Statement of the Chairman
of the Board of Directors

We have been constructing a solid platform for achieving key targets throughout the past decade, since Transoil was launched. The jubilee year 2013 confirmed the appropriateness of the chosen business model and fully demonstrated the fundamental advantages of the Group. Having achieved strong operational results in complicated economic conditions, Transoil strengthened its leadership in the oil and petroleum products rail freight segment within the 1520 Space.
As of year-end, each tank in operation carried 1,472 tonnes of freight, that surpasses the average market rate by more than half, our freight volume in physical terms amounted approximately to 56 mln tonnes and freight turnover increased by 12.4% – up to 84.6 bln tonne-km.

Despite a deterioration in market conditions and the development of restrictive system factors, we managed to achieve record financial performance due to returns from program projects in the sphere of a logistic scheme to improve use of rolling stock, to enhance operational sustainability and optimize cost. Changes in the key business metrics of Transoil’s activities have been recognized by Moody’s Investors Service: the Group’s corporate credit rating outlook was changed to “positive”. Such an evaluation of our financial and operational successes proves that Transoil is a first-class borrower that occupies strong position within the industry, pursues well-balanced financial policy and reliable risk management methods.

Having crossed the decade mark, Transoil started a large-scale implementation of projects in the sphere of business corporate social responsibility. The portfolio of initiatives included in the Group’s CSR concept has successfully passed the stage of establishment. In 2013, we launched a corporate volunteering system, started two flagship programs with the Non-commercial Organization “Russian Aid Fund” (Rusfond), and carried out preparatory research within the framework of the environmental project “Green Filling”. Furthermore, we improved processes aimed at creating favorable conditions for the self-fulfillment and professional development of employees. Further details on the Transoil’s role in public life are available in the section “Sustainable development policy” of this Report.

During the year, we have been focusing on business process efficiency improvement and service production cost control, the modeling of integrated proposals, and expanding capacity of auxiliary divisions through broadening the geographic footprint. This is aimed not only at creating opportunities for meeting the changing demands of our customers, but also at increasing the share of services with high added value in our portfolio. Along with a prevailing position in a historically stable and prospective segment, these factors will allow us creating optimal conditions for providing maximum benefit for shareholders.

We are careful in assessing forecasts with respect to market dynamics while noting the instability of economy and the remaining excess rolling stock in the Russian Railways’ network in Q1 2014. Nevertheless, following the results of analysis of recent policy documents of the Government of the Russian Federation with respect to the national oil industry and the Russian Railways’ forecasts on petroleum products transportation volumes, we expect that the rail oil and petroleum products rail freight segment will retain its attractiveness in the mid-term. At the same time, I am confident that the Group, having an efficient strategy aimed at share expansion in its core segment, will properly overcome the system crisis.

On behalf of the Board of Directors, I promise that we will support the Transoil team and assist it in attaining our ambitious goals.

IGOR ROMASHOV

Statement
of the Chief Executive Officer

The year 2013 became an important stage in the development of Transoil. We faced the task to prove in practice what had been earlier calculated on paper – the efficiency of retaining rented tank wagon rolling stock with the purpose of strengthening market positions and minimizing risk of loss in scope. We also had to demonstrate the sustainability of business against external factors, both system and macroeconomic ones.

Final performance results show that Transoil managed to find responses to the challenges of the last year. Transoil market share in the segment of rail transportation of oil and petroleum products increased by 0.6%, revenue reached the record maximum while the volume of transportation remained at the level of the previous year.

Success in our operations was determined by the client-oriented projects with key customers, our expansion into new petrochemical regions, the modernization and expansion of production capacities of the service unit, and promotion of the competence demanded by the market – namely, the technological link “railway operator – terminal” and expansion of the route network serviced by our own locomotives fleet.

Essential achievement of the previous year for Transoil was the execution of a contract with JSC Gazprom Neft. After having defined the most convenient conditions for them, the companies settled the agreement for a five-year term.

Let me remind you that Transoil has been transporting products of the Omsk Refinery since 2006. Within this period, a sustainable cooperation technology has been elaborated and an infrastructural platform has been organized for the major customer in the Western Siberian Region, which ensured regularity of the pace of loading operations – namely, TransService LLC. Moscow Refinery became a new promising project. In December 2013, the companies launched the joint development of a logistics technology and started transportation of fuel oil between Yanichkino and Luzhskaya. According to the Russian Railways’ expert estimation, we managed to introduce advanced practice to the hub’s operation: we started to form direct shipping routes with length of 72 tanks on non-public tracks, which allows accelerating the delivery process.

In the first half of 2013, Rosneft – the largest public oil company in the world – announced its plans to reconsider its partnership relations in the sphere of transport services. Under this program, Rosneft organized a large-scale tender for transport and logistics services among the leading operators. As a result of the tender, Transoil confirmed a high level of competitiveness through obtaining 70% of freight of the Achinsk Refinery, as well as over 30% of freight of the Angara enterprise. Later, due to repeated wins in purchase procedures of Rosneft for transportation of products of the Samara Group of Refineries, Transoil occupied steadfast position on the loading area that has been historically developed by it.

Within the reported period, Transoil also managed to implement the principal freight owner structure diversification and to secure an essential key to the future. The Group has strengthened interaction with oil refineries, which are the most innovative in the country – Afipsky Refinery, Ilsk Refinery, Purovsky Condensate Processing Plant, and Yaysk Refinery. The last two provided the basis for the opening of wagon preparation areas by Transoil, which contributes to establishment of the Group at these prospective facilities.

Such impressive results became possible thanks to the hard work and determination of our employees, whose enthusiasm and high professionalism are at the heart of our progress towards long-term objectives.

I would like to thank our employees, members of the Board of Directors and partners for the efficient cooperation in the past year. I am confident that 2014 will become a year of the segment’s recovery, and will see minimal impact from any network restrictions and the growth of Transoil to the benefit of all its shareholders and partners.

VLADIMIR SOKOLOV

Portrait of the Group

The Transoil Group includes the parent company Transoil LLC and four subsidiaries – service business units that provide technical maintenance and overhaul of rolling and traction stock.

The Group’s regional network structure consists of more than twenty branches, offices and facilities that ensure high quality of customer service throughout the entire territory of the 1520 Space – in the Russian Federation, Mongolia, Finland, the Baltic States, and the CIS and Eastern-European countries.

In 2013, the Transoil Group celebrated the tenth anniversary of its activities while having retained the volume of transportation at the previous year’s level despite the decrease in general loading in the Russian Railways’ network and in the oil and petroleum products rail freight segment. Moody’s Investors Service enhanced the Transoil’s corporate rating outlook to “positive” while left the international rating unchanged at the level of Ba3.

The Transoil Group was rated 69th in the Forbes’ 2013 annual rating of the biggest private companies of Russia and became the fourth in the transport sector.

MISSION

VALUES

QUALITY

The high quality and reliability of Transoil’s services are based on professionalism, strict maintenance procedures and modern management standards.

LEADERSHIP

We strive for the best results while providing leadership of our clients.

SUSTAINABILITY

We consider that long-term sustainable development can only be achieved through a carefully managed relationship with the environment, social responsibility, and developing our staff.

RESPECT, TRUST, COOPERATION

We share information, delegate authority, expect mutual responsibility, and respect the rights and interests of staff and business partners.

INTEGRITY

We act with integrity in our relationships with employees, clients, partners, and suppliers.
We supply reliable information and keep our promises.

GROUP OBJECTIVES

• Securing of leading positions in the Russian rail freight transport market.
• The implementation of innovative technology and development of sector-specific
  know-how in order to increase efficiency.
• Growth of modern fleet in operation.
• Expansion of geographical presence and development of new potential routes.
• Stable growth in freight volumes.
• Enhancement of social responsibility and establishment of sustainable interrelations
  between the Group and the society.

STRENGTHS

MODERN TANK FLEET AND OWN SERVICE NETWORK

• Average age of fleet in operation does not exceed 13.1 years – more than twice less than statutory service life.
• High proportion of tanks equipped with steam heating system – 18.4%.
• Reliable infrastructure support system consisting of a depot, locomotive maintenance and tank filling preparation stations, flushing and recirculation stations in strategic areas of the Group’s footprint.

GEOGRAPHIC DIVERSIFICATION

• Broad network of branches and offices located in major industrial regions of Russia ensures efficient maintenance of export, transit and internal freight shippings.
• Operating area — the entire wide-gauge line network on the territory of Russia,
  Mongolia, EU and CIS states.

SOLID CUSTOMER BASE

• Key partners include Russian oil and gas giants like Gazprom Neft, Rosneft, Surgutneftegas, NOVATEK, Afipsky Refinery, and Kuban Oil and Gas Company. At the same time, the Group diversifies its customer base: a range of contracts has been settled with major oil companies and refineries of Russia in 2013.
• Activities in the segment resistant to critical implications: impact of negative macroeconomic and fuel and energy rends on operations remains insignificant.
• Outlooks for sustainable growth of oil refining industry.

EXPERIENCED MANAGEMENT TEAM

• Highly professional team of managers, who possess successful experience in attaining set goals and apply the best international practices for the Group management.

CONSERVATIVE FINANCIAL POLICY

• Flexible investment program gradually adjusted to the changes of market environment.
• Low leverage along with major long-term loan facilities that ensure financial
  stability of the Group.

Results of 2013

History of development

Key events of 2013

Group structure

Unified planning and budgeting are currently exercised within the Group, consolidated financial reporting in compliance with IFRS is being prepared and a unified purchasing policy has been implemented.A single auditor under Russian accounting standards has been also approved in all companies.

The actions have been completed in 2013 with respect to rebranding of the entire Group, and as a result, Transoil LLC and its subsidiaries are operating under a common brand.

Geographic footprint of the Group

Rail freight transportation

Russia is the third largest global player in terms of railway length, the second – in terms of electrified lines, the third – in terms of total loading and freight volume, and the first – in loading and freight volume per capita.

Within the past ten years, the freight carried volume in the Russian railroad network has increased by 32%, while its share in the total transport freight volume of Russia has increased from 39% to 43%. Moreover, if pipeline transportation is excluded, the share of rail freight volume amounts to 85%.

2013 was a difficult year for the entire Russian economy; and railways were no exception both due to macroeconomic factors and through the influence of internal problems of the segment. The freight volume carried by rail transport reduced by 2.8% — down to 1,237 mln tonnes, freight turnover fell by 1.2% — to 2,196 bln tonne-km.

Loading structure at the Russian Railways’ network has been stable in recent years; over 75% of transportation was related to four commodity groups essential for industry and export — hard coal, oil and petroleum products, metallurgic products and construction cargo.

Within the last ten years, the share of bulk oil cargoes within the freight structure at the Russian Railways’ network increased from 18% to 20% while the loading volume grew by 21.4%.

Oil and petroleum products remain in key cargo groups transported by railways of Russia — both by loading volume and by rate of profit. Furthermore, the rail bulk oil cargoes transportation is resistant to critical implications: even during the global financial crisis 2008-2009, no dramatic fall has been observed in oil and petroleum products transportation volumes, unlike in case of other cargo groups.

Oil and oil-related
products transportation

At year-end 2013, the oil cargoes transporta-tion volume via the Russian Railways’ network
amounted to 250.3 mln tonnes, which is 7.9 mln tonnes, or 3.1%, less than a year ago.

Within the loading structure, the largest share belongs to fuel oil — 28%, 13% belong to crude
oil, 22% — to diesel fuel, 15% — to petrol, and 22% — to other petroleum products.

Oil extraction
and petroleum production

Russian oil producers are not complacent, but continue to develop new deposits, to launch tight oil production, and to construct and modernize oil and gas processing plants. In 2013, the Government adopted a state program “Energy efficiency and development of the power industry”, under which the volume of oil extracted in Russia will remain at the current level until 2020.

