GAZ.L Regulatory News (GAZ)

3. Cash and cash equivalents

Cash and cash equivalents as of 30 September 2018 and 31 December 2017 comprise the following:

4. Trade and other receivables

Trade and other receivables as of 30 September 2018 and 31 December 2017 comprise the following:

5. Inventories

Inventories as of 30 September 2018 and 31 December 2017 consist of the following:

6. Other taxes receivable

Other taxes receivable as of 30 September 2018 and 31 December 2017 comprise the following:

7. Other current assets

Other current assets as of 30 September 2018 and 31 December 2017 comprise the following:

8. Property, plant and equipment

Movements in property, plant and equipment for the nine months ended 30 September 2018 and 2017 are as follows:

Capitalized borrowing costs for the nine months ended 30 September 2018 include interest expense in the amount of RUB 22.8 billion and exchange losses arising from foreign currency borrowings in the amount of RUB 4.2 billion.

9. Investments in associates and joint ventures

The carrying values of the investments in associates and joint ventures as of 30 September 2018 and 31 December 2017 are summarised below:

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

Slavneft

PJSC NGK Slavneft and it's subsidiaries (Slavneft) are 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.

Arcticgas

In January 2018 SeverEnergy LLC and Yamal Razvitie LLC were merged to JSC Arctic Gas Company (Arcticgas, an entity jointly controlled by the Group and PJSC NOVATEK). In March 2018 the loans issued by Gazprom Neft were converted to ordinary shares from additional share emission of Arcticgas. As result the Group's share in Arcticgas (previously was held through SeverEnergy LLC and Yamal Razvitie LLC) increased to 50.0% as of 31 March 2018.

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.

Northgas

CJSC Northgas (Northgas) is engaged in development of Severo-Urengoiskoe natural gas and oil field. The Group's investment in Northgas is held through Gazprom Resource Northgas LLC which is controlled by the Group and owns a 50% share in Northgas. The control over Northgas is divided equally between the Group and PJSC NOVATEK.

Messoyakha

JSC Messoyakhaneftegas (Messoyakha) is developing the Vostochno-Messoyakhskoe and Zapadno-Messoyakhskoe oil and gas condensate fields. The control over Messoyakha is divided equally between the Group and PJSC NK Rosneft.

The summarised financial information for the significant associates and joint ventures as of 30 September 2018 and 31 December 2017 and for the nine months ended 30 September 2018 and 2017 is presented in the tables below.

Others

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

10. Other non-current assets

Other non-current assets are primarily comprised of advances provided on capital expenditures (RUB 60.5 billion and RUB 69.3 billion as of 30 September 2018 and 31 December 2017, respectively).

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

As of 30 September 2018 and 31 December 2017 the Group has short-term debt and current portion of long-term debt outstanding as follows:

12. Trade and other payables

Accounts payable as of 30 September 2018 and 31 December 2017 comprise the following:

During the 30 September 2018 the Group paid an interim dividend on the ordinary shares for the nine months ended 30 September 2017 in the amount of RUB 10.00 per share.

On 9 June 2018 the annual general shareholders' meeting of PJSC Gazprom Neft approved a dividend on the ordinary shares for 2017 in the amount of RUB 15.00 per share including an interim dividend on the ordinary shares in the amount of RUB 10.00 per share which were paid in July 2018.

13. Other current liabilities

Other current liabilities as of 30 September 2018 and 31 December 2017 comprise the following:

14. Other taxes payable

Other taxes payable as of 30 September 2018 and 31 December 2017 comprise the following:

Tax expense other than income tax expense for the three and nine months ended 30 September 2018 and 2017 comprise the following:

15. Long-term debt

As of 30 September 2018 and 31 December 2017 the Group has long-term outstanding debt as follows:

Bank loans

In March and September 2018 the Group performed principal repayment in the total amount of USD 614.3 million (RUB 38.9 billion) under the Club term loan facility with the syndicate of international banks (facility agent - Mizuho) according to the payment schedule.

In March and September 2018 the Group performed principal repayment in the total amount of USD 200 million (RUB 12.4 billion) under the Club term loan facility with the syndicate of international banks (facility agent - Commerzbank) according to the payment schedule.

In January 2018 the Group borrowed RUB 51.3 billion under long-term facility agreements due payable in January 2023. In July 2018 the Group performed pre-scheduled principal repayment in the total amount of RUB 48.0 billion due to borrowing RUB 48.0 billion under long-term facility agreement due payable in July 2023.

In December 2017 the Group signed several long-term facility agreements with final maturity date in December 2022 - June 2023. In June 2018 the Group performed pre-scheduled principal repayment in the total amount of RUB 102.0 billion due to borrowing RUB 102.0 billion under long-term facility agreement due payable in June 2023.

In September 2018 the Group borrowed RUB 10.0 billion under long-term facility agreement with Alfa-Bank due payable in September 2023.

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 30 September 2018 and 31 December 2017 and during nine months ended 30 September 2018.

Bonds

In March 2018 the Group placed six-year Rouble Bonds (001P-06R series) with the total par value of RUB 25.0 billion. The bonds bear interest of 7.2% per annum.

In March 2018 the Group exercised the call option on Rouble bonds (series BO-02 and BO-07) in the total amount of RUB 25.0 billion. The bonds are fully repaid.

In April 2018 the Group exercised the put option on Rouble bonds (series 4-04) in the total amount of RUB 9.9 billion.

