НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2018 рік) - 11

171

170

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

Segment information for the reportable business segments of the Group for the year ended 31 December 2018 is as follows:

In millions of Ukrainian hryvnias

tegr

ed g

Oil mids

tream

and do

wns

tream

Gas tr

ansit

Gas domes

tic

transmis-sion

Gas s

tor

Ukrna

fta

Other

Elimina

tion

Tot

Sales – external

108,534

12,950

72,347

24,815

259

36,029

1,378

256,312

Sales to other segments

29,291

2,353

1,537

(33,295)

Total revenue

137,825

12,980

72,347

27,168

1,796

36,113

1,378

(33,295)

256,312

Segment result

35,214

1,103

8,150

(3,194)

(1,264)

11,384

(2,695)

48,698

Non-refundable VAT recognised according to the Gas Transit Arbitration

(4,751)

Change in provisions for litigations and other provisions

(14,530)

Impairment of property, plant and equipment and intangible assets

(1,466)

Finance costs, net

(4,073)

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

(1,316)

Unallocated income/(expense), net

(2,025)

Profit before income tax

20,537

NOPLAT

28,875

904

6,683

(3,194)

(1,264)

9,335

(2,695)

38,644

Net segment cash flows from operating activities

33,291

1,175

26,803

(3,307)

186

3,145

(1,947)

59,346

Payments for natural gas made directly by lending bank to suppliers

17,699

Unallocated cash flows from operating activities

(5,402)

Net cash flows from operating activities

71,643

Material non-cash items included in segment results:

Depreciation, depletion and amortisation

8,515

1,359

29,912

1,378

1,234

1,539

223

44,160

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

and other current assets

2,421

13,344

219

3,287

19,361

Change in provisions

122

Net foreign exchange loss

128

209

Capital expenditure

24,749

545

2,492

340

242

1,530

697

30,595

Property, plant and equipment

115,772

11,993

80,389

9,413

199,596

13,726

3,481

434,370

Other segment assets

94,739

2,869

15,960

8,914

178

16,243

5,071

143,974

Investments in associates and joint ventures

1,255

Cash and bank balances

14,224

Unallocated assets

9,889

Total assets

603,712

Segment liabilities

15,281

1,456

5,884

1,277

1,852

6,782

765

33,297

Borrowings

55,999

Portion of net profit attributable to the State Budget of Ukraine

4,084

Deferred tax liabilities

50,544

Provisions for litigations

15,254

Unallocated liabilities

30,676

Total liabilities

189,854

Net working capital

77,679

1,416

9,075

7,506

(1,675)

9,462

837

104,300

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173

172

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

ІSegment information for the reportable business segments of the Group for the year ended 31 December 2017 is as follows:

In millions of Ukrainian hryvnias

tegr

ed g

Oil mids

tream

and

wns

tream

Gas tr

ansit

Gas domes

tic

transmission

Gas s

tor

Ukrna

fta

Other

Elimina

tion

Tot

Sales – external

89,089

11,302

73,937

24,747

184

26,858

1,361

227,478

Sales to other segments

29,358

2,874

774

(33,083)

Total revenue

118,447

11,330

73,937

27,621

958

26,907

1,361

(33,083)

227,478

Segment result

33,590

2,243

12,721

(881)

(2,361)

4,939

748

50,999

Income recognised per results of Gas Transit Arbitration

57,125

Expense recognised per results of Gas Sales Arbitration

(44,528)

Change in provisions for litigations and other provisions

2,787

Impairment of property, plant and equipment and intangible assets

(3,399)

Finance costs, net

(6,704)

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

(47)

Net foreign exchange loss

(764)

Unallocated income/(expense), net

(2,718)

Profit before income tax

52,751

NOPLAT

27,544

1,839

10,431

(881)

(2,361)

4,050

613

41,235

Net segment cash flows from operating activities

19,752

1,341

36,039

(6,039)

(325)

6,874

475

58,117

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

3,231

Net cash flows from operating activities

70,601

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

5,632

887

27,997

1,570

1,992

1,596

150

39,824

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

current assets

1,591

(58)

11,173

(345)

(76)

12,353

Change in provisions