Moreover, the oil conversion ratio at domestic refineries will substantially increase (from 70% to 85%), petrol and diesel fuel production will grow by half, and that of naphtha, jet fuel and liquefied petrol gas is to double.

Russia is shifting from the crude oil export model to the development of oil refining. Most of the country’s major refineries are currently implementing modernization programs aimed at increasing the oil conversion ratio and accreting production output. The key customers of Transoil — Rosneft, Surgutneftegas, Gazprom Neft, and Novatek — are heading this process. At a federal level, these companies, being oil and gas giants, extract more than half the oil and produce more than half of all petroleum products. Sustainable and mutually beneficial relations with them provide a solid base for the Group’s development.

The Group’s market position

As of 2013 year-end, the Group retained the second place among Russian rail operators in terms of the number of tank wagons both in ownership and in operation. As of the end of the reporting period, the share of tanks owned by Transoil within the total fleet of such wagons in Russia amounted to 8.5%, and the share of tanks in operation — to 13%.

The Group efficiently uses its rolling stock. As of year-end, each tank operated by Transoil carried 1,472 tonnes of freight that is higher than average market rate more than by half and significantly more than results of competing operators.

Risks of core activities

Operational results

Despite the problems at the Russian Railways’ network and a decrease in total freight volumes, the Group retained its shippings at the previous year’s level and substantially increased its freight turnover.

Within 2013, the Group’s own and rented rolling stock carried 56 mln tonnes of oil cargoes — Transoil managed to retain the freight volume at the level of 2012 despite the complicated market situation. The Group’s share in the rail oil and oil products transportation segment increased to 22.2%.

At the same time, the Group’s freight turnover increased by 12.4% at an annual rate to 85 bln
tonnes-km following the average length of haul growth to 1,522 km.

The main reason for this upside change was the new contract concluded by Transoil for the supply of stable gas condensate from the Novatek’s Purovsky Plant to the Ust-Luga Port, as well as increase in loading volumes on Nikolsk, Samara and Southern routes due to maintenance procedures at Kirishinefteorgsintez.

In the reporting year, 75% of Transoil’s freight volume accounts for four key clients of the Group — Rosneft, Surgutneftegas, Gazprom Neft, and Novatek. These oil and gas giants extract more than half of oil and produce more than half of all petroleum products in Russia; working together with them encourages the outlook for Transoil’s organic growth through improving operational and financial stability.

At the same time, the Group successfully diversifies the core shippers’ structure; 2013 for Transoil appeared to be a year of new contracts concluded with major Russian oil and gas companies. The Group won several Rosneft’s tenders, thereby strengthening cooperation with the country’s main oil company, and signed a contract for the supply of products from the Ufa Group of Refineries owned by Bashneft.

The Group also strengthened cooperation with oil and gas refineries that are among the most innovative in the country — Afipsky Refinery, Ilsk Refinery, Purovsky Plant, and Yaysk Refinery, which provided significant increase in loading volumes as of year-end due to production growth.

In order to improve the efficiency at these sites, most of the Afipsky and Ilsk Refineries’ products are shipped by the Group’s own trains; and on the basis of Purovsky Plant and Yaysk Refinery, Transoil opened wagon preparation sites. Personal approach to customers is a crucial competitive advantage of the Group, which enables securing positions on prospective sites.

The Group is consistently increasing the light oil products share in the shipping structure: as of 2013 year-end, it amounted to 48%, or 26.7 mln tonnes in physical terms. The leading position in the Transoil’s light oil products shipping structure is occupied by diesel (44%) and petrol (31%);
in the reporting year, relative share of stable gas condensate increased almost sevenfold, up to 14%.

The main freight carried by the Group’s rolling stock remains to fuel oil, which accounts for 43% of total freight volume. Meanwhile, the downsize trend for crude oil transportation volumes continued in the last year: its share reduced to the minimum of recent years – to 5.5%, which caused a decrease in heavy oil product share to 50%.

A guarantee for the Group’s success and its important competitive advantage is the availability of its own infrastructural base, which includes rolling stock, locomotives, and overhaul and maintenance assets.
The availability of this chain makes Transoil a unique company in the Russian rail freight transport market: the company possesses everything required for swift and reliable freight delivery throughout the 1520 Space.

Infrastructure. Wagon fleet

Group’s wagon fleet dynamics

Group’s fleet in operation as per
31.12.2013, by ownership types, %

The Transoil Group is the second among Russian companies in terms of the number of tank eagons in ownership and operation, following only the UCL Rail Holding as of 2013 year-end. However, Transoil’s rolling stock fleet is distinguished by its age, and the Group is the leader by oil and petroleum products transportation volume despite the smaller size of the fleet, thereby demonstrating high shipping efficiency.

Within the reporting year, Transoil made no purchases of wagons; the increase in own fleet was due to delivery of tanks under the contract executed in 2012 for acquisition of 10,000 wagons from JSC “Freight One”.

The Group is prepared for the further growth of its wagon fleet in ownership and carefully monitors the market environment and uses periods of falling rolling stock prices to implement investment projects in respective purchases. A long-term target of Transoil is the increase in its own wagon fleet.

Meanwhile, the Group made a managerial decision in 2013, to retain the rented tank wagon fleet in order to strengthen its market position and downsize risks. At the same time, Transoil negotiated with contractors the decreasing of tank rental rates and the unification of rental contract terms that would leverage rented fleet maintenance costs and simplify the fleet control.

As a result, the number of tank wagons rented by the Group increased by 1,466 units, or 13% – to 13,012 wagons as of the end of reporting period, while the rented fleet share in the compound rolling stock increased to 34% from 32% that had been reported in 2012.

Within the rolling stock fleet structure operated by the Group, all-purpose tanks (63.3% of total fleet as of 2013 year-end) designed for the transportation of both light and heavy oil products, including crude oil, prevail. Relatively equal shares in the Transoil fleet structure fall to light oil product transportation tanks (17.0%) and heavy oil product transportation tanks (19.6%).
The Group also operates a small number of tanks designed for transporting sulfuric acid (20 units,
i.e. 0.1% of total fleet).

The availability of such a fleet structure operated by the Group enables Transoil to fully meet the requirements of customers and to feel itself confidently in the oil and petroleum products rail freight segment. However, the Group gradually performs conversion of the rolling stock fleet in compliance with light oil products output and transportation uptrend.

18.4% of tanks within the fleet operated by the Group are equipped with steam heating systems, which enable year-round transportation of freezable cargoes and their continuous loading and unloading. Transoil operates almost a half of fleet of such tanks in Russia, thereby satisfying customers’ demands to transportation conditions to the maximum.

An important competitive advantage of the Group is a low rolling stock wear rate. The average age of tanks owned and operated by Transoil as of 2013 year-end amounted to 13.4 and 13.1 years respectively, which is substantially lower than both the average Russian index and statutory service life.

In order to improve situation with Russian Railways’ network throughput and to ensure a balance between the cargo base and infrastructure capacity, the Group advocates optimizing the rolling stock fleet in the network that would positively affect the entire railway industry of Russia.

Infrastructure. Locomotives

• EXPEDITING FREIGHT DELIVERY
• IMPROVING THE REGULARITY OF THE TRAFFIC PACE
• ENSURING TRANSPORTATION SAFETY
• QUALITY IMPROVEMENT OF SERVICES RENDERED
• ENSURING RELIABILITY OF THE GROUP’S OPERATION

Unlike the situation with rolling stock, where private operators dominates due to the reform of Russian Railways, the state company actually retains the monopoly on the traction power in Russia. By now, total number of main-line locomotives cruising on public routes and not owned by Russian Railways does not exceed 3% of the total size of locomotive fleet of the country. Such locomotives are either used on short-leg closed circular routes, or leased to Russian Railways.

As of 2013 year-end, the Transoil Group’s locomotive fleet amounted to 39 units, having increased by 3 units during the year due to the implementation of an investment program for the acquisition of three 2ES4K Donchak series direct current freight trunk locomotives. This purchase became necessary due to the increase in share of electrified lines on strategic routes of the Group’s operations; these locomotives are used now for the Kirishinefteorgsintez Refinery’s products shippings. The Group’s locomotive fleet also includes main-line locomotives 2ТE116, which are optimal by the traction properties and widely used throughout the entire 1520 Space.

The operation of the Group’s locomotives performed on a contractual basis with Russian Railways’ regional directorates is carried out by Transoil-Service, which was founded in 2006 and joined the Group in 2011. The company’s staff includes 92 locomotive crews attached to specific locomotives that enables the Group to manage maintenance expenditures and technological risks. Transoil-Service also undertake current repair of locomotives on the technical maintenance station at the Kirishi railway station.

Use of own resources to ensure complete traction fleet operation allows the locomotives to be maintained in excellent condition, which positively influences the decrease defaults and ensures train motion safety, thereby securing the high reliability of the Group’s deliveries.

Within 2013, the Group’s own trains (owned wagons and an owned locomotive) carried 20.8 mln tonnes of freight, which surpasses the level of the previous year by 4% and amounts to 37.4% of total transportation. Transoil’s own locomotives are used at two sites that are key for the Group.

Transoil plans to perform the same conversion on the Kirishi-Luzhskaya section after its reconstruction, to start using its own trains on the routes of Moscow and Northern Railways, and to develop locomotives fleet overhaul and maintenance capacities. The Group is convinced that the full-fledge access of private locomotives to the Russian railway network is inevitable, and is therefore preparing for such a course of events.

Infrastructure. Repair and maintenance

The repair and maintenance assets of the Group are concentrated in VRK Kupino, TransService and Transoil-Service subsidiaries on sites of Oktyabrskaya, West Siberia and Sverdlovsk Railways. They ensure the entire rolling stock technical maintenance and overhaul production cycle not only for the Group, but also for other owners.

Main service asset of the Transoil Group is VRK Kupino, which joined the Group in 2012. The wagon repair depot in Kupino has over 75 years of history, and its experience together with Transoil’s approach made VRK one of the biggest depots by repair volume in Russia and the biggest one on West Siberia Railway.

VRK Kupino provides a broad range of services in complete overhaul and depot repair of freight wagons, as well as combined treatment of oil and petrol tank barrels, preparation for repair, and filling at its own flushing and recirculation station. Highly professional staff of enterprise’s employees together with application of advanced repair technologies ensure swift and reliable maintenance services, which positively affects the Group’s competitiveness.

Since the accession to the Group, an investment program of hi-tech equipment purchases has been implemented, and the input materials and parts procurement system has been completely changed. As a result thereof, VRK Kupino’s repair quality ratio as of 2013 year-end amounted to a record 0.97 point; at the same time, the enterprise’s operational indicators has been significantly improved.

Within the reporting period, the number of wagons prepared for repair increased by 31%, that of depot repairs – by 19%, and of complete overhaul – by 84%. Total amount of depot and complete wagon overhaul by VRK Kupino’s capacities amounted to 6,447 units as of 2013 year-end, while 93% thereof were performed for the Transoil Group’s needs.

Organization of the Limbey wagon preparation section by VRK Kupino on the Novatek’s Purovsky Plant base in the Yamalo-Nenets Autonomous District became a significant event for the entire Transoil Group in 2013.

Organization of the Limbey wagon preparation section by VRK Kupino on the Novatek’s Purovsky Plant base in the Yamalo-Nenets Autonomous District became a significant event for the entire Transoil Group in 2013. This section located in Limbey at Sverdlovsk Railway is designed for the technical maintenance of tank wagons arriving to load stable gas condensate from one of the key customers of the Group. It allows the performance of executive expertise of wagons’ for loading within the plant’s territory and performing on-site works to remove faults, thereby optimizing technological processes of both Transoil and shippers. In Q4 of the reporting year, freight wagon wheel set repairs started to be carried out on the VRK Kupino’s Limbey section.

Within the framework of depot’s modernization in 2013, VRK Kupino has also finalized the design documentation for wagon wheel workshop construction and started the reconstruction of the carriage shop. The works will be completed in the next two years, whereupon the enterprise’s service list referred to rolling stock repair will be extended, the repair quality will be improved, capacities and labour performance will increase, and new jobs will be generated.

A second service asset of the Transoil Group on West Siberia Railway is TransService

This company’s core areas of activities include rolling stock repair organization and control, including current uncoupling repair, and rail tanks preparation for oil products filling.

The acquisition of TransService in 2011 allowed for the strengthening of the Transoil Group’s capacities to extend the technological service of its rolling stock, in compliance with the areas’ development strategy related to the provision of highly profitable services, as well as the enhancing of operational efficiency in the core segment.

In 2013, the number of depot repairs organized by TransService increased almost six-fold to 936 units, almost all of which were wagons of the Transoil Group. The Company launched the organization of current uncoupling repair on customer-furnished raw material at Moskovka station at West Siberia Railway, thereby ensuring substantial cuts in the Group’s costs. Moreover, TransService has commissioned the Sudzhenka Autonomous Facility on the base of Yaysk Refinery owned by NefteKhimServis and located at Sudzhenka station at West Siberia Railway.

Transoil-Service, besides operating the Group’s locomotives fleet, provides a range of services at Kirishi station at Oktyabrskaya Railway, that are aimed at ensuring the sustainable operation of one of the Group’s key customers, Kirishinefteorgsintez Refinery owned by Surgutneftegas.

The company’s production capacities include a locomotive technical maintenance station, where TO-2 is performed, as well as the regular oversight of technical state of undercarriage, break, electric and other equipment, and a flushing and recirculation station.

As of 2013 year-end, Transoil’s rolling stock repair share within the framework of intra-group transactions increased by more than two percentage points – to 45.5%.
The Group intends to continue developing its own repair and maintenance base, which provides Transoil with additional competitive advantages and financial benefit.

Information technologies

The project’s priority in the reporting year was the conversion and optimization of the document management system with Russian Railways.

In 2013, due to the conversion to actual expenditure accounting for current uncoupling repair (CUR) of the Group’s wagons, the development of OpenText continued in a new area – through the development of an archive for digitally-signed e-documents signed. Jointly with Russian Railways’ representatives, a new business process has been developed and introduced – the approval and packaging of documents generated in the course of Transoil wagon’s CUR process and endorsed with a digital signature. Innovative methods of teamwork were used in the introduction of this tool, which allow operations by all parties to the process via Rolling Stock Owners Portal to be safely carried out.

Adjusted business processes and information systems are currently used actively by both industry and accounting units of the Group and respective units of Internal Administration of Russian Railways’ Central Infrastructure Directorate.

E-document management implementation project
at Kirishi – Ust-Luga

One of the most promising areas of the Group’s activities in the IT sphere in 2013 was the participation jointly with Russian Railways in e-document management implementation project at Kirishi – Ust-Luga site of Oktyabrskaya Railway. This technology envisages an active involvement of the rolling stock owners in processes related to loading, wagon preparation for filling, and in repair and other in-yard processes.

A model solution “Electronic cargo station” is planned to be developed in the future on the basis of this project. Even today, the issue of the use of mobile desktops integrated with the Rolling Stock Owners Portal by Russian Railways employees, consignors and wagon owners is already being discussed.

By now, the operation technology and terms of reference for the project have been developed. The system has also been tested in Kirishi and Ust-Luga, key operational sites of the Group.

An integrated system landscape unites all the branches and subsidiaries of the Group and provides modern tools for the efficient management of production processes.

Production system development on SAP and MC “Slezhenie” platform in 2013 was stipulated by the Group’s need for tools that would allow for the controllable optimization of Transoil’s fleet. For this purpose, a new business process was developed and a new tool was introduced that helped to relocate the Group’s rolling stock, also in compliance with programs of wagon repair and wagon input/output in/from the fleet. A product has also been developed that allowed carrying out analysis in consolidated and quantitative terms as derived from data on planned relocation of wagons and established shipping routes.

Main areas of IT development in 2014 will include production processes in automated fleet regulation, yard operation, as well as processes associated with customer service in part related to exchange of e-documents endorsed through the use of digital signature.

Future development.
Group Strategy

Strategic priorities in the Transoil Group’s development will continue to include business sustainability and leadership within its key segment, support for a customer-centered business approach and Group’s market competitiveness, and ensuring of investment attractiveness.

Corporate governance principles and development in Transoil

Internal documents

In 2013, the Group elaborated and implemented a range of new internal documents: HR and Remuneration Committee Regulations, Code of Ethics of the Transoil Group, Regulations on the Prevention, Uncovering and Settlement of Conflict of Interest in the Transoil Group, Regulations on the Countering of Corruption and Fraud, Regulations on Insider Information, and Regulations on Information Policy.

Management structure

Company beneficiaries

The General Meeting of Shareholders acts as the highest management body of Transoil, the competence of which is determined by the Federal Law “On Limited Liability Companies” and the Company Articles of Association. All shareholders have the right to attend the Meeting, to take part in the discussion of agenda, and to vote on decisions. At the General Meeting, each shareholder has the number of votes equal to the amount of their share in the Company’s issued capital. The General Meeting of Shareholders may be convened by the CEO, by the Auditor, by the Board of Directors, as well as by shareholders owning altogether no less than 1/10 of total number of members’ votes.

