSNEFT: KEY FEATURES 33
Ordinary shares of Preferred shares of Comparative analysis Transneft Transneft Voting rights √ - The presence of a shareholder holding 100% of ordinary √ √ shares Dividends linked to IFRS net profit √ √ DPS not lower than DPS per ordinary share - √ Liquidity - √
In case of Daily average Transneft preferred shares turnover Moscow Exchange, RUB mln (as of 03/16/2020) - the presence of a shareholder holding 100% of ordinary shares 400 - dividends linked to IFRS net profit
- DPS per preferred share not lower than DPS per ordinary share 200 - comprehensive disclosure requirements in accordance with the Code of
Corporate Conduct 0 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 preferred shares of Transneft are a close alternative to ordinary shares. Daily average Transneft preferred shares turnover was equal to RUB 246 mln in 2019 and RUB 290 mln since the beginning of 2020 EU AND US FINANCIAL SANCTIONS HAVE LIMITED EFFECT ON TRANSNEFT GROUP 34
SUBJECT IMPACT ON THE GROUP
US OFAC Directive 2 under Executive Order 13662:
Activities prohibited for US person or within the US – NEUTRAL for reasons: issuance of a new debt on or after November 28, 2017, all transactions in, provision of, financing for, and other 1) Moderate level of debt burden and high dealings in in such new debt with a maturity exceeding degree of financial stability Transneft 60 days 2) Sustainably positive free cash flow Group (RUB 78 bln in 2018 and RUB 93 bln in 2019) Council Regulation (EU) No 960/2014, Article 5 (2) (b): 3) No need to attract equity financing or Restrictions on debt and equity financing if issued after debt financing on foreign markets September 12, 2014 with a maturity exceeding 30 days
Sanctions do not restrict investors’ opportunity to purchase Transneft preferred equity, as well as NCSP equity DIVIDENDS AND KEY FINANCIAL RESULTS 35
Profit for the reporting period, capital Dividends on preferred shares (RUB per share) expenditures, free cash flow and dividends and dividend payout ratio
400 14,000 11,454 60% 51.2%
50% % 12,000 50% OF NORMALIZED PROFIT 233 225 184 192 197 200 10,000 158 143 40% 100 78 93 7 578 60 8,000 (**) 30% 20 6 21 6,000 0 SHARE PER RUB 18% 10,706 -5 -8 -3 -13 -2 20%
-38 -31 4,000 . -82.5 -77.6 8.9% 10% 2,000 5.0% 5.0% 4,296 3,875
-200 2.6% DIVIDENDS,
RUB BLN RUB -197 -223 0 685 724 758 823 0% -268 -268 2012 2013 2014 2015 2016 2017 2018 -311 -323 -320 -306 -400 4.9 7.9 2.9 12.8 30.6 82.5 77.6 2012 2013 2014 2015 2016 2017 2018 2019 Profit for the reporting period (including non-controlling interests) Interim dividend, RUB per 1 pref. share, for relevant year Capital expenditures Annual dividend, RUB per 1 pref. share, for relevant year Free cash flow Transneft PJSC dividend payments, RUB bln, for relevant year Total Transneft PJSC dividend payments, for relevant year* Payout ratio for all types of shares, % of normalized profit under IFRS*, right axis
To form a recommendation on dividends, profit is normalized on key non-monetary items
* In 2012-2015 dividends were calculated as a share of Transneft PJSC profit under RAS ** Final dividend for the year 2017 INVESTMENT CASE 36
• Unique assets and market position. One of the largest infrastructure companies in Russia and in the world. We transport 83% of Russian crude and 29% of light petroleum products. In terms of key metrics* Transneft is among the most efficient pipeline operators in the world • Transformation from an exclusively pipeline company to an integrated infrastructure player. With the consolidation of control over Novorossiysk Commercial Sea Port in 2018, Transneft in addition to control over the pipeline business became #1 port operator in Russia and one of the largest port operators in Europe • Increase of dividends. In 2019, the Company completed its pipeline system expansion program, and shifted focus on maintenance for the 2020-2024 period. For the year of 2018 Transneft has paid out more than 50% of normalized IFRS net income in the form of dividends (DY over 7%, covered by FCF) • Improvement in corporate governance and investor relations. This includes approval of Corporate Governance code, improvements in transparency and establishment of the dialogue with analysts and investors. Starting from 2017, the adjustments to the Articles of Association were introduced pegging DPS on prefs to DPS on ords • Value creation potential. Current discounts to peers – 70-80% to pipeline companies. The company focuses on further improvement of efficiency and cost control, increase of free cash flow, integration and development of acquired assets • A low-beta stock. Transneft beta according to Bloomberg is 0.4-0.6 in the last 5 years
