НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2017 рік)

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

213

212

PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017

In millions of Ukrainian hryvnias

Note

2017

2016

(as restated, Note 3)

CASH FLOWS FROM OPERATING ACTIVITIES

Profit before income tax

52,751

18,485

Adjustments for:
Depreciation of property, plant and equipment and amortisation of
intangible assets

39,824

24,068

Loss on disposal of property, plant and equipment

132

406

Impairment of property, plant and equipment

3,399

1,231

Write down of inventories

1,903

1,905

Net movement in provision for trade accounts receivable and
prepayments made, other current assets, financial investments and VAT
balances

12,613

24,656

Net result of Gas Sales and Gas Transit Arbitrations

(12,597)

–

Change in provisions

(834)

12,067

Write off of accounts payable and other current liabilities

(48)

(101)

Share of after-tax results of associates and joint-ventures

Foreign exchange loss

1,043

5,790

Finance costs, net

6,704

3,668

Operating cash flows before working capital changes

104,937

92,274

(Increase)/decrease in other non-current assets

(338)

554

Increase in inventories

(10,749)

(18,616)

Increase in trade accounts receivable

(24,981)

(31,249)

Decrease in prepayments made and other current assets

2,277

8,623

Increase/(decrease) in other long-term liabilities

(106)

Provisions paid or used

(1,581)

(873)

Increase/(decrease) in trade accounts payable

18,702

(4,042)

(Decrease)/increase in advances received and other current liabilities

(5,199)

7,080

Cash generated from operations

83,076

53,645

Income taxes paid

(13,719)

(7,522)

Interest received

1,244

1,182

Net cash generated by operating activities

70,601

47,305

CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property, plant and equipment and intangible assets

(14,438)

(7,680)

Proceeds from sale of property, plant and equipment

Withdrawal of bank deposits

495

2,315

Dividends received

123

Net cash used in investing activities

(13,857)

(5,238)

PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2017

In millions of Ukrainian hryvnias

Note

2017

2016

(as restated, Note 3)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from borrowings

12,941

4,806

Repayment of borrowings

(49,469)

(25,641)

Interest paid

(7,378)

(8,711)

Profit share and dividends paid

(13,264)

(1,021)

Net cash used in financing activities

(57,170)

(30,567)

Net (decrease)/increase in cash and cash equivalents

(426)

11,500

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR

21,853

9,256

Effect of exchange rates change on cash and cash equivalents

1,666

1,097

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

23,093

21,853

Significant Non-Cash Transactions

In millions of Ukrainian hryvnias

2017

2016

Payment for the natural gas acquired by a lending bank

21,850

13,636

Dividends set off with accounts payable

3,242

–

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FINANCIAL STATEMENTS

ANNUAL REPORT 2017

215

214

1� THE ORGANISATION AND ITS

OPERATIONS

Public Joint Stock Company

“National Joint Stock Company

“Naftogaz of Ukraine” (“Naftogaz

of Ukraine”, the “Parent” or the

“Company”) was founded in 1998

in accordance with the Resolution

of the Cabinet of Ministers of

Ukraine #747 dated 25 May 1998.

Naftogaz of Ukraine and

its subsidiaries (hereinafter

collectively referred to as the

“Group”) are beneficially owned

by the State of Ukraine. The

Government of Ukraine, as

represented by the Cabinet of

Ministers of Ukraine, executes

government functions over the

Company through participation

in the shareholders’ meetings, as

well as through the appointment

of the Supervisory Board

members, the Chairman of

the Executive Board and the

Executive Board members.

Naftogaz of Ukraine is a

vertically integrated oil and

gas company engaged in full

cycle of operations in gas

and oil field exploration and

development, exploratory

drilling and production, gas and

oil transmission and storage,

sales and supply of natural gas

and petroleum products to

customers.

The Company holds stakes

in various entities that form

the national system of

production, refinery, distribution,

transportation, and storage of

natural gas, condensate and oil.

The Company is registered at

6 B. Khmelnytskoho Street, Kyiv,

Ukraine.

The Group conducts its business

and holds its production facilities

mainly in Ukraine. The principal

subsidiaries and joint operations

are presented as follows:

Name/Type of activity

% Interest held

as at 31 December

Country of

registration

2017

2016

Production of gas, oil and refinery products
Ukrgazvydobuvannya, PJSC

100.00

Ukraine

Ukrnafta, PJSC

50.00+1 share 50.00+1 share

Ukraine

Petrosannan Company, Joint operations with the Arab Republic of
Egypt and Egyptian General Petroleum Corporation

50.00

Egypt

Zakordonnaftogaz, Subsidiary Enterprise

100.00

Ukraine

Carpatygaz LLC, Joint operations with Misen Enterprises AB

49.99

Ukraine

Oil and gas transportation
Ukrtransgaz, PJSC

100.00

Ukraine

Ukrtransnafta, PJSC

100.00

Ukraine

Ukrspetstransgaz, PJSC

100.00

Ukraine

Wholesale and retail distribution of oil, gas and refinery products
Gaz Ukraiiny, Subsidiary Enterprise

100.00

Ukraine

Naftogaz Trading Europe S.A.