Loan participation notes

In April 2013 the Group raised EUR 750 million (RUB 30.6 billion) financed by 2.9% Loan Participation Notes (LPN) due payable in April 2018 (Series 2). In April 2018 the Group performed principal repayment of LPN (series 2) in the total amount of EUR 750 million (RUB 56.6 billion). The LPN are fully repaid.

16. Finance lease

Since 2017 the Group has finance lease agreements regarding vessels. As of 30 September 2018 net book value of the leased assets which are pledge for finance lease is RUB 24.4 billion (RUB 24.8 billion as of 31 December 2017). At the end of lease term ownership title to the vessels transfers to the Group. The lease contract also contains an option for early purchase of the assets by the Group.

Net book value of other items of property, plant and equipment under finance lease contracts is non significant.

The reconciliation between future minimum lease payments and their present value as of 30 September 2018 and 31 December 2017 is presented in the table below:

The difference between the minimum lease payments and their present value represents future finance charges on finance lease liabilities.

17. Other non-current financial liabilities

Other non-current financial liabilities as of 30 September 2018 and 31 December 2017 comprise the following:

Deferred consideration represents liability to PJSC Gazprom for assets relating to Prirazlomnoe project. Payments of the principal amount of the liability are presented as financing activities at line "Repayment of long-term borrowings" in Interim Condensed Consolidated Statement of Cash Flows.

18. Non-controlling interest

In September 2018 the Group completed deal on disposal of non-controlling interest equal to 49% of share capital of Gazpromneft-Vostok LLC to third parties. The Group maintained control over the Company.

In result non-controlling interest in the amount of RUB 21.3 billion was recognized. Excess of the payment over non-controlling interest was recognized at additional paid-in capital attributable to Gazprom Neft shareholders.

19. Net foreign exchange loss / gain

Net foreign exchange loss / gain for the three and nine months ended 30 September 2018 and 2017 comprise the following:

20. Finance expense

Finance expense for the three and nine months ended 30 September 2018 and 2017 comprise the following:

21. Fair value measurement

The following assets and liabilities are measured at fair value in the Interim Condensed Consolidated Financial Statements: derivative financial instruments, equity investments and Stock Appreciation Rights plan (SARs). 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 Company'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 30 September 2018 the fair value of bonds and loan participation notes is RUB 326,154 million (RUB 378,085 million as of 31 December 2017). The fair value is derived from quotations in active market and related to Level 1 of the fair value hierarchy. Carrying value of other financial liabilities approximates their fair value.

22. 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 2015 - 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.

The Russian transfer pricing legislation is generally aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD), although it has specific features. This legislation provides for the possibility of additional tax assessments for controlled transactions (transactions between related parties and certain transactions between unrelated parties) if such transactions are not on an arm's-length basis.

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. Nineteen pricing agreements between the Group and tax authorities regarding major intercompany transactions have been concluded in 2012-2018.

As Russian tax legislation does not provide definitive guidance in certain areas, the Group adopts, from time to time, interpretations of such uncertain areas that reduce the overall tax rate of the Group. While Management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that an outflow of resources will be required should such tax positions and interpretations be challenged by the tax authorities. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group.

Economic environment in the Russian Federation

The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. The Russian economy was growing in 2017 and 2018, after overcoming the economic recession of 2015 and 2016. The economy is negatively impacted by volatility of oil prices, ongoing political tension in the region and international sanctions against certain Russian companies and individuals. The financial markets continue to be volatile. This operating environment has a significant impact on the Group's operations and financial position. Management is taking necessary measures to ensure sustainability of the Group's operations. However, the future effects of the current economic situation are difficult to predict and management's current expectations and estimates could differ from actual results.

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 2014. In August 2018 the U.S. signed an act to impose further sanctions against the Russian Federation. The Group assessed that the new sanctions don't have significant impact on its activity.

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 30 September 2018 the Group has entered into contracts to purchase property, plant and equipment for RUB 372,480 million (RUB 328,697 million as of 31 December 2017).

23. 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 or jointly 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 government-related entities. 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 6 and 14. The Group also leases vessels under time-charter agreements with a government related entity (lease expense amounted RUB 4.1 billion and RUB 4.0 billion for the nine months ended 30 September 2018 and 2017, respectively). The tables below summarise transactions in the ordinary course of business with either the parent company or parent's subsidiaries and associates or associates and joint ventures of the Group.

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 30 September 2018 and 31 December 2017 the outstanding balances with related parties were as follows:

For the nine months ended 30 September 2018 and 2017 the following transactions occurred with related parties:

Transactions with Key Management Personnel

For the nine months ended 30 September 2018 the Group recognised RUB 2,021 million as compensation for key management personnel (members of the Board of Directors and Management Committee). Comparative data for the nine months ended 30 September 2017 are disclosed in Interim Condensed Consolidated Financial Statements as of and for the three and nine months ended 30 September 2017. Key management remuneration includes salaries, bonuses, quarterly accruals of SAR and other contributions.

24. 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, production and sale 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 nine months ended 30 September 2018 and 2017 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 petroleum 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, net 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 nine months ended 30 September 2018 and 2017 is presented below:

For the nine months ended 30 September 2018 and 2017 export sales of crude oil include sales from upstream segment in the amount of RUB 27,259 million and RUB 144,051 million, respectively. The remaining amount of RUB 409,717 million for nine months ended 30 September 2018 (RUB 167,086 million for nine months ended 30 September 2017) represents sales from downstream segment.

Adjusted EBITDA for the three and nine months ended 30 September 2018 and 2017 is reconciled below: