GAZ.L Regulatory News (GAZ)

Gazprom Neft Group

Interim Condensed Consolidated Financial Statements (unaudited)

As of and for the three months ended 31 March 2017

Contents

Interim Condensed Consolidated Statement of Financial Position.......................................................... 2

Interim Condensed Consolidated Statement of Profit and Loss and Other Comprehensive Income….. 3

Interim Condensed Consolidated Statement of Changes in Shareholders' Equity.................................. 4

Interim Condensed Consolidated Statement of Cash Flows................................................................... 5

Notes to the Interim Condensed Consolidated Financial Statements

1. General

2. Summary of significant accounting policies

3. Application of new IFRS

4. New accounting standards

5. Cash and cash equivalents

6. Short-term financial assets

7. Trade and other receivables

8. Inventories

9. Other taxes receivable

10. Other current assets

11. Property, plant and equipment

12. Investments in associates and joint ventures

13. Long-term financial assets

14. Other non-current assets

15. Short-term debt and current portion of long-term debt

16. Trade and other payables

17. Other current liabilities

18. Other taxes payable

19. Long-term debt

20. Other non-current financial liabilities

21. Finance lease

22. Net foreign exchange gain

23. Finance income

24. Finance expense

25. Fair value measurement

26. Commitments and contingencies

27. Related party transactions

28. Segment information

29. Subsequent events

1. General

Description of business

PJSC Gazprom Neft (the "Company") and its subsidiaries (together referred to as the "Group") is a vertically integrated oil company operating in the Russian Federation, CIS and internationally. The Group's principal activities include exploration, production and development of crude oil and gas, production of refined petroleum products and distribution and marketing operations through its retail outlets.

The Company was incorporated in 1995 and is domiciled in the Russian Federation. The Company is a public joint stock company and was set up in accordance with Russian regulations. PJSC Gazprom ("Gazprom", a state controlled entity), the Group's ultimate parent company, owns 95.7% of the shares in the Company.

2. Summary of significant accounting policies

Basis of presentation

The Group maintains its books and records in accordance with accounting and taxation principles and practices mandated by legislation in the countries in which it operates (primarily the Russian Federation). The accompanying Interim Condensed Consolidated Financial Statements were primarily derived from the Group's statutory books and records with adjustments and reclassifications made to present them in accordance with International Financial Reporting Standards ("IFRS").

The Interim Condensed Consolidated Financial Statements have been prepared in accordance with International Accounting Standard IAS 34 Interim Financial Reporting.

The Group does not disclose information which would substantially duplicate the disclosures contained in its audited Consolidated Financial Statements as of and for the year ended 31 December 2016, such as significant accounting policies, estimates and judgements, financial risk disclosures or disclosures of financial line items, which have not changed significantly in amount or composition. Management of the Group believes that the disclosures in these Interim Condensed Consolidated Financial Statements are adequate to make the information presented not misleading if these Interim Condensed Consolidated Financial Statements are read in conjunction with the Group's Consolidated Financial Statements as of and for the year ended 31 December 2016.

Subsequent events occurring after 31 March 2017 were evaluated through 23 May 2017, the date these Interim Condensed Consolidated Financial Statements were authorised for issue.

The results for the three months ended 31 March 2017 are not necessarily indicative of the results expected for the full year.

The Group as a whole is not subject to significant seasonal fluctuations.

Changes in significant accounting policies

Significant accounting policies, judgements and estimates applied while preparing these Interim Condensed Consolidated Financial Statements are consistent with those applied during the preparation of the Consolidated Financial Statements as of and for the year ended 31 December 2016, except for those described in the Application of new IFRS paragraph.

Foreign currency translation

The following exchange rates for Roubles to US dollars, EURO and Serbian Dinars applied while preparing these Interim Condensed Consolidated Financial Statements:

3. Application of new IFRS

The following standards or amended standards became effective for the Group from 1 January 2017:

The amendments to IAS 7 - Statement of Cash Flow (issued in January 2016 effective for annual periods beginning on or after 1 January 2017) require entities to provide disclosures that enable investors to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. The Group will present the disclosure in the Consolidated Financial Statements as of and for the year ended 31 December 2017.