100.00

Switzerland

Kirovohradgaz, Open JSC

51.00

Ukraine

Ukravtogaz, Subsidiary Enterprise

100.00

Ukraine

Other
Vuhlesyntezgaz Ukraiiny, Subsidiary Enterprise

100.00

Ukraine

Naftogaz-Energoservice, Subsidiary Enterprise (former
Ukrnaftogazkomplekt)

100.00

Ukraine

2� OPERATING ENVIRONMENT

In the recent years, Ukraine
has been in a political and
economic turmoil. Crimea,
an autonomous republic
of Ukraine, was effectively
annexed by the Russian Federa-
tion. An armed conflict contin-
ues in certain parts of Luhanska
and Donetska regions. These
events resulted in higher infla-
tion, devaluation of the national
currency against major foreign
currencies, decrease of GDP,
illiquidity, and volatility of finan-
cial markets.

In 2017, annual inflation rate
amounted to 13.7% comparing
to 12.4% in 2016. The Ukrainian
economy proceeded recovery
from the economic and political
crisis of previous years that
resulted in real GDP smooth
growth of around 2.5% (2016:
2.4%) and stabilisation of
national currency. From trading
perspective, the economy was
demonstrating refocusing on
the European Union (“EU”)
market, which was a result
of the signed Association
Agreement with the EU in
January 2016 that established
the Deep and Comprehensive
Free Trade Area (“DCFTA”).
Under this agreement, Ukraine
has committed to harmonise
its national trade-related rules,
norms, and standards with those
of the EU, progressively reduce
import customs duties for the
goods originating from the EU
member states, and abolish
export customs duties during
a 10-year transitional period.
Implementation of DCFTA
began on 1 January 2017. As a
result, the Russian Federation
implemented a trade embargo
or import duties on key
Ukrainian export products. In
response, Ukraine implemented
similar measures against Russian
products.

As part of foreign currency trans-
action regulations, the National
Bank of Ukraine (“NBU”) decreased
share of mandatory sale of foreign
currency proceeds from 65%
down to 50% with effect from
April 2017, increased foreign
currency denominated export/
import transactions settlement
period from 120 up to 180 days
with effect from May 2017, and
allowed companies to pay the
2013 (and earlier) dividends in
amount of not more than USD
2 million per month with effect
from November 2017.

In March 2015, Ukraine signed
four-year Extended Fund Facility
(“EFF”) with the International
Monetary Fund (“IMF”) that
will last until March 2019. The
total program amounted to
USD 17.5 billion, while Ukraine
has so far received only USD 8.7
billion out of the total amount.
In September 2017, Ukraine
successfully issued USD 3 billion
of Eurobonds, of which USD 1.3
billion is new financing, with the
remaining amount aimed to refi-
nance bonds due in 2019. The
NBU expects that Ukraine will
receive another USD 3.5 billion
from the IMF in 2018. To receive
next tranches, the government
of Ukraine has to implement
certain key reforms, including in
such areas as pension system,
anti-corruption regulations, and
privatisation, as well as transi-
tion to market pricing for natural
gas.

Further stabilisation of the eco-
nomic and political situation
depends to a large extent upon
success of the Ukrainian govern-
ment’s efforts, yet further eco-
nomic and political developments
are currently difficult to predict.

Gas market reform in Ukraine
started with adoption of the Law
of Ukraine “On Natural Gas Mar-
ket” #329-VIII dated 9 April 2015

(“the Law on Gas Market”) that
became effective on 1 October
2015. Starting from this date, the
wholesale and retail natural gas
markets introduced the principle
of free pricing and freedom of
choice regarding sources of the
natural gas supplies, except for
the cases when the Cabinet of
Ministers of Ukraine imposes
specific obligations on the natural
gas market participants.

The Government and the Group
are undertaking significant mea-
sures in the open European natu-
ral gas market development that
is required by the Memorandum
on Economic and Financial Policy
agreed with the IMF, provisions
of the Coalition Agreement, the
“Ukraine-2020” Sustainable Devel-
opment Strategy, the Corporate
Governance Action Plan, and
the Plan for Implementation of
the Gas Sector Reform approved
by Resolution of the Cabinet of
Ministers of Ukraine #375-р. These
measures introduce conceptual
changes to the legal framework
and functioning of the natural gas
market, to certain aspects of oper-
ations of the Company and also
will have significant impact on the
performance of the Company and
the Group as a whole.

State regulation of gas market

in Ukraine
Starting from 1 October 2015
model of the gas market has
switched to the principles of free,
fair competition and ensuring
a high level of protection of
customer rights and interests
from the regulated tariffs market
model.

At the same time, the Cabinet of
Ministers of Ukraine has issued
Resolution #758 dated 1 Octo-
ber 2015, imposing public service
obligations (“PSO Resolution”) on
the Company during the transi-
tional period from 1 October 2015

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FINANCIAL STATEMENTS

ANNUAL REPORT 2017

217

216

to 31 March 2017 in respect of gas

purchase of domestic production

from “Ukrgazvydobuvannya” PJSC

and gas supply for the needs

of households, municipal heat

generating entities and religious

organisations, and starting from

23 December 2016 – for the

needs of budget financed entities

and PJSC “Odessa Port Plant”.