Board of Directors

The Board of Directors, which consists of six individuals who are elected for a term of three years, is responsible for the overall management of the Company, and is elected by the General Meeting of Shareholders. The Chairman of the Board of Directors is appointed by the General Meeting from among the current members of the Board. Decisions relating to reserved matters are taken unanimously by all those present at the meeting, while matters which are not reserved are decided by a majority vote. The following issues that significantly affect the Transoil’s activities fall under the exclusive competence of the Board of Directors:

• changes to issued capital;
• significant changes to the nature and extent of the Company’s activity;
• reorganizations;
• liquidations.

Issues related to the Company’s transactions, the acquisition of securities and participating shares, recommendations to the General Meeting, and others, do not fall under the exclusive competence of the Board of Directors.

A specially created “Board of Directors” website has been designed for the efficient familiarization of the Board of Directors’ members with materials for the meeting; all Board members have access to this website.

The Board of Directors holds meetings on a regular basis in accordance with the approved action plan. 12 meetings were held in 2013, both in presentia and in absentia. By tradition, meetings in presentia are held for discussing performance results for the reporting half-year and year, as well as for the adoption of the budget.

Committees of the Board of Directors

Independent experts are involved in the work of committees on a permanent basis, whose opinion is taken into consideration when adopting decisions.

Sole executive body

Mr. Sokolov joined the Company in 2004 as Deputy Chief Executive Officer for Development, and later held the position of Deputy Chief Executive Officer for Operations. Since 2008, he has been First Deputy Chief Executive Officer. In March 2012, he was appointed the Company’s acting Chief Executive Officer. Appointed as Chief Executive Officer in June 2013.

• Date of birth: 1955
• Citizen of the Russian Federation
• Education: Leningrad Institute of Railway Engineers (now Petersburg State Transport University), specializing in Transport Organization and Management
• More than 30 years of experience working in transport

Management remuneration

The provision regarding payment of compensation to members of the Board of Directors, which was approved on July 19, 2012 by a resolution of the General Meeting of Shareholders, establishes that the Board of Directors is remunerated on the basis of the Company’s results for the reporting year, subject to the achievement of a net profit calculated according to IFRS. In addition, the provision established a base remuneration level, which is adjusted depending on the term of office of the member of the Board of Directors during the reporting year and that person’s participation in Board meetings. The Chairman of the Board of Directors and members of the committees of the Board of Directors receive bonuses in addition to their remuneration.

The Chief Executive Officer is remunerated in accordance with his contract and in accordance with the Annual Bonuses Offered to Senior Management Regulations, as approved on October 2, 2012 by decision of the Board of Directors. The size of the annual bonus which is awarded to the Chief Executive Officer on the basis of the annual results is calculated from the target annual bonus (percentage of base salary) and the actual achieved value of the established ROE and EBITDA indicators (as normalized).

Transoil Group

• TransService
• Transoil-Service
• VRK Kupino
• Transport Leasing

CORPORATE SECRETARY

In order to coordinate the decision-making process across the Group’s managing bodies in Transoil acts the Corporate Secretary, whose activities are determined by the Company’s Regulations on Corporate Secretary. The Corporate Secretary is responsible for developing a corporate governance system in two key areas:

• establishing effective relationships with shareholders, ensuring that the Company acts transparently and openly in its relations with external audiences;
• ensuring that the corporate management structure is focused on effectively resolving
  business tasks.

CREDIT RATING

An important step in the development of corporate governance at the Company and its transparency in dealing with the investment community was the decision by the international rating agency Moody’s in December 2010 to assign the Company an initial credit rating. Following an analysis of the Company’s key financial and business indicators, the Company was awarded an international credit rating of Ba3 with a “stable” outlook. The national scale rating was Aa3.ru.

The Company’s credit rating was confirmed as unchanged in 2011 and 2012, on the basis of an annual review carried out by Moody’s, and in December 2013, the agency enhanced the outlook to “positive” from “stable”. The change of the outlook was due to improvement of financial performance of the Group, enhancement of operational efficiency, and strengthening of leadership in oil and petroleum products rail freight segment.

PROCUREMENT

In 2010, the Company adopted a Regulations on Procurement Procedure. This ensures targeted and effective expenditure of the Company’s funds, as well as economically justified costs (market prices for products). The Price Committee grants permission to procure goods, and monitors and coordinates procurement activity on an on-going basis. The Committee approves qualification and evaluation criteria for each type of procurement, and approves product suppliers that can meet Transoil’s requirements on the basis of the results of a candidate selection process. A Procurement Section has been created on the Company’s official website, which publishes invitations to potential suppliers to submit proposals.

In 2013, the Company undertook work in material and equipment procurement for its own needs through conduction of e-trading. In September 2013, a contract has been settled with the e-trading system Picon.ru.

Procurement conversion to e-trading enabled the Company to ensure transparency of procedures carried out and to cut procurement costs by enhancing the competition level for suppliers. The E-trading system ensures competition in the form of participation of no less than five contactors that guarantees economically justified costs in the form of market prices, while the winning bids are lower than average market prices by 5% on average. In the future, the procurement for subsidiaries is also planned to be converted to the e-trading platform.

Group auditors

The following auditors were confirmed by resolution
of the General Meeting in 2013:

We understand corporate social responsibility as a system of continuous economic, environmental and social measures implemented on the basis of constant interaction with interested parties (stakeholders) and aimed at reducing nonfinancial risks, long-term improving of image and business reputation of the Group, and increasing capitalization and competitiveness that ensure profitability and sustainable development of Transoil.

Corporate social responsibility as a separate area in the sustainable development management of the Group’s activities started to evolve in 2012. The principles by which Transoil is guided in sustainable development management are established today in statutory documents, including the Code of Ethics adopted in 2013, and comply with social responsibility principles ISO 26000 “Guidance for social responsibility”.

The Group has established a corporate social responsibility policy and adopted an individual action plan. Corporate social responsibility management is recognized as one of key functions of corporate management. All elements of social responsibility program are considered at business plan development with respect to economic performance indices and evaluation of existing social and economic risks.