The following standards or amended standards that became effective for the Group from 1 January 2017 did not have any material impact on the Group:

· The amendments to IAS 12 - Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses (issued in January 2016 effective for annual periods beginning on or after 1 January 2017).

4. New accounting standards

Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2017 or later, and that the Group has not early adopted.

IFRS 9 - Financial Instruments: Classification and Measurement (amended in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are:

· Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value (either through profit and loss or other comprehensive income), and at amortised cost. The decision is to be made at initial recognition.

· An instrument is subsequently measured at amortised cost only if it is a debt instrument and both (i) the objective of the entity's business model is to hold the asset to collect the contractual cash flows, and (ii) the asset's contractual cash flows represent payments of principal and interest only. All other debt instruments are to be measured at fair value through profit or loss.

· All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is no recycling of fair value gains and losses to profit or loss.

The Group is currently assessing the impact of the new standard on its Consolidated Financial Statements.

 IFRS 15 - Revenue from Contracts with Customers (issued in May 2014 and effective for annual periods beginning on or after 1 January 2018) and Amendments to IFRS 15 (issued in April 2016 and effective for annual periods beginning on or after 1 January 2018). The new standard introduces the core principle that revenue must be recognised when the goods and services are transferred to the customer, at the transaction price. Any bundled goods and services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. 

The Group is currently assessing the impact of the new standard on its Consolidated Financial Statements.

IFRS 16 - Leases (issued in January 2016 and replaces the previous IAS 17 Leases, effective for annual periods beginning on or after 1 January 2019 with early adoption permitted in case of implementation of IFRS 15 Revenue from Contracts with Customers). Key features of the standard are:

· IFRS 16 changes the lessees accounting requirements given in IAS 17 and eliminates the classification of leases as either operating leases or finance leases. Instead, introduces a single lessee accounting model where a lessee is required to recognise:

(a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and

(b) depreciation of lease assets separately from interest on lease liabilities in the income statement.

· IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17.

· IFRS 16 does not change the accounting for services.

The Group is currently assessing the impact of the new standard on its Consolidated Financial Statements.

5. Cash and cash equivalents

Cash and cash equivalents as of 31 March 2017 and 31 December 2016 comprise the following:

6. Short-term financial assets

Short-term financial assets as of 31 March 2017 and 31 December 2016 comprise the following:

7. Trade and other receivables

Trade and other receivables as of 31 March 2017 and 31 December 2016 comprise the following:

Trade receivables represent amounts due from customers in the ordinary course of business and are short-term by nature.

8. Inventories

Inventories as of 31 March 2017 and 31 December 2016 consist of the following:

9. Other taxes receivable

Other taxes receivable as of 31 March 2017 and 31 December 2016 comprise the following:

10. Other current assets

Other current assets as of 31 March 2017 and 31 December 2016 consist of the following:

11. Property, plant and equipment

Movements in property, plant and equipment for the three months ended 31 March 2017 and 2016 are as follows:

12. Investments in associates and joint ventures

The carrying values of the investments in associates and joint ventures as of 31 March 2017 and 31 December 2016 are summarised below:

The principal place of business of the most significant joint ventures and associates disclosed above is the Russian Federation.

Slavneft

The Group's investment in OJSC NGK Slavneft and various minority stakes in Slavneft subsidiaries (Slavneft) are held through a series of legal entities. Slavneft is engaged in exploration, production and development of crude oil and gas and production of refined petroleum products. The control over Slavneft is divided equally between the Group and PJSC NK Rosneft.

SeverEnergy

The Group's investment in SeverEnergy LLC (SeverEnergy) is held through Yamal Razvitie LLC (Yamal Razvitie, an entity jointly controlled by the Group and PJSC NOVATEK). SeverEnergy, through its subsidiary OJSC Arctic Gas Company (Arcticgas), is developing the Samburgskoye, Urengoiskoe and Yaro-Yakhinskoye oil and gas condensate fields and some other small oil and gas condensate fields located in the Yamalo-Nenetskiy autonomous region of the Russian Federation.