Public service obligations

imposed on the Company were

prolonged up to 1 April 2018

according to the Resolution of the

Cabinet of Ministers of Ukraine

#187 dated 22 March 2017. This

Resolution contains, amongst

others, a series of differences from

the previous one, in particular:
•

Both “Ukrgazvydobuvannya”

PJSC and “Chornomornaf-

togaz” PJSC are obliged to sell

gas to the Company for the

needs of households, religious

organisations, municipal heat

generating entities for heat

distribution and hot water

supply for households and

religious organisations.

•

The Company is obliged to

sell gas to municipal heat

generating entities for all

groups of customers, as well

as for producing electricity by

these companies.

•

Starting from 1 April 2017

the Company sells gas for the

needs of households, religious

organisations and municipal

heat generating entities at the

price of UAH 4,942 for 1,000

cubic meters. (excluding VAT,

transportation and distribution

tariffs and trade mark-up). In

setting wholesale price for

religious organisations and

municipal heat generating

entities for the needs of reli-

gious organisations a ratio

of 0.5 is applied to the price

defined above; in setting

wholesale price for gas for

municipal heat generating

entities for all customers,

except for the needs of

religious organisations and

households, and for electricity

production by municipal heat

generating entities a ratio of

1.6 is applied.

•

In case gas wholesale price

calculated at 100% import

parity before 1 July 2017 is

more than 10% higher than

currently effective price, sell-

ing price should be calculated

at 100% import parity for the

period from 1 October 2017

up to 1 April 2018 for gas

sales to households, religious

organisations and municipal

heat generating entities.

Concurrently with resolution

on Company’s gas sales price

change for specified catego-

ries, gas purchase price from

PJSC “Ukrgazvydobuvannya”

and PJSC “Chornomor-

naftogaz” should be revised.

Nevertheless, despite all precon-

ditions for such price revision

after recalculations performed by

the Ministry of Energy and Coal

of Ukraine, final decision was not

approved.

Other customers outside the Res-

olution buy imported natural gas

under the prices set discretionary

by the gas market participants,

including the Company.

The following tariffs and prices

were set:

31 December

2017

31 December

2016

Natural gas prices for households, including VAT, tariffs for gas
transmission and distribution and mark up on price.
Starting from 1 April 2017, Resolution of the Cabinet of Ministers of
Ukraine #187 dated 22 March 2017 sets maximum level of mark up
on price of 2.5% from the retails price for gas suppliers.

From 1 April 2017:

UAH 6.96 per cubic
meter

From 1 May 2016 to
31 March 2017:

UAH 6.88 per cubic
meter

Natural gas prices for municipal heat generating entities

producing heat for household, excluding VAT and tariffs for gas
transmission and distribution.

UAH 4.94 per cubic
meter

From 1 May 2016:

UAH 4.94 per cubic
meter

Gas selling prices for industrial customers and entities financed

from the State or municipal budgets, excluding VAT and tariffs
for gas transmission and distribution. These selling prices are set
discretionary by the Company depending on monthly consumption
levels and terms of payments.

From UAH 7 516
to UAH 8 265 per
1 000 cubic meters

From UAH 6 484
to UAH 7 148 per
1 000 cubic meters

General tariff for gas storage (storage, injection, and withdrawal),
excluding VAT, UAH per thousand cubic meters for one season of
storage.

UAH 112.0

Tariff for entry and exit points of Ukrainian gas transmission

network, excluding VAT, USD per thousand cubic meters per day

USD 12.47

Households settle their debts
on natural gas consumed
via special purpose accounts
opened in banks that were
authorised by the Cabinet of
Ministers of Ukraine for such
purpose. According to the cur-
rent procedure, gas suppliers
with public service obligations
open special purpose bank
accounts to receive payments
for natural gas consumed.
Amounts accumulated on the
special purpose bank accounts
are then allocated to current
accounts of the transmission
system operator, distribution
system operators and gas
supplier with public service
obligations according to ratios
calculated by the gas suppliers
with specific obligations and
approved by the National
Commission for Regulation of
Energy and Utilities (“NCREU”).
Balances on the special pur-
pose accounts cannot be
arrested or blocked.

Municipal heat generating
entities also open special
purpose banks accounts for
the settlement of debts for
heat supplied. Cash received
by municipal heat generating
entities on their special pur-
pose bank accounts is then
allocated, among others, to
current bank accounts of the
gas supplier with public ser-
vice obligations according to
ratios approved by the NCREU
monthly. The special purpose
bank accounts of municipal
heat generating entities also
cannot be blocked or arrested.

In November 2016 the Law
of Ukraine “On measures to
settle the debts for the natural
gas consumed by municipal
heat generating entities
and distribution and water
supplying companies” #1730
was adopted. The principles
of municipal heat generating

entities and distribution and
water supply companies
payables for gas settling are
set in this Law. Among other,
the Law assumes writing off
penalties and fines implied
for overdue debts for gas
supplied, and restructuring of
payables to the Company on
gas consumed.

The list of companies entitled
for debt settling procedures is
approved by the central body
of the government executive
authority responsible for pur-
suing the State policy in hous-
ing and utilities.

As at 31 December 2017 the
Company has signed gas debts
restructuring agreements
according to this Law in the
amount of UAH 432 mil-
lion. Fulfilment of gas debt
restructuring agreements
is guaranteed by municipal
executive government bod-
ies representing particular
territorial community as set
by the separate guarantee
agreement. According to the
terms of gas debt restructuring
agreements, the Company has
a right to terminate them in
case of late payments by coun-
terparty. There were no such
agreements terminated up to
the date of these consolidated
financial statements.