The program implementation is overseen at the level of the Group’s Board of Directors. At management level, administration of the program is implemented by the CEO of Transoil. The annual budget of CSR on the basis of individual areas is elaborated with respect to the Group’s Development Strategy and social and economic situation.

The costs of corporate social responsibility programs are an important part of the Group’s budget

Corporate culture

The principles of respect to people and human rights support are key in the Group’s work, where the staff is a key success factor. The main qualities of every Group employee should include professionalism, responsibility, initiative, integrity, a passion for development and efficiency improvement, and adherence to ethical standards and behaviours.

The strengthening and development of corporate culture are important components of securing and improving operational efficiency. To ensure compliance with professional and ethical standards, the Group’s Code of Ethics provides employee behaviour guidelines and describes their affiliation with business principles and the Transoil core values. The Group’s employees share core values – quality, leadership, sustainability, trust and cooperation, and integrity.

Besides the Code of Ethics, the Group elaborated and adopted in 2013 Regulations on the Prevention, Uncovering and Settlement of Conflict of Interest, Regulations on the Countering of Corruption and Fraud, and Regulations on Insider Information. These documents are actively implemented in the Group’s operational practice and together with other internal local documents ensure performance in the framework of applicable law in compliance with ethical requirements specified in general principles of activities.

The control system for implementing these principles requires the Group’s management to ensure safe and confidential conditions for raising concerns, addressing issues, and informing of their noncompliance. Employees in their turn shall notify of any uncovered violations of general principles of activities.

The Group’s activities are performed so as to complement the core values and develop a mentality and behaviour that complies with the interests of the Company’s common goal.

Social responsibility of the Group

The following areas of social investments were the priority for the Group in 2013:

• charity;
• volunteering;
• education;
• social development of footprint regions.

Since the moment of their foundation, the Group’s member companies have been paying particular attention to implementing socially important programs. Consistent investments into the social sphere and a deliberate long-term policy aimed at attaining socially important targets comply with the Group’s commitment to sustainable development. Transoil pursues the policy on the basis of mutual input of resources that is beneficial for all stakeholders.

The Group’s social investments envisage the implementation of projects that are elaborated on the basis of consultations and refer to issues affecting the Company’s reputation. However, they do not necessarily relate directly to the Group’s performance, but enable sustainable development and demonstrate Transoil’s commitments in sustainable development to stakeholders.

Social responsibility of business is its impact on the society, responsibility before those who are directly or indirectly affected by the business. Therefore, when choosing projects and areas of activity, the Group is guided by objective feasibility and viability of projects, as well as by their capability actually to change the life of communities in a positive manner.

Social projects implemented in 2013:

1. Joint projects with Russian Aid Foundation, Kommersant Publishing House, and Channel One

2. Corporate volunteering development

3. Project “Kupino is our city”

4. Laboratory for the Future

5. Individual charity projects

Interaction with interested parties
(stakeholders)

In 2013, core areas of interaction
included the following:

• interaction with the staff;
• informing stakeholders via the Group’s website, distribution of information reports and printed materials via mass media;
• interaction with non-commercial industry organizations;
• expert participation at professional platforms attached to executive bodies;
• expert participation in professional conferences, exhibitions, forums, etc.;
• interaction with contractors.

 

Interaction with the Group’s stakeholders is developed on the basis of principles of transparency, regularity, and accuracy of provided information. The key priorities of interaction are described in corporate documents. In developing approaches to interaction, the Group takes into account both the scope of interaction and the fact that the interests of different stakeholders do not always coincide.

 

Human capital
and internal social policy

We support the pursuit of high standards of quality and a safe working environment; we strive to create a corporate culture aimed at the attainment of high performance outcomes, strategic goals of the Group, and social activity of employees.

A single HR policy, combining a practical approach with cutting-edge technology and the best HR practice, identifies the paths and directions of human resource management and ensures that the Company’s staff is able to implement strategic goals and objectives.

In 2013, the Board of Directors’ HR and Remuneration Committee approved the Transoil HR Policy. The main objective of the Policy’s implementation is to ensure a matching of the Group’s human capital with strategic business goals, and the creation of vocational and motivational preparedness of the staff to their attainment.

Transoil is aimed at ensuring that professionalism, the attainment of high results, the adherence to and promotion of corporate ethical norms and a commitment to the values – these are the sole precondition and guarantee for professional and personal growth in the Group.

HR management is a crucial task for managers at any Group level. However, the employees remain responsible partners for Transoil business development. Mutual responsibility, loyalty, cohesion, mutual respect and determination – these are the guarantees for quality and efficiency of Group’s current operations.

The Group’s HR management policy uses an integrated approach, under which it defines the following core personal characteristics of employees required for attaining target indicators of the Development Strategy and general objectives of the Group:

• commitment to accomplish tasks set
  for the Group;
• initiative and commitment to active
  search for solutions;
• ability to study and apply useful knowledge;
• flexibility and stress resistance;
• commitment to the Group’s corporate values.

The HR management policy through ensuring efficiency of all internal processes of the Group considers them as broken down by the following areas:

• HR procurement;
• training and development;
• establishment of an efficient general remuneration and motivation system;
• corporate culture development;
• HR use and cost efficiency management

The main objectives of HR Policy implementation
are as follows:

• provision of qualified staff to implement the Group’s Development Strategy, also of an efficient talent pool;
• creation of a balance of HR qualitative/quantitative parameters and labour productivity improvement;
• establishment of a business partnership model between the employer and employees through an open communication system and efficient integrated staff incentive and development model;
• creation of a HR team compliant with business requirements.

Staff composition

Average employment experience in the Transoil Group on December 31, 2013 amounts to 3.3 years; while in recent years, the number of employees working in the Group for over five years has been sustainably increasing.

The age range of employees is balanced and stable. Over a half of Transoil employees are younger than 40 years old; in 2013, their number has slightly increased.

In 2013, the Group’s staff structure broken down by employees’ category was retained at the previous year’s level. The 55:45 proportion between operational and administrative staff fully meets the Group’s current demands.