* Including metrics related to operational efficiency and safety FCF – free cash flow, DY – dividend yield, DPS – dividend per share Environmental, social and 06. corporate governance aspects (ESG) 2019 ESG RESULTS AND PLANS FOR 2020 38
As part of the efforts to improve the sustainable development indicators including Sustainability Ratings Growth corporate governance improvement, the following actions were implemented in 2019: Board of Directors: The number of independent directors represented in the Committee on Strategy, In 2019, two ESG agencies, Investments and Innovation increased from 1 to 2 Sustainalytics and RA Expert, raised On 20 September 2019, the Transneft Board of Directors approved the Corporate Transneft ratings Governance Code in accordance with the Corporate Governance Code recommended by the Bank of Russia. The document is published on the In January 2020, Company's website in Russian and English ISS agency raised the Communication with Investors: Company's rating Sustainability dialog was organized between the Company’s management, investor relations officers and members of the investor community. A series of meetings PLANS FOR 2020 with investors in countries of mainland Europe was held with the participation of an independent member of the Board of Directors Mr. Alexander Korsik During these meetings, participants actively discussed sustainable development . Transneft plans to continue active issues, including investors' proposals on ESG activities improvements in corporate practices, disclosing of information in the field of Information Disclosure ESG, and to further develop a dialogue Sustainable Development Report based on GRI standards issued (since 2016) with investors and ESG agencies on these Transneft Anti-Corruption Policy and Ethics and Professional Conduct Code were issues published on the Company’s website . In the area of corporate governance, an Information on ESG topics was included in the presentation for investors published external assessment of the Board of on the Company's website Directors is planned to be held in 2020 COMMUNICATION WITH ESG AGENCIES 39
Key ESG agencies The activities of COMMUNICATIONS covering Transneft Transneft Group are analyzed in detail by the largest and well-known ESG data ESG agencies disclosure
Transneft group ESG rating provides data and disclosures to ESG methodology agencies subject to discussion current Russian non- financial disclosure Analytical comments on regulation ESG reports The Company maintains an active Comments to agencies on communication with ESG agencies controversial events covered in the media BOARD OF DIRECTORS 40
Alexander Novak Minister of Energy of the Russian Federation Chairman of the Board of Directors of Transneft
Matthias Warnig Maxim Sokolov CEO of Nord Stream 2 AG (Switzerland) Vice-Governor of Saint-Petersburg 2012-2018 – Minister of Transport of the Russian Federation
Kirill Dmitriev Nikolay Tokarev CEO of Russian Direct Investment Fund Chairman of the Management Board, President of Transneft
Ilya Klebanov Valery Shantsev Member of the Board of Directors of Sovcomflot In 2005-2017 Governor of the Nizhny Novgorod Region In 2003-2011, Plenipotentiary Representative of the President of the Russian Federation to the North-Western Federal District Independent director Genadii Shmal Alexander Korsik President of the Union of Oil and Gas Producers of Russia President and Management Board Chairman of Bashneft Independent director (From April 2011 till October 2016) Independent director 1 ൗ3 of the Board of Directors are independent directors
Additional information is available at: https://en.transneft.ru/about/management/board-directors/ BOARD OF DIRECTORS COMMITTEES 41 Human Resources and Committee on Strategy, Audit Committee Investment, and Innovation Remuneration Committee Kirill Dmitriev 100% of independent directors 100% of independent directors Head of Сommittee on Strategy, Investment, and Innovation Ilya Klebanov Alexander Korsik Head of Audit Сommittee Head of Human Resources and Remuneration Matthias Warnig Independent director Committee Independent director
Alexander Korsik* Alexander Korsik Ilya Klebanov Independent director Independent director Independent director
Maxim Sokolov Genadii Shmal Genadii Shmal Independent director Independent director Nikolay Tokarev
Valery Shantsev
Genadii Shmal Independent director
* Since July, 2019 Additional information is available at: https://en.transneft.ru/about/management/board-directors/457/ MANAGEMENT BOARD 42
Nikolay Tokarev Chairman of the Management Board President of Transneft
Maksim Grishanin Boris Korol Vyacheslav Skvortsov First Vice-President Vice-President Vice-President
Sergey Andronov Mikhail Margelov Rashid Sharipov Vice-President Vice-President Vice-President
Larisa Kalanda Pavel Revel-Muroz Sergey Shotsky Vice-President Vice-President Vice-President
Additional information is available at: https://en.transneft.ru/about/management/board/ ECOLOGY AND ENVIRONMENTAL PROTECTION 43
Transneft sets the task of environment protection and Oil vapor recovery unit ensuring high level of environmental safety of operating facilities as its utmost and unchangeable priority. Transneft is applying the uniform Policy of Labour, Industrial, Environmental Safety and Energy Efficiency. The Environmental Management System (EMS) is developed, adopted and is constantly being improved. Measures undertaken by the Company:
ecological monitoring Specific emissions of air Discharge of insufficiently treated pollutants*, kg/tonne wastewater, thsd cubic m additional biomonitoring of marine areas reducing specific emissions of air pollutants 0.153 precluding discharge of insufficiently treated 0.1514 114 -3% 110 -3% wastewater into water basins 107 implementing biodiversity programs within the 0.14102 -100% areas of Transneft Group operation
0
2017 2018 2019 2017 2018 2019 2020E * target indicator decrease in 2020 – 1%, in 2021 – 0,7% ENVIRONMENTAL MANAGEMENT SYSTEM 44
As of today, the Environmental Management System (EMS) is developed, adopted and certified in the Company. Back in 2004, Transneft subsidiaries were certified internationally for the compliance with ISO 14001 standard. Annual audits to confirm the EMS compliance with the requirements of the ISO 14001 international environmental standard are conducted in Transneft subsidiaries. Within 2019, EMS audits were conducted in Transneft PJSC and 27 Transneft subsidiaries. The audits’ results confirmed the EMS compliance with the requirements of ISO 14001:2015. ENVIRONMENTAL CONTROL SYSTEM 45
All industrial facilities of the Company established an efficient system of industrial environmental control for atmospheric air, water and soil. The control is carried out by 53 ecology analysis laboratories certified by the Federal Service for Accreditation (Rosaccreditation). The labs are manned with highly qualified specialists and equipped with modern analytical equipment. Environmental and analytical control is carried out in accordance with schedules agreed with regulatory authorities. Implementation of measures for construction and revamping of environmental facilities and procurement of environmental equipment ensures that Transneft production facilities comply with international agreements of the Russian Federation, legislative requirements of the Russian Federation, standards and rules in the field of environmental management, protection and safety. ENERGY SAVING 46
Specific consumption Parameters for Transneft’s Energy Saving and Energy LED lighting (in 2018) Efficiency Enhancement Program for 2019 – 2024 Electricity are: kWh / th. tkm rate of reducing specific electricity consumption Max 31.4 for crude oil and petroleum products transportation, transshipment, intake, loading, 16.4 11.4 unloading and delivery Min 7.4 rate of reducing consumption of energy resources (boiler and furnace fuels, thermal energy, electricity, fuels and lubricants) by the Company’s All energy resources internal processes related to the provision of Solar panels toe / mln. tkm services of oil and petroleum products Max 5.2 transportation via trunk pipelines the share of LED lights at production facilities 2.7 1.6 rate of reducing greenhouse gas emissions Min 1.2 achieved by implementing energy-saving
measures Transneft Group the share of natural gas vehicles Average for foreign peer group companies
toe – tonnes of oil equivalent SOCIAL POLICY, OCCUPATIONAL AND INDUSTRIAL SAFETY 47
