gazprom’s financial and economic policy ......2017/06/22 · china gas business 5 cost...

Moscow

GAZPROM’S FINANCIAL AND ECONOMIC POLICY

PRESS CONFERENCE

JUNE 22, 2017

1

DISCLAIMER

1

This presentation was prepared by Gazprom (hereafter “the Company”). It contains corporate information for investors. This presentation does not constitute an offer to

sell or a solicitation of any offer to purchase any shares or other securities for equity participation in the Company, or a subscription for such. The presentation and

information contained herein, as well as the fact of the display or publication thereof, cannot be regarded in connection with any contract or investment decision.

The information contained herein should not be construed as investment advice. The Company made every effort to ensure that the facts contained in this presentation

would be reliable and the opinions voiced herein would be reasonable and impartial. However, no guarantees or assurances, either expressed or implied, are provided

as to the accuracy and completeness of the information or opinions contained or reviewed herein on behalf of the Company or any of its shareholders, directors, officials,

employees or any other persons. None of the Company’s directors, shareholders, officials, employees or any other persons assume any responsibility for any losses that

may occur as a result of using this presentation or its contents in any form or in any other way relating to this presentation.

This presentation may contain forward-looking statements. Such forward-looking statements include the following: the data that are not accomplished facts; statements

of the Company’s intentions; and suggestions or current expectations in relation to, inter alia, the Company’s operating results, its financial condition and liquidity,

prospects, growth, strategy, and development of the industry the Company operates in. Due to being related to future events and depending on the circumstances that

may occur in the future, forward-looking statements inherently involve risks and uncertainties. The Company wishes to advise that it provides no guarantees for forward-

looking statements to be realized and that the actual operating results, financial condition and liquidity, as well as the development of the industry the Company operates

in, may differ essentially from the projections or suggestions contained or implied in the said forward-looking statements. Furthermore, regardless of whether the

Company’s operating results, financial condition and liquidity, as well as the development of the industry the Company operates in, conform with forward-looking

statements contained herein, such results and circumstances do not reflect the results and circumstances of the future periods.

The data and statements contained in this presentation are relevant as of the time of its display and are subject to change without prior notice. No party is under legal

obligation to update and amend the data contained herein.

By attending this presentation, you agree to abide by the limitations mentioned above.

GAZPROM’S FINANCIAL AND ECONOMIC POLICY, JUNE 22, 2017

2

FUNDAMENTAL ASPECTS OF FINANCIAL POLICY


Key developments in Gazprom’s financial

performance throughout 2016

• Increased severance tax on natural gas

• Reduced revenue from gas sales (caused by lower contract gas prices) offset by record gas exports

• Positive free cash flow (RUB 202 bln)

• Strong discipline with regard to capital expenditures

• Dividends increase to RUB 190 bln in 2016

• High level of corporate governance at Gazprom confirmed by Moscow Exchange

167

42.0

66.9

166

48.0

63.3

0

50

100

150

200

GAS EXPORT PRICE OIL RUB/USD

Basic planning assumptions for 2017 budget

USD

2016 2017actual budget



3

GAZPROM GROUP’S KEY FINANCIAL INDICATORS

(1) Net of excise tax, VAT and customs duties

(2) EBITDA is adjusted by changes in asset impairment reserves

(3) Annual profit attributable to Gazprom shareholders

(4) Average quarterly figures

RUB bln

20

40

60

80

100

120

1q14 2q14 3q14 4q14 1q15 2q15 3q15 4q15 1q16 2q16 3q16 4q16 1q 17

OIL NBP GAZPROM'S AVERAGE EXPORT PRICE FOR EUROPE

Oil and gas prices, 2014-2017%

(1) (2) (3)

(4)


5,590

1,963

159

6,073

1,875

787

6,111

1,322952

0

2,000

4,000

6,000

Revenue Adjusted EBITDA Net profit

2014 2015 2016

4

KEY INVESTMENT PROJECTS IN GAS BUSINESS


Oil

26%

Power generation

3%

Other lines of business

3%

Gazprom’s investment program

(RUB 911 bln)