Compensation of price

difference between sales

tariffs and price of imported

gas and other types of

financial support by the State
In accordance with Para 7, Arti-
cle 11 of the Law of Ukraine
“On Natural Gas Market”, a gas
market player with public ser-
vice obligations is eligible for
compensation of economically
justified expenditures incurred
by such player, less any income
obtained in the course of

fulfilling such obligations plus
adequate margin. The level of
margin should be calculated
following the relevant resolu-
tion by the Cabinet of Minis-
ters of Ukraine.

In July 2017, Kyiv county
administrative court has sup-
ported the Company’s claim
against the Cabinet of Minis-
ters of Ukraine, and has admit-
ted the failure of the latter to
identify formula and sources
of financing the compensation
for performing public service
obligations when approving
the PSO Resolution. The court
decision became effective in
October 2017.

As at the date of these con-
solidated financial statements
such resolution has not been
adopted. Accordingly, the
Company did not receive any
compensation as a gas market
player with public service
obligations during 2016 and
2017. Expected amount of
compensation for performing
special obligations for the
whole period of PSO and up
to 31 December 2017 approx-
imates to UAH 36.2 billion
(unaudited) per the Compa-
ny’s calculations, excluding
compensation that other gas
market players with public
service obligation are eligible
to, namely – “Ukrgasvydoby-
vannia” PJSC and “Chornomor-
naftogaz” PJSC. Total amount
of compensation to all gas
market players named above
comprises UAH 111 billion
(unaudited) according to Naf-
togaz’s calculations.

Gas transmission unbundling

process

As at 31 December 2017 and
2016, the Company executed
control over transmission sys-
tem operator “Ukrtransgaz” PJSC.

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FINANCIAL STATEMENTS

ANNUAL REPORT 2017

219

218

Unbundling plan was

approved by the Resolution

of the Cabinet of Ministers

of Ukraine #496 dated 1 July

2016, which envisages transfer

of gas transmission activities

to “Mahistralny gasoprovody

Ukrainy” PJSC after Stockholm

Arbitrations are completed

(Note 23).

Under the Gas Transit

Contract Naftogaz is

responsible for reliable and

uninterrupted functioning

of the Ukrainian gas

transmission system.

Technical realisation of such

Naftogaz’s obligations is

performed by “Ukrtransgaz”

PJSC. The rights and

obligations in respect of the

Gas Transit Contract cannot

be designated to a third party

(e.g. “Mahistralny gasoprovody

Ukrainy” PJSC) without

“Gazprom” PJSC (“Gazprom”)

consent. Gazprom is reluctant

to give such consent and has

filed a Request for Arbitration

to The Arbitration Institute of

the Stockholm Chamber of

Commerce (“Arbitral Tribunal”)

requesting revision or,

alternatively, setting aside of

the Gas Transit and Gas Sales

Contracts (Note 26).

Therefore, management

believes that legal ownership

unbundling is not an option,

because it would deprive

Naftogaz of control of the

assets, which provides the

basis for Naftogaz’s legal

interest in defending its rights

under the Gas Transit Contract

according to the Swedish law.

Meanwhile, implementation

of the ISO (Independent

System Operator) unbundling

model, which would require

separation of transit and

domestic transmission if

aiming at unbundling to be

done before 2020, also cannot

be physically finalised until the

Gas Transit Contract expires.

ITO (Independent Transmission

Operator) unbundling model

is not envisaged in the Law on

Gas Market.

Given the above, management

believes that the transfer of

gas transmission activity is

unlikely to be completed

before 2020.

Assets located at temporarily

occupied territories

In early 2014, Ukraine suffered

from the military aggression of

the Russian Federation which

resulted in the occupation of

the Autonomous Republic of

Crimea (“Crimea”) and unlawful

military take-over of certain

areas in Luhanska and Donetska

regions by armed terrorist

groups that are controlled,

directed, and financed by the

Russian Federation, as well as а

result of the unconcealed intru-

sion of regular armed forces of

the Russian Federation.

As a result, by 1 January 2016,

the Company has recognised

a provision for impairment for

assets located on anti-terrorist

operation (“ATO”) as stipulated

by the Law of Ukraine „On Pro-

visional Measures during ATO”

#1669 dated 2 September 2014.

Management of the Group con-

tinues to undertake all possible

legal and diplomatic measures

to reimburse for losses and

recover control of the Group’s

assets in Crimea (Note 23).

3� RESTATEMENT OF

COMPARATIVE INFORMATION

The Group has issued the consol-

idated financial statements as at

and for the year ended 31 Decem-

ber 2016 on 4 May 2017. Subse-

quently to that date, the Group

identified matters requiring

correction in information for the

previous reporting periods that

has significant effect on the con-

solidated statement of financial

position as at and for the year

ended 31 December 2016. These

matters were corrected retrospec-

tively in these consolidated finan-

cial statements for the year ended

31 December 2016.

Impact of such misstatements on

the consolidated financial posi-

tion as at 31 December 2015, con-

solidated statement of profit and

loss and consolidated cash flows

for the year then ended is not

material, so the Group does not

present comparative information

at that date and for respective

periods.