The carrying amount of the Group's investment exceeds the Group's share in the underlying net assets of SeverEnergy by RUB 18.2 billion as of 31 March 2017 and 31 December 2016 due to complex holding structure, current financing scheme and goodwill arising on acquisition.

Northgas

The Group's investment in CJSC Northgas (Northgas) is held through Gazprom Resource Northgas LLC which is controlled by the Group and owns a 50% share in Northgas. Northgas is engaged in development of natural gas and oil field.

The summarised financial information for the significant associates and joint ventures as of 31 March 2017 and 31 December 2016 and for the three months ended 31 March 2017 and 2016 is presented in the tables below.

Others

The aggregate carrying amount of all individually immaterial joint ventures and associates as well as the Group's share of those joint ventures' and associates' profit or loss and other comprehensive income are not significant.

13. Long-term financial assets

Long-term financial assets as of 31 March 2017 and 31 December 2016 comprise the following:

14. Other non-current assets

Other non-current assets are primarily comprised of advances provided on capital expenditures (RUB 76.1 billion and RUB 97.2 billion as of 31 March 2017 and 31 December 2016, respectively).

15. Short-term debt and current portion of long-term debt

As of 31 March 2017 and 31 December 2016 the Group has short-term debt and current portion of long-term debt outstanding as follows:

In March 2017 the Group executed credit facility drawdown under facility agreement with a Russian bank. The outstanding balance as of 31 March 2017 is RUB 4 billion payable in April 2017.

In March 2017 the Group executed credit facility drawdown under facility agreement with PJSC Sberbank. The outstanding balance as of 31 March 2017 is RUB 10.8 billion payable in April 2017.

Short-term debt and current portion of long-term debt include interest payable as of 31 March 2017.

16. Trade and other payables

Accounts payable as of 31 March 2017 and 31 December 2016 comprise the following:

17. Other current liabilities

Other current liabilities as of 31 March 2017 and 31 December 2016 comprise the following:

18. Other taxes payable

Other taxes payable as of 31 March 2017 and 31 December 2016 comprise the following:

Tax expense other than income tax expense for the three months ended 31 March 2017 and 2016 comprise the following:

19. Long-term debt

As of 31 March 2017 and 31 December 2016 the Group has long-term outstanding debt as follows:

Bank loans

In March 2017 the Group borrowed RUB 15 billion under long-term facility agreement with JSC Gazprombank due payable in October 2021.

In March 2017 the Group performed principal repayment in the total amount of USD 307 million (RUB 18.1 billion) under the Club term loan facility with the syndicate of international banks (facility agent - Mizuho) according to the payment schedule.

In March 2017 the Group performed principal repayment in the total amount of USD 100 million (RUB 5.7 billion) under the Club term loan facility with the syndicate of international banks (facility agent - Commerzbank) according to the payment schedule.

The loan agreements contain financial covenant that limits the Group's ratio of "Consolidated financial indebtedness to Consolidated EBITDA". The Group is in compliance with all covenants as of 31 March 2017.

20. Other non-current financial liabilities

Other non-current financial liabilities as of 31 March 2017 and 31 December 2016 comprise the following:

Deferred consideration represents liability to PJSC Gazprom for assets relating to Prirazlomnoye project. In February 2017 the payment schedule was modified. The effect of the change in carrying value of liability due to the contract term revision in amount of RUB 7.6 billion was reflected in additional paid-in capital.

21. Finance lease

In 2016 the Group entered into an agreement to lease a vessel and the contract was classified as a finance lease. In February 2017 the Group became entitled to exercise the right to use the asset. The net book value of the leased asset as of 31 March 2017 is RUB 8.5 billion. Upon termination of lease term ownership title to the vessel transfers to the Group. The lease contract also contains an option for early purchase of the asset by the Group.

Net book value other items of PPE under finance lease contracts is non significant.

The reconciliation between future minimum lease payments and their present value is presented in the table below:

The difference between the minimum lease payments and their present value represents the unwinding of discount of finance lease liabilities.