Other lines of gas business

Gas business

68%

Gazprom Group’s Investment Program for 2017

Major projects under Gazprom’s Investment Program for 2017

MAJOR INVESTMENT PROJECTS

CAPITAL INVESTMENTS IN 2017, RUB BLN

St. Petersburg

Moscow

Torzhok

Blagoveshchensk

Ukhta POWER OF SIBERIA

RUB 159 BLN

AMUR GPP

RUB 102 BLN

CHAYANDINSKOYE

OIL, GAS AND

CONDENSATE FIELD

RUB 64 BLN

UKHTA –

TORZHOK 2

RUB 62 BLN

NORD STREAM 2

RUB 111 BLN

TURKSTREAM

RUB 42 BLN

Anapa

BOVANENKOVSKOYE

OIL, GAS AND

CONDENSATE FIELD

RUB 37 BLN

RUSSIA

TURKEYKiyikoy (Turkey)

GERMANY

Greifswald (Germany)

CHINA

Gas business

5

COST OPTIMIZATION FOCUS AREAS AND PRIORITIES FOR 2017


• Strategic planning for 10-year period

Scope of workMain cost optimization stages

• Gazprom’s 3-year budget plan and

investment program

• Gazprom’s budget and investment program

for upcoming year

• Defining key development targets for Gazprom and scope of priority

projects, building long-term financial model, and developing three

development scenarios for Gazprom

Major steps in restraining cost escalation

• Project development

• Project execution

• Detailed analysis and design

• Appraisal and optimization of project solutions

• Setting limits for investment program and operating expenses

• Ranking investment projects and preliminary approval thereof. Control of

claimed costs

• Setting limits for investment program

• Approving investment program. Control of claimed costs

• Control over project execution

• Procurement optimization. Control over contract performance

6

* Prime cost of gas production – costs for production of 1,000 m3 of gas by 7 major gas producing subsidiaries of Gazprom

** Average severance tax rate for taxable volume of gas production

*** Prime cost of gas transmission – costs for transmission of 1,000 m3 of gas per 100 km by Gazprom’s gas transmission subsidiaries (within Russian Federation)

WELL-BALANCED COST MANAGEMENT POLICY

53 57

65 6570

0

20

40

60

80

2013 2014 2015 2016 2017P

631 717872 880 906

602719

677 722991

0

400

800

1200

1600

2000

2013 2014 2015 2016 2017P

UNIT COST OF GAS PRODUCTION SEVERANCE TAX FOR GAS**

RUB /1,000 m3

RUB /1,000 m3 per 100 km

1,896

1,233

1,436

Prime cost of gas production*

Prime cost of gas transmission***

1,549 1,601


Forecast effect from Program in 2017: RUB 12.2 bln:

• Operating activities:

current costs: RUB 6.9 bln

financial costs: RUB 0.2 bln

• Investment activities: RUB 5.1 bln

Effect from Program in 2016: RUB 19.7 bln:

• Operating activities:

current costs: RUB 9.8 bln

financial costs: RUB 1.2 bln

• Investment activities: RUB 8.7 bln

Cost optimization (reduction) program, 2016–2017

7

TAX PAYMENT STRUCTURE


Tax payment by Gazprom Group’s companies (RUB mln)

31%

3%12%31%

5%6%

12%

Tax payments in 2016

НДПИ НДС

Акциз Таможенные пошлины

Налог на прибыль Налог на имущество

Прочие

Excise tax

Profit tax

Others

Customs duties

Property tax

2015 2016

Customs duties 693,746 617,788

Severance tax 599,433 601,985

Excise tax 219,105 236,892

Property tax 110,123 120,391

Profit tax 104,729 95,576

VAT 27,586 53,771

Others 191,942 240,048

Total: 1,946,664 1,966,451

Severance tax VAT

8

?Upward revision of

withholding ratio in severance

tax formula for gas and

condensate produced by

Gazprom Group:

• 0.2051 in 2016

Upward revision of Cgp

coefficient in severance

tax formula for gas

produced by Gazprom

Group:

• 1.7969 in 2017

• 1.4022 in 2018

• 1.4441 in 2019

CHANGES IN SEVERANCE TAX FOR NATURAL GAS PRODUCTION

BY GAZPROM GROUP


0.15 0.15

0.2051 0.2103 0.2166 0.2166

719677

1,001

557531

586611

563

722

1,063

809

891 910

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0

200

400

600

800

1000

2014 2015 2016 2017 2018 2019 2020

Average rates, RUB / 1,000 m3

Withholding ratio

0.3411

0.2695

Fixed severance tax

rate for Gazprom

Group

RUB 700 / 1,000 m3

Q1-Q2 2014Q3-Q42014 2016 Q1-Q3 2017 Q4 2017

Introduction of formula-based

severance tax. Single withholding

ratio for Gazprom Group and

independent producers:

• 0.15 with no time limit

- 2015

Upward revision of Cgp

coefficient in severance

tax formula for gas

produced by Gazprom

Group:

• 2.2738 in Q4 2017

• 1.4441 in 2020

2016 scenario

2014 scenario

2017 initial scenario

2017 updated scenario

9

NEED FOR EQUAL CONDITIONS FOR DOMESTIC GAS SALES

Current terms

Measures aimed at creating equal conditions for competition in domestic market

Wholesale gas price regulation

Regulated prices and tariffs do not offset costs of gas transmission

via UGSS

For independent gas producersFor Gazprom

Increased tax burden on gas production

Obligations to ensure reliability of gas supplies to all consumer

categories, including in peak consumption periods

Social obligations for gas supplies to and gasification of regions

Free gas pricing

Lower tariffs for gas transmission services

Preferential taxation (severance tax)

Gas supplies mostly to major industrial consumers in high-yield

regions

1. Various approaches are being explored for gradual transition from stringent regulation of Gazprom’s gas prices in the domestic market to pricing

within a regulated range and free pricing.

2. Work is underway on deregulation of gas prices, providing for gas liquefaction at any stage of gas delivery.

3. Proposals are under development to allow Gazprom to sell its natural gas at unregulated prices to companies specializing in gas liquefaction for

export purposes.

4. A joint working group for domestic gas market development was set up under the Federal Antimonopoly Service of Russia.

5. Gas volumes supplied via an established trading platform are increasing.

Short transportation distances


10

DEVELOPMENT OF CENTRALIZED MANAGEMENT SYSTEM FOR

GAZPROM GROUP’S LIQUIDITY


Centralized

Management of

Gazprom Group’s Cash

Flows

Efficient Liquidity

Management at

Gazprom

Centralized

Management of

Financial Risks

• developing ruble-based

cash pooling system

• developing cash pooling

system involving

Gazprom Group’s

companies based

abroad

• setting up single

transaction processing

center for Gazprom

Group

• expanding list of

treasury instruments

• maintaining liquidity

reserve through short-

term credit lines

• improving financial

discipline across

Gazprom Group

• introducing uniform

standards for financial

risk management

• setting limits on credit

institutions, including

foreign ones

• creating internal control

and efficiency

evaluation system for

treasury operations

11

20 23.4

40.9

28.2

48.155.7

47.454.7

50.5

33.5

23.5

-16.2-21.2

-28.7-25

-34.3

-52.8

-43.4 -43.9

-33.2-27.1

-20.5

3.8 2.212.1

3.213.7

2.9 4.010.8

17.2

6.43.0

-60

-40

-20

0

20

40

60

80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

OPERATING CASH FLOW CAPITAL INVESTMENTS FREE CASH FLOW

CONSISTENT GENERATION OF FREE CASH FLOW


USD bln

unfavorable price environment for natural gas at foreign markets

low prices for oil and petroleum products

growing debt burden

strong trend for gas exports

increasing revenue from oil and power generation businesses

tight discipline in capital investment management

+ USD 3.0 blnof free cash flow

In 2016:

Conservative financial policy : generating positive free cash flow for 11 years

12

* As of late 2016

** Including capitalized interest

DEBT BURDEN

Repayment schedule of Gazprom Group’s debt

for 2017–2020*

7.4

11.7

6.9

4.3

0

3

6

9

12

15

2017 2018 2019 2020

USD bln


2.7

1.45.8%

8.4%

0%

3%

6%

9%

0

1

2

3

Interest paid Interest

revenues

Average interest rates of borrowings and

placements

Interest revenues and expenses** of Gazprom Group in 2016

46.6

14.8

3.1

0

15

30

45

Total debt Cash and cash

equivalents

Gazprom Group’s debt under IFRS*

• Efficient debt and liquidity management

• Conservative financial policy

USD bln

USD bln

Bank deposits

with maturity of

over 3 months17.9

Cash and cash

equivalents

13

SUCCESSFUL PERFORMANCE IN DEBT CAPITAL MARKETS

Q1 2016 EUR 2,000 mlnEURIBOR+3.5%

EUR 800 mlnEURIBOR+2.6%

Q4 2016

Q1 2017

Q2 2017

CHF 500 mln3.375%

CHF 500 mln2.75%

EUR 1,000 mln3.125%

Loans Bonds

EUR 700 mlnEURIBOR+2.5%

USD 750 mln4.95%

RUB 30 bln*

8.9%

GBP 850 mln4.25%

• In March 2016, Gazprom got a EUR 2 billion loan from Bank of China. It was the Company’s largest deal in terms of financing

attracted directly from one credit institution and first bilateral loan facility agreement with Chinese bank.

• In March 2017, Gazprom placed dollar bonds for the first time in three years.

• In April 2017, Gazprom issued bonds for GBP 850 mln, thereby closing the largest deal in the UK among the same-ranking companies

in the emerging markets over the past 3 years.

• Two bond issues were placed in Q1 2017, each with value of RUB 15 bln.

• In June 2017, Gazprom obtained a long-term loan of EUR 300 mln from VTB Bank (Austria), with insurance coverage provided by

Austria's export credit agency OeKB.


* Two bond issues each worth RUB 15 bln

EUR 300 mln

14

DIVIDENDS

* Proposed by Board of Directors

** Dividend yield: ratio of dividends for 2016 to share price as of June 16, 2017

Dividend payout Dividend yield on shares in largest global oil

and gas companies**

Dividend yield on Gazprom’s shares is commensurate with that of largest global oil and gas companies

SOURCE: COMPANY’S DATA, BLOOMBERG, JP MORGAN


0.36

2.39

3.85

8.97

5.99

7.2 7.2

7.89 8.04

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012 2013 2014 2015 2016

RUB/ share

* 7.0% 7.0%6.7%

5.8%5.5%

5.2%

4.5%

4.0%3.6%

2.3%2.0%

1.4%

0%

2%

4%

6%

8%

10%

12%

**

15

STREAMLINING CORPORATE GOVERNANCE


Current Board of Directors includes three independent

directors (status is confirmed by Russian stock exchanges)

Audit Committee, largely made up of independent directors

and chaired by independent director, was created

Nomination and Remuneration Committee, consisting mostly

of independent directors, was set up

Corporate Secretary unit (responsibility distributed among

several structural units) was established

Gazprom’s key corporate documents aimed at protecting

shareholders’ rights were updated to best practice standards

Continuous enhancement of corporate governance standards in accordance with

best practices and improvement in transparency of Company’s activitiesGoal

Planned efforts:Results of efforts made in 2016:

to conduct independent audit of Company’s corporate

governance; to receive and implement recommendations on

further improvement of corporate standards

to evaluate Board of Directors and its committees’ performance

to receive and implement recommendations on further

streamlining of corporate standards based on independent

audit of corporate governance

to continue practice of arranging conference calls and personal

meetings of independent directors with shareholders and

investors

16 GAZPROM’S FINANCIAL AND ECONOMIC POLICY, JUNE 22, 2017

KEY OBJECTIVES

Stable tax and regulatory environment needed for sustainable

development of Company

Continuous cost control

and optimization at all

levels

Efficient debt and liquidity management

Stable dividend policyCorporate governance

improvement

gazprom’s financial and economic policy ......2017/06/22 · china gas business 5 cost...

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