ESPO drives Transneft into debt.

Transneft plans to use both equity and debt for the financing of the ESPO expansion. The total investment in increasing capacity of this transport artery to 80 million tons per annum amounts to 172 billion roubles. The company expects that 30 % of this amount (nearly 52 billion roubles) it would contribute from its own funds, and plans to raise the rest from other sources. Earlier Transneft also assumed that the tariff for pumping oil through the ESPO will be substantially increased in order to fund the increase of the pipeline's capacity. However, the natural monopolies' tariffs were frozen, and their further growth will be at best in line with the inflation.

In 2013 Transneft’s FCF for nine months amounted to 104 billion roubles, but in the future it will be certainly significantly reduced, as the company will have to significantly increase the capital expenditures. The size of approved investment until 2020 is almost 2 trillion roubles. Given its scope, as well as freezing rates and slow growth of oil production in Russia, we can expect that free cash flow will continue to decrease and the flow from operations is not sufficient to finance the investment in full. This means that Transneft will have to resort to debt financing.