22. Net foreign exchange gain

Net foreign exchange gain for the three months ended 31 March 2017 and 2016 comprise the following:

23. Finance income

Finance income for the three ended 31 March 2017 and 2016 comprise the following:

24. Finance expense

Finance expense for the three months ended 31 March 2017 and 2016 comprise the following:

25. Fair value measurement

The following assets and liabilities are measured at fair value in the Interim Condensed Consolidated Financial Statements: derivative financial instruments (forward exchange contracts and interest rate swaps used as hedging instrument), Stock Appreciation Rights plan (SARs) and financial investments classified as available for sale except for unquoted equity instruments whose fair value cannot be measured reliably that are carried at cost less any impairment losses. Derivative financial instruments and SARs refer to Level 2 of the fair value measurement hierarchy, i.e. their fair value is determined on the basis of inputs that are observable for the asset or liability either directly or indirectly. The fair value of the foreign exchange contracts is determined by using forward exchange rates at the reporting date with the resulting value discounted back to present value. The fair value of the liability under the SAR plan is estimated using the Black-Scholes-Merton option-pricing model by reference primarily to the Group's share price, historic volatility in the share price, dividend yield and interest rates for periods comparable to the remaining life of the award. There were no transfers between the levels of the fair value hierarchy during the interim period. There are no significant assets or liabilities measured at fair value categorised within Level 1 or Level 3 of the fair value hierarchy.

As of 31 March 2017 the fair value of bonds and loan participation notes is RUB 303,206 million (RUB 315,488 million as of 31 December 2016). Carrying value of other financial assets and liabilities approximate their fair value.

26. Commitments and contingencies

Taxes

Russian tax and customs legislation is subject to frequent changes and varying interpretations. Management's treatment of such legislation as applied to the transactions and activity of the Group, including calculation of taxes payable to federal, regional and municipal budgets, may be challenged by the relevant authorities. The Russian tax authorities may take a more assertive position in their treatment of legislation and assessments, and there is a risk that transactions and activities that have not been challenged in the past may be challenged later. As a result, additional taxes, penalties and interest may be accrued. Generally, taxpayers are subject to tax audits for a period of three calendar years immediately preceding the year in which the decision to carry out a tax audit has been taken. Under certain circumstances tax audits may cover longer periods. The years 2014-2017 are currently open for tax audit. Management believes it has adequately provided for any probable additional tax accruals that might arise from these tax audits.

Russian tax legislation on tax control over prices applied for tax purposes in related party transactions ("transfer pricing rules") was amended starting from 1 January 2012 to introduce significant reporting and documentation requirements regarding market environment at the date of transaction. Compared to the old rules the new transfer pricing rules appear to be more technically elaborate and better aligned with the Transfer Pricing Guidelines developed by the Organisation for Economic Cooperation and Development (OECD). The transfer pricing rules allow the tax authorities to make transfer pricing adjustments to the respective tax bases and impose additional tax liabilities in respect of controllable transactions (transactions with related parties and some transactions with unrelated parties), in cases where the prices of such transactions do not correspond to the ranges of prices deemed to be fair market prices for tax purposes defined in compliance with the said rules.

The compliance of the prices of the Group's controllable transactions with related parties with the transfer pricing rules is subject to regular internal control. Management believes that the transfer pricing documentation that the Group has prepared to confirm its compliance with the transfer pricing rules provides sufficient evidence to support the Group's tax positions and related tax returns. In addition in order to mitigate potential risks, the Group regularly negotiates approaches to defining prices used for tax purposes for major controllable transactions with tax authorities in advance. Twelve pricing agreements between the Group and tax authorities regarding major intercompany transactions have been concluded in 2012-2016.

However, given that the practice of enforcement of the new transfer pricing rules has not yet developed and some clauses of the applicable law are ambiguous and contain contradictions, the impact of the transfer pricing rules on the Group's tax liabilities cannot be reliably estimated.

Economic environment in the Russian Federation

The Russian Federation displays certain characteristics of an emerging market. Tax, monopoly, currency and customs legislation of the Russian Federation is subject to varying interpretations and contributes to the challenges faced by companies operating in the Russian Federation. The political and economic instability, uncertainty and volatility of the financial markets and other risks may have negative effects on the Russian financial and corporate sectors. The future economic development of the Russian Federation is dependent upon external factors and internal measures undertaken by the government to sustain growth and to change the tax, legal and regulatory environment. Management believes it is taking all necessary measures to support the sustainability and development of the Group's business in the current business and economic environment.