The effect of the retrospective

corrections to the consolidated

statement of financial position

as at 31 December 2016 was as

follows:

In millions of Ukrainian hryvnias

Note

31 December 2016,

as previously

reported

Effect of

restatement

31 December 2016,

as restated

Deferred tax assets

3.1.

6,415

(1,907)

4,508

Prepayments made and other current assets

3.1.

12,051

(2,552)

9,499

Accumulated deficit

3.1.

(175,873)

(2,341)

(178,214)

Non-controlling interest

3.1.

1,164

(2,341)

(1,177)

Deferred tax liabilities

3.1.

82,088

224

82,312

The effect of the retrospective corrections on the consolidated statement of profit or loss for the year ended

31 December 2016 was as follows:

In millions of Ukrainian hryvnias

Note

2016,

as previously

reported

Effect of

restatement

2016,

as restated

Other operating expense

3.1.

(41,752)

(3,793)

(45,545)

Finance income

3.1.

4,672

1,241

5,913

Income tax benefit

3.1.

1,495

(2,131)

(636)

The effect of the retrospective corrections on the consolidated statement of cash flow for the year ended

31 December 2016 was as follows:

In millions of Ukrainian hryvnias

Note

2016,

as previously

reported

Effect of

restatement

2016,

as restated

Net movement in provision for trade accounts
receivable and prepayments made, other current
assets, financial investments and VAT balances

3.1.

20,863

(3,793)

24,656

Finance costs, net

3.1.

4,909

1,241

3,668

Proceeds from borrowings

3.2.

19,348

14,542

4,806

Repayment of borrowings

3.2.

(40,183)

(14,542)

(25,641)

3.1. Impairment of prepayments

made for petroleum products

As at 31 December 2016,

“Ukrnafta” PJSC accounted for

prepayments made for petro-

leum products that, taking

uncertainty in the form and

expected dates of their settle-

ment, have had impairment

indicators. Management of the

Group has decided to recog-

nise provision for impairment

in respect of such assets as at

31 December 2016, as it believes

that such accounting properly

reflects expectation of their set-

tlement as at this date.

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FINANCIAL STATEMENTS

ANNUAL REPORT 2017

221

220

3.2. Change in accounting

policy in presenting cash flows
From 1 January 2017 the Group

has changed its accounting

policy in respect of cash receipts

and payments for borrowings

and presenting cash flows for

such operations in consolidated

statement of cash flow on a net

basic. Management believes such

presentation is more accurate and

provides more relevant informa-

tion for the users of the financial

statements, since amounts of

receipts and payments for bor-

rowings are large and maturities

for such borrowings are quick.

3.3. Other changes
There were other individually

insignificant adjustments.

4� SEGMENT INFORMATION

The Executive Board is the

Group’s chief operating decision

maker. As at 31 December 2017,

the Group has changed presen-

tation of segment information in

line with performance manage-

ment approach to its subsidiaries.

Comparative information as at

31 December 2016 was restated

to reflect the changes in presen-

tation.

Management vision of the Group

performance is viewed through

the following business areas:

Gas production, imports, sales

and supply to different groups

of customers. Management

identified four main groups of

customers in respect of gas sales

and supply:
•

Gas production, imports and

sales to the regional gas sup-

ply companies (“RSC”) for the

needs of households,

•

Gas production, imports and

supply to the municipal heat

generating entities (“MHE”) for

the needs of households,

•

Gas production, imports and

supply to the other customers

under PSO,

•

Gas imports and supply to the

other customers outside PSO.

Each group of customers has its

own selling price setting pro-

cedure and its own economic

characteristics, such as products

delivered to the end customers,

their credit risks etc.

Selling price setting for gas sales

to RSC, MHE for the needs of

households and to the other

customers under PSO is per-

formed within the current PSO

Resolution (Note 2). Gas supply

for other groups of customers is

performed at prices established

independently by Naftogaz.

As described in Note 2, “Ukrg-

asvydobyvannia” PJSC and

“Chornomornaftogaz” PJSC are

obliged to sell gas to Naftogaz

for the needs of households,

religious organisations, munici-

pal heat generating entities and

distribution and water supply

companies for households and

religious organisations. There-

fore, management views perfor-

mance of gas upstream business

from gas production up to its

sale to one of the groups of cus-

tomers named above as a single

reporting segment. Natural gas

production is mainly performed

in Poltava, Kharkiv, Sumy, Dnipro,

Lviv and Zakarpattya regions.

Exploration works are mainly

performed in Carpathian and

Dnipro-Donetsk regions. The

Group controls about 80% of all

natural gas produced in Ukraine.

Demand in gas for other custom-

ers outside PSO is satisfied from

gas imports.

Gas domestic transmission and

gas transit. These segments are

presented by the gas transmis-

sion pipelines operated by the

Group. Management considers

gas transit and gas transmission

as separate business segments as

gas transit is manly represented

by a contract with a single coun-

terparty and is being assessed

separately.

Ukrainian gas transmission sys-

tem is one of the largest in the

world in terms of its transporta-

tion capacities. The total length

of gas transmission pipelines

in Ukraine is 38.5 thousand km.

