Letter to Shareholders

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Vadim Yakovlev
Chairman of the Board of Directors NIS j.s.c. Novi Sad

Kirill Tyurdenev
General Director NIS j.s.c. Novi Sad

Dear Friends,

As a successful and dynamic year for NIS, 2017 has become a significant milestone in our history. It saw strategic directions for the development of NIS defined and the cornerstone laid for implementing large projects aimed at improving our competitiveness in an ever-more demanding market.

The current reality and the accelerating rate of development in new technologies are bringing continuous transformations globally, creating new challenges for our business. Rapid development in the IT sector greatly changes both the expectations and the behaviour of our consumers, while continuous innovation reforms not only production methods but also how processes of conventional markets operate on global and regional levels.

In 2017 we set our focus on sustaining profitability and improving operational efficiency. Accordingly, we developed a business model that reflected low oil prices and new macroeconomic realities. This enabled us to return excellent financial results by the end of the year as well as initiating and strengthening important partnerships and to formulate the future strategic direction.

Improving results

The significant financial growth during 2017 is the result of the total commitment to business activities by all employees, from the top management to operating personnel. NIS net profit increased by 80 per cent compared to 2016 reaching RSD 27bln. We invested a total of RSD 26.5bln, while fiscal charges reached RSD 171bln, 5 per cent more than the previous year. This is the fifth consecutive year that NIS delivered high returns for its shareholders; in 2017 over RSD 4bln were paid in dividends.

Continuous modernisation

During last year, NIS proved success in all its business directions. The implementation of the vast programme of production modernisation continued. We began the works for the ‘Bottom of the Barrel’ project at the Pančevo Oil Refinery, where implementation envisages investments in excess of EUR 300 million. The start-up of the Delayed Cocking Unit complex, set for 2019, will enable the NIS processing complex to become one of the most up-to-date and efficient refining capacities in South-East Europe.

NIS also made further investments in increasing the environmental protection level at the Pančevo Oil Refinery. In 2017, the refinery became the first energy complex in Serbia to receive the IPPC permit, an international certificate that confirms that production processes comply with European standards for environmental protection.

Our retail network also underwent further modernisation. In 2017, we opened fourteen new petrol stations, all of which fully meet the latest environmental, safety and construction standards. Following further expansion of the petrol station network, the quality of the offering for clients was also improved; the loyalty programme was actively improved and the branded fuel line was expanded.

There was also a new step in the field of energy projects; as part of a joint venture with ‘Gazpromenergo Holding’, we signed a contract with the Shanghai Electric Group for the construction of Combined Heat and Power Plant Pančevo. The scale of investment envisaged for this project is approximately EUR 180 million. Applying contemporary combined-cycle technology will deliver a high level of environmental safety for the new Combined Heat and Power Plant, covering the majority of the electricity consumption at the Pančevo Oil Refinery. Any remaining capacity will be directed towards boosting Serbia’s energy security.

NIS also continued its successful business activities in the Balkans region. We concentrated on developing our retail network within Bosnia and Herzegovina, Bulgaria and Romania. In Romania, we completed the drilling of the Teremia 1000exploration well, delivering promising results.

Reliable partner

However, it is not operational results alone that make NIS the leading company in Serbia. In 2017, NIS remained the reliable partner of local communities, implementing programmes to improve the quality of life in the regions where the NIS operates, supporting educational, cultural, sport activities and organising significant social events.

Also during last year, our social responsibility programme benefitted from an investment of approximately RSD 370 million. We proved ourselves as leaders in the area of social responsibility in Serbia. We are particularly proud of organising a social event where employees and customers raised a large contribution for the University Childrens’ Hospital ‘Tiršova’ in Belgrade. These will be used to procure new medical equipment for the hospital.

As ever, we gave significant attention to implementing personal development programmes, including those to attract and support young specialists.

In 2017, a new Collective Agreement was established. This is one of the best in Serbia, demonstrating a true declaration of mutual understanding between employer and employee.

Vision of development

Finally, we concluded 2017 by establishing a new development strategy to 2025 for NIS. This laid the foundation for further development, with the goal of increasing value for both shareholders and employees as well as those communities where NIS operates. First, we will invest in Exploration and Production, thus preserving the trend of expanding hydrocarbon reserves, increasing refining efficiency, modernising the retail network and generating electrical energy.

The results we have achieved to date display our ability to turn challenges into business success. This shows that today, NIS is a company with clear vision for its development trajectory. This is confirmed by the development plan we have adopted, as well as our devotion and the pioneering approach to work shown by all our employees. We are demonstrating the future at work.