In 2014 the U.S., the EU and certain other countries imposed sanctions on the Russian energy sector that partially apply to the Group. The information on the main restrictions related to sanctions was disclosed in the Consolidated Financial Statements as of and for the year ended 31 December 2016. There were no significant changes in sanctions during the three months ended 31 March 2017.

Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its potential obligations under environmental regulation. Management is of the opinion that the Group has met the government's requirements concerning environmental matters, and therefore the Group does not have any material environmental liabilities.

Capital commitments

As of 31 March 2017 the Group has entered into contracts to purchase property, plant and equipment for RUB 304,791 million (RUB 300,978 million as of 31 December 2016).

27. Related party transactions

For the purpose of these Interim Condensed Consolidated Financial Statements parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operational decisions as defined by IAS 24 Related Party Disclosures. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

The Group has applied the exemption as allowed by IAS 24 not to disclose all government related transactions, as the parent of the Company is effectively being controlled by the Russian Government. In the course of its ordinary business the Group enters into transactions with natural monopolies, transportation companies and other companies controlled by the Russian Government. Such purchases and sales are individually insignificant and are generally entered into on market or regulated prices. Transactions with the state also include taxes which are detailed in Notes 9 and 18. The Group also leases vessels under time-charter agreements with a government related entity (RUB 1.3 billion for the three months ended 31 March 2017). The tables below summarise transactions in the ordinary course of business with either the parent company or associates and joint ventures.

The Group enters into transactions with related parties based on market or regulated prices. Short-term and long-term loans provided as well as debt are based on market conditions available for not related entities.

As of 31 March 2017 and 31 December 2016 the outstanding balances with related parties were as follows:

For the three months ended 31 March 2017 and 2016 the following transactions occurred with related parties:

Transactions with Key Management Personnel

For the three months ended 31 March 2017 and 2016 the Group recognised RUB 375 million and RUB 374 million, respectively, as compensation for key management personnel (members of the Board of Directors and Management Committee). Key management remuneration includes salaries, bonuses, quarterly accruals of SAR and other contributions. 

28. Segment information

Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM), and for which discrete financial information is available.

The Group manages its operations in 2 operating segments: Upstream and Downstream.

Upstream segment (exploration and production) includes the following Group operations: exploration, development and production of crude oil and natural gas (including joint ventures results), oil field services. Downstream segment (refining and marketing) processes crude into refined products and purchases, sells and transports crude oil and refined petroleum products.

The information about the Group's operating segments for the three months ended 31 March 2017 and 2016 is presented below:

Intersegment revenues are based upon prices effective for local markets and linked to market prices.

Eliminations and other adjustments section encompasses elimination of inter-segment sales and related unrealised profits, mainly from the sale of crude oil and products, and other adjustments.

Adjusted EBITDA represents the Group's EBITDA and its share in associates' and joint ventures' EBITDA. Management believes that adjusted EBITDA represents useful means of assessing the performance of the Group's ongoing operating activities, as it reflects the Group's earnings trends without showing the impact of certain charges. EBITDA is defined as earnings before interest, income tax expense, depreciation, depletion and amortisation, foreign exchange gain (loss), other non-operating expenses and includes the Group's share of profit of associates and joint ventures. EBITDA is a supplemental non-IFRS financial measure used by Management to evaluate operations.

The geographical segmentation of the Group's revenue and capital expenditures for the three months ended 31 March 2017 and 2016 is presented below:

 Adjusted EBITDA for the three months ended 31 March 2017 and 2016 is reconciled below:

29. Subsequent events

In April 2017 the Group placed five-year Rouble Bonds (001P-01R series) with the total par value of RUB 15 billion. The bonds bear interest of 8.7% per annum.

The Group's office is

3-5 Pochtamtskaya St.,St. Petersburg, Russian Federation190000

Telephone: +7 (812) 363-31-52Hotline: 8-800-700-31-52Fax: +7 (812) 363-31-51

www.gazprom-neft.ru

Investor Relations

Tel.: +7 (812) 385-95-48Email: ir@gazprom-neft.ru