Over 45% of natural gas supplies

from the Russian Federation

to European countries were

delivered through Ukrainian gas

transmission system in 2017 and

2016.

This segment also includes

result of market-based gas bal-

ancing operations introduced

by the Code of the Gas Trans-

mission System. Market-based

gas balancing operations is an

activity to balance gas volumes

entered the gas transmission

system at entry point and vol-

umes taken out at exit point.

Gas balancing services are pro-

vided to consumers of gas trans-

mission services. Currently this

type of activities is performed

by “Ukrtransgaz” PJSC.

Gas storage. Ukrainian gas

transportation system includes

11 underground gas storage

facilities located in mainland

Ukraine. The total capacity of the

underground gas storage system

located in Ukraine is 31 billion

cubic meters of gas.

Petroleum products sales. The

Group sells purchased and

domestically refined petroleum

products through filling stations

network in the most of Ukraine.

Domestic refinery of petroleum

products is performed at oil and

gas refineries controlled by the

Group. This segment includes

both wholesale and retail sales

of petroleum products. Whole-

sale activities are performed

through electronic auctions,

while retail sales are done

through own network of fuel

filling stations.

Oil and gas condensate. The

Group sells oil and gas con-

densate at exchange auctions

in accordance with the Law of

Ukraine “On oil and Gas” #2665-

III dated 12 July 2001 and the

procedure for organising and

holding exchange auctions for

sale of domestically produced

crude oil, gas condensate and

LNG, approved by the Cabinet of

Ministers of Ukraine Regulation

#570 dated 16 October 2014.

Oil domestic transmission and

transit. These segments are pre-

sented by oil transmission pipe-

lines and 11 oil reservoirs oper-

ated by the Group. Total length

of oil transmission pipelines in

Ukraine is 4.7 thousand km.

Other. Revenues of this segment

include revenues from sales of

materials, services and chemical

products. The segment also

includes results of joint operations

under the concession agreement

for exploration and development

with the Arab Republic of Egypt.

Management assesses perfor-

mance of operating segments

based on adjusted operating

result. Adjusted operating result

represents operating profit/(loss)

with operating foreign exchange

differences included.

Management uses net working

capital and net cash flows

from operating activities as

measures of both a segment

operational efficiency and its

short-term financial health.

Management also uses adjusted

operating result net of income

taxes (NOPLAT) to measure

segment operational efficiency.

Income taxes at nominal tax

rate are deducted from adjusted

operating profit to arrive to

NOPLAT. Adjusted operating

loss is not corrected for income

taxes.

The accounting policies of the

reportable segments are the same

as the Group’s accounting policies

described in Note 26 other

than presentation of payments

for natural gas made directly

by lending bank to suppliers

within cash flows from operating

activities.

-------------------------------------------------------------------------------------------------------------------------------------------------------------

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

223

222

Segment information for the reportable business segments of the Group for the year ended 31 December 2017

is as follows:

In millions of Ukrainian hryvnias

Gas pr

oduc

tion,

impor

t and sales t

RSC

’s f

or r

esale t

households

Gas pr

oduc

tion,

impor

ts and supply

to MHE’

s f

or the

needs of households

Gas pr

oduc

tion,

impor

ts and supply

to other cust

omers

under PSO

Gas impor

ts and

supply t

o other

cust

omers outside

PSO

Gas tr

ansit

Gas domestic tr

ansmis-sion

Gas st

age

Petr

oleum pr

oduc

sales

il and gas

condensa

il tr

ansit

il domestic

ansmission

ther

Elimina

tion

Total

Sales – external

54,257

22,766

7,755

4,113

73,937

24,829

184

18,095

12,895

3,574

160

4,913

–

227,478

Sales to other segments

–

23,399

–

2,874

774

–

(27,081)

–

Total revenue

54,257

22,766

7,755

27,512

73,937

27,703

958

18,095

12,895

3,574

188

4,919 (27,081) 227,478

Segment result

20,369

3,942

1,626

513

14,512

(329)

3,407

5,556

1,996

(581)

(138)

–

50,877

Net result of Gas Sales and Gas Transit Arbitrations

12,597

Change in provisions for litigations and other provisions

2,787

Impairment of property, plant and equipment

(3,399)

Finance income/ (expense)

(6,704)

Share of after-tax results of associates

(47)

Net foreign exchange loss/gain

(764)

Unallocated income/ (expense), net

(2,594)

Profit before income tax

52,751

NOPLAT

16,703

3,232

1,333

421

11,900

(329)

2,794

4,556

1,637

(581)

(138)

–

41,531

Net segment cash flows from operating activities

11,173

1,240

2,331

2,790

38,322

(4,878)

407

1,557

5,983

1,354

(151)

932

–

61,060

Payments for natural gas made directly by lending bank to suppliers

21,850

Net result of Gas Sales and Gas Transit Arbitrations

(12,597)

Unallocated cash flows from operating activities

288

Net cash flows from operating activities

70,601

Material non-cash items included in segment results:
Depreciation, depletion and amortisation

5,336

1,287

147

109

28,014

1,570

382

916

963

497

215

388

–

39,824

Net movement in provision for trade and other receivables and
prepayments made and other current assets

1,059

692

(91)

–

11,197

(345)

(82)

–

(60)

(42)

–

12,353

Change in provisions

212

(19)