Personal insurance: TRANSNEFT GROUP’S MAIN PRINCIPLES IN THE FIELD OF Voluntary health Protecting OCCUPATIONAL SAFETY insurance, insurance employees’ life and against accidents and illnesses health, as well as priority of employees’ life and health over the Promoting mass ensuring safe labor 1 athletics and result of industrial activities Support to non-working healthy life style conditions is corporate retirees considered a priority by Transneft the right of each employee to suspend works and Group. 2 their duty to refuse to carry out the work which does not meet safety requirements Main vectors The Group has of the social adopted an involvement of all employees in the prevention of policy 3 occupational safety occupational injuries and diseases management system according to Non-governmental Residential and the requirements of leading role of managers at all levels in ensuring pension 4 financial support the international safe working conditions and compensations standard BS OHSAS Growing awareness on occupational safety and Health resort and recreation 18001: 2007. 5 health measures programs for employees and their children COUNTERING CORRUPTION 48
Key aspects Organisational structure of countering corruption Transneft adheres to high ethical standards of Board of Directors conducting fair business by openly declaring Audit Committee zero tolerance to corruption in all its forms of Transneft and manifestations Commission for Countering President The anti-corruption provision is stipulated in Corruption the Transneft Anti-Corruption Policy, as well as in the Code of Ethics and Official Conduct of Management Board of Transneft and Transneft Subsidiaries’ Transneft Business units Employees Key measures Continuous awareness raising and training for employees Setup of the Anti-Corruption Hotline1 in order to inform the management about possible facts of corruption, as well as rapid response to received alerts Development of a specialized section on the corporate website in order to ensure transparency on Transneft activities in preventing and countering corruption Transneft Anti-Corruption Hotline 1. Electronic form on corporate website: Linked by QR-code: http://www.transneft.ru/protivodeistvie- korrypcii/elektronnaya-forma-obrasheniya/ 2. E-mail box for whistleblowers: [email protected]
Additional information is available at: https://en.transneft.ru/protivodeistvie-korrypcii/goryachaya-liniya/?re=en Appendix. 07. Segment breakdown of key financial results KEY RESULTS BY SEGMENTS* (1/2) 50
4Q19 4Q18 YoY 2019 2018 YoY
RUB bln Revenue 271 264 ▲3% 1,064 980 ▲9%
Transneft segment revenue 260 249 ▲4% 1 013 965 ▲5% NCSP segment revenue 13 16 ▼19% 56 16 ▲by 3.5х
EBITDA** 110 119 ▼8% 486 433 ▲12%
Transneft segment EBITDA** 102 109 ▼6% 448 424 ▲6% NCSP segment EBITDA 8 10 ▼20% 40 10 ▲by 4.0х
Profit attributable to shareholders of Transneft 35 53 ▼34% 179 224 ▼20%
Transneft segment profit 35 52 ▼33% 154 223 ▼31% attributable to shareholders of Transneft NCSP segment profit -1 2 х 24 2 ▲by 12.0х attributable to shareholders of Transneft
Total debt at the end of the period 637 673 ▼5% 637 673 ▼5%
Transneft segment total debt 587 603 ▼3% 587 603 ▼3% NCSP segment total debt 50 70 ▼29% 50 70 ▼29%
* There are inter-segment transactions between Transneft segment and NCSP segment ** Less crude oil sale and purchase operations under contracts with Rosneft and China National United Oil Corporation KEY RESULTS BY SEGMENTS* (2/2) 51
4Q19 4Q18 YoY 2019 2018 YoY
RUB bln Operating cash flow 127 123 ▲3% 361 346 ▲4%
Transneft segment operating cash flow 119 116 ▲3% 337 339 ▼0,6%
NCSP segment operating cash flow 7 7 ►0 24 7 ▲by 3.4х
(minus) CAPEX -82 -76 ▲8% -268 -268 ►0
Transneft segment CAPEX** -79 -73 ▲8% -263 -265 ▼1%
NCSP segment CAPEX -2 -3 ▼33% -5 -3 ▲67%
Free cash flow 45 47 ▼4% 93 78 ▲19%
Transneft segment free cash flow 40 42 ▼5% 74 73 ▲1%
NCSP segment free cash flow 5 5 ►0 19 5 ▲by 3.8х
Net cash flow 18 11 ▲64% -13 13 х
Transneft segment net cash flow 15 -1 х -28 1 х
NCSP segment net cash flow 3 13 ▼77% 15 13 ▲15%
* There are inter-segment transactions between Transneft segment and NCSP segment ** Purchase of property, plant and equipment adjusted for proceeds from sale of property, plant and equipment Contacts: Address: 4 bld. 2, Presnenskaya embankment Investor Relations Moscow, 123112 Telephone: +7 (495) 950-81-78 Telephone: +7 (495) 950-84-54 Fax: +7 (495) 950-89-00, +7 (495) 950-81-68 E-mail: [email protected] E-mail: [email protected]