Training and development

The Company’s training policy focuses on encouraging employees to develop their skills and improve their qualifications, thereby creating the right conditions to enable the Company to compete successfully on the market.

Training programs are intended for all employees. Various types of training are provided: compulsory periodic training (for example, in occupational health and safety), vocational training (specialized training is organized for employees and managers to maintain and develop their level of knowledge in a particular professional field), training in general business skills, and long-term continuing education and retraining courses for individuals.

The Group is arranging partnerships with top Russian universities in order to establish an external talent pool. We views successful students and top graduates as one of its most important and promising resources. The Group provides university students with opportunities to undertake work experience and internships, using this experience as a stage in the selection of promising candidates.

In 2013, the Group launched implementation of the “Laboratory for the Future” project,
which includes three areas:

• support for managerial competences implemented jointly with Graduate School of Management at St.Petersburg State University in cooperation with the Center for International Logistics and Supply Chain Management, which envisages involvement of Transoil employees in professional seminars and conferences, as well as development of dedicated modular program aimed at the Group’s managers competence development in operational management and supply chain management;
• maintenance of technical competences implemented on the basis of VRK Kupino and Transoil-Service in cooperation with higher educational institutions. This area includes development of a technical specialist training and attraction/motivation program: internship and job recruitment with the profession “technologist” for graduates of Omsk State Transport University, internship for students of Omsk Technical Rail Transport College with major in “rolling stock repair technician”, internship for students of Vocational Technical College No. 37 of the city of Karasuk with nonprofessional occupations, recruitment of graduates with the profession “rolling stock repairman”;
• in order to promote Transoil’s HR brand, the Group in 2013 has first participated as a sponsor in the Annual Award Ceremony for Graduate School of Management students and professors, who had been recognized the best by internal voting, and supported the nomination “An employer’s dream” with provision the winner with a place for internship within the Group.

Environmental and industrial safety
and occupational health

Industrial safety and occupational health

The successful accomplishment and operation of major projects require a special approach to industrial safety and occupational health. The main priority for the Group is the safety of production and avoidance of staff injury. The Group’s occupational health and industrial safety system is based upon regulatory acts, on which a range of local regulations has been developed.

Key areas of activities in the sphere of safety remains:

• industrial safety;
• rail and road shipping safety;
• behaviour safety.

In 2013, the Group did not register any cases of diseases that are determined as occupational diseases by Russian law. Within the same period, no significant accident in the sphere of technological safety took place at Transoil’s hazardous production facilities.

In order to retain and improve indicators in shipping safety, the Group continued the implementation of such measures as:

• in-vehicle monitoring system report analysis for traction rolling stock that allows controlling the machinist’s behaviour, uncovering any incompliance and applying measures for prevention of situations that cause railway accidents.
• organization of actions aimed at excellence and coaching improvement, also in skills of safe operation of locomotives and other means of transport;
• transport and rail transport checks for compliance with all safety requirements and taking measures for their updating, as well as preventive safety measures.

An efficient way of workplace arrangement is its attestation under labour conditions, the main objective of which is impartial evaluation of actual levels of various industrial factors at workplaces and their comparison with applicable sanitary norms. In 2013, 100% of Transoil employees’ workplaces were attested; and unscheduled medical inspections of employees were also organized.

Besides compulsory health programs, the Group continued in 2013 to pursue the employee encouragement policy for maintaining good physical fitness and disease prevention. The Group provides all employees with a voluntary medical insurance program, accident insurance and foreign travel insurance, and provides corporate discount for insuring employees’ family members.

The Group operates a number of hazardous operational facilities. Transoil has adopted operational monitoring regulations to ensure compliance with industrial safety requirements at hazardous facilities in order to guarantee the safe operation of such facilities. Operations monitoring is an integral part of the industrial safety management system, and it is implemented through a set of measures to ensure the safe operation of hazardous facilities, to prevent accidents, and to ensure that accidents, when they do occur, are contained and the consequences mitigated.
One of the key measures for the prevention of industrial injuries and occupational diseases is the efficient training of employees in occupational health requirements, as well as employee preparation and certification in the sphere of industrial safety. Training centers are involved in training, including distant ones. Occupational health requirements training shall be undergone by all employees of the Group within the first month of work, and then – no less than once in three years. Most of employees undergo training directly within the Group under developed programs and thematic plans.

Moreover, the working premises in carriage shop of VRK Kupino has been completed in the framework of the project “Kupino – the culture of labour”; a set of actions was taken for the improvement of individual protection, and modern protective glasses and filtering half-masks were purchased for employees working in a hazardous environment.

In 2013, 100% of Transoil employees’ workplaces were attested; and unscheduled medical inspections of employees were also organized.

Ecology and environmental protection

Industrial environmental control is performed by the Group in the following areas:

• control of impact on outdoor air;
• control of water use and impact on water facilities;
• control of waste treatment.

The Group strives for reducing a negative impact in all the above mentioned areas. No negative impact was uncovered after internal monitoring of the state of environment in the zones of the Group’s production facilities’ location.

In 2013, the Group also accomplished the following projects directly affecting environmental protection and potential risk minimization:

• development of a joint-project with refineries with respect to the reduction of environmental risks at loading oil and petroleum products (minimization of tank barrel outer surface pollution);

The project has been developed; joint meetings with representatives of two major refineries have been organized; reasons for barrel outer surface pollution have been defined; proposals for risk minimization have been developed and submitted for consideration in elaboration of technical programs of refineries. The work in this area will continue in 2014

• flushing and recirculation station modernization (Kirishi) for creation of a closed circulation perimeter;

Research has been carried out with respect to the feasibility of facilities construction for wagon outside cleaning from oil and petroleum products with regard to the state of the Group’s fleet and equipment appraisal at the market. The implementation was suspended prior to finalization of pollution avoidance project due to affiliation between the reason for pollution and the consequence.