–

128

–

466

Net foreign exchange (loss)/gain

(52)

(12)

(1)

(9)

(1)

–

(204)

–

(279)

Capital expenditure

8,428

3,978

103

1,695

1,287

710

109

477

–

16,996

Property, plant and equipment

77,805

25,432

4,196

1,456 174,092

11,908 152,385

17,101

9,610

7,092

7,784

2,621

–

491,482

Other segment assets

65,641

23,246

1,050

848

15,278

9,999

5,058

1,195

873

1,156

10,357

–

134,726

Investments in associates and joint ventures

1,197

Cash and bank balances

23,093

Indebtedness under the Gas Transit Arbitration

57,125

Unallocated assets

15,501

Total assets

723,124

Segment liabilities

10,106

3,583

823

1,891

8,661

1,451

1,680

2,934

6,054

107

394

1,819

–

39,503

Borrowings

59,315

Portion of net profit attributable to the State Budget of Ukraine

29,498

Deferred tax liabilities

67,304

Indebtedness under the Gas Transit Arbitration

57,125

Unallocated liabilities

29,860

Total liabilities

282,605

Net working capital

54,350

19,238

198

(503)

5,662

8,430

(1,656)

1,825

(2,580)

766

755

1,747

88,232

-------------------------------------------------------------------------------------------------------------------------------------------------------------

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

225

224

Segment information for the reportable business segments of the Group for the year ended 31 December 2016

is as follows:

In millions of Ukrainian hryvnias

Gas pr

oduc

tion, impor

and sales t

o RSC

’s f

resale t

o households

Gas pr

oduc

tion, impor

and supply t

o MHE’

s f

the needs of households

Gas pr

oduc

tion, impor

and supply t

o other

cust

omers under PSO

Gas impor

ts and supply

to other cust

omers

outside PSO

Gas tr

ansit

Gas domestic tr

ansmis-

sion

Gas st

age

Petr

oleum pr

oduc

ts sales

il and gas c

ondensa

il tr

ansit

il domestic

ansmission

ther

Elimina

tion

Total

Sales – external

48,920

18,871

4,600

12,880

59,986

14,710

13,482

11,149

3,336

4,678

– 192,764

Sales to other segments

–

15,560

–

2,624

930

–

(19,168)

–

Total revenue

48,920

18,871

4,600

28,440

59,986

17,334

991

13,505

11,149

3,336

4,709

(19,168) 192,764

Segment result

19,936

4,954

(392)

(1,678)

24,648

3,093

(315)

(7,550)

(3,521)

1,959

(643)

513

–

41,004

Change in provisions for litigations and other provisions

(10,957)

Finance income/ (expense)

(3,668)

Share of after-tax results of associates

(99)

Net foreign exchange loss/gain

(6,052)

Unallocated income/ (expense), net

(1,743)

Profit before income tax

18,485

NOPLAT

16,347

4,062

(392)

(1,678)

20,211

2,537

(315)

(7,550)

(3,521)

1,607

(643)

419

–

31,084

Net segment cash flows from operating activities

(7,928)

(1,713)

(2,188)

5,403

35,187

1,437

323

(4,608)

4,425

898

497

(1,084)

–

30,648

Payments for natural gas made directly by lending bank to suppliers

13,636

Unallocated cash flows from operating activities

3,021

Net cash flows from operating activities

47,305

Material non-cash items included in segment results:
Depreciation, depletion and amortisation

5,585

2,120

–

165

11,503

1,564

124

1,335

716

456

221

280

24,069

Net movement in provision for trade and other receivables and
prepayments made and other current assets

(156)

1,375

4,033

–

4,048

152

8,024

6,610

–

(15)

266

24,383

Change in provisions

(22)

(8)

(2)

–

(44)

–

(74)

Net foreign exchange (loss)/gain

–

(501)

229

(262)

Capital expenditure

3,580

1,805

112

1,667

597

617

260

119

558

9,469

Property, plant and equipment

67,019

32,565

1,669

1,540 242,350

14,651 155,554

12,430

5,203

7,285

7,996

3,399

551,661

Other segment assets

53,622

20,497

5,108

14,019

4,713

129

4,337

885

819

1,067

10,198

115,435

Investments in associates and joint ventures

1,328

Cash and bank balances

22,336

Unallocated assets

9,370

Total assets

700,130

Segment liabilities

6,068

3,163

129

1,772

3,868

1,065

1,461

4,415

3,457

440

2,040

27,961

Borrowings

70,844

Provisions for litigations

11,844

Portion of net profit attributable to the State Budget of Ukraine

13,264

Deferred tax liabilities

82,312

Unallocated liabilities

38,315

Total liabilities

244,540

Net working capital

47,277

17,139

1,368

1,721

9,630

3,573

(1,332)

538

(3,024)

379

987

2,313

80,569

-------------------------------------------------------------------------------------------------------------------------------------------------------------

FINANCIAL STATEMENTS

ANNUAL REPORT 2017

227

226

Geographical information

In millions

of Ukrainian

hryvnias

2017

2016

Ukraine

147,309 127,908

Russian
Federation

77,511

63,322

Egypt

457

398

Europe

2,201

1,136

Total

revenue

227,478 192,764

Allocation of sales in the table

above is made based on the

country of residence of the

Group’s customers.

External customers

concentration, exceeding 10%

of total revenues

During the years ended

31 December 2017 and 2016,

the only external customer

with concentration of

revenue exceeding 10% of

total revenues was Gazprom.

Amount of revenue from

Gazprom related to gas

transit in 2017 amounted

to UAH 73,937 million

(2016: UAH 59,986 million).

Revenues, operating profit/(loss)

and receivables of the segments

“Gas transit” and “Gas transmis-

sion” by main types of services are

as follows:

31 December 2017

In millions of Ukrainian

hryvnias

Revenue

Operating

profit/(loss)

NOPLAT

Trade accounts receivable

gross

amount

provision for

impairment

carrying

amount

International transit

73,937

14,512

11,900

6,589

Domestic transmission

24,829

22,804

(15,562)

7,242

including gas balancing

operations

16,085

(6,133)

20,033

(14,483)

5,550

Total

98,766

14,516

11,903

29,393

(15,562)

13,831

31 December 2016

In millions of Ukrainian

hryvnias

Revenue

Operating

profit/(loss)

NOPLAT

Trade accounts receivable

gross

amount

provision for

impairment

carrying

amount

International transit

59,986

24,648

20,211

6,354

–

6,354

Domestic transmission

14,710

3,093

2,537

8,873

(4,843)

4,030

including gas balancing

operations

6,242

(3,475)

6,616

(4,051)

2,565

Total

74,696

27,741

22,748

15,227

(4,843)

10,385

5� BALANCES AND TRANSACTIONS

WITH RELATED PARTIES

Parties are generally considered

to be related if one party has the

ability to control the other party,

is under common control, or can

exercise significant influence or

joint control over the other party

in making financial and opera-

tional decisions. In considering

each possible related party rela-

tionship, attention is directed to

the substance of the relationship,

not merely the legal form.

As discussed in the Note 1, the

Group is ultimately controlled

by the Government of Ukraine,

and therefore, all state-controlled

entities and institutions are con-

sidered as related parties under

common control.

Transactions with related parties

are performed on terms that

would not necessarily be avail-

able to unrelated parties.

Transactions with state-

controlled entities and

istitutions. The Group

performs significant

transactions with entities and

institutions controlled, jointly

controlled or significantly

influenced by the Government

of Ukraine. These entities

and institutions include State

Savings Bank of Ukraine,

Ukreximbank, Ukrgazbank, tax

authorities, municipal heat

generating entities, regional

gas distribution entities and

other entities.

For the year ended 31 December

2017, about 30% of Group’s

revenue (2016: 32%) were earned

from transactions with the entities

controlled, jointly controlled or

influenced by the Government

of Ukraine. Outstanding trade

accounts receivable related

to these transactions as at

31 December 2017 and 2016 are

about 45% and 44%, respectively,

of the total trade accounts

receivable balance.

Outstanding accounts payable,

advances and other current

liabilities as at 31 December 2017

and 2016 are about 18% and 60%,

respectively, of the total balance

of these liabilities.

Provisions in respect of the

entities controlled by the Govern-

ment of Ukraine as at 31 Decem-

ber 2017 and 2016 are about 80%

of the total provisions.

As at 31 December 2017 and

2016, about 98% and 95%,

respectively, of cash and bank

balances were placed in the banks

controlled, jointly controlled or

influenced by the Government

of Ukraine and about 65% of

borrowings were provided by

these banks (2016: 54%). About

55% of finance income in 2017

relate to balances in these banks

(2016: 23%) and about 70% of

finance costs for the year ended

31 December 2017 (2016: 68%)

relate to borrowings from these

banks.

In December 2017 the Company

has completed redemption

of bonds amounting to

UAH 4 800 million that were

issued in 2013 guaranteed by the

State.

In 2017 the Group has concluded

additional agreements with two

state-owned banks in respect

of decreasing interest rates and

changes to the borrowings

repayment schedules prolonging

their maturities, and converting

one loan to a revolving credit

line.

Pledges. As at 31 December

2017 and 2016, borrowings from

related parties (State-owned

banks) were secured by property,

plant and equipment, inventories

and proceeds from future sales.

Guarantees. Amount of guaran-

tees, provided by the Government

of Ukraine, as at 31 Decem-

ber 2017 and 2016 equalled

to UAH 22,023 million and

UAH 28,912 million, respectively

(Note 14).

Transactions with the State are

further disclosed in Note 13.

Key management remuneration.

During 2017, key management

personnel consisted on average

of 6 Executive Board members

and 9 directors (2016: 4 Executive

Board members and 6 directors).

Compensation to the key man-

agement personnel included

into other operating expense

consists of salary and additional

current bonuses and comprises

UAH 214 million in 2017 (2016:

UAH 87 million).

During 2017 the Company

also incurred UAH 25 million

of expenses on operations of

the Supervisory board (2016:

UAH 20 million). This amount

includes UAH 20 million

in service fees accrued

(2016: UAH 15 million), and

UAH 5 million in compensation of

expenses incurred by the Board

members during performance of

their duties (2016: UAH 5 million),

as well as directors and officers

liability insurance procured and

paid by the Company to insure

the liability of these officers after

their appointment.

-------------------------------------------------------------------------------------------------------------------------------------------------------------

НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2017 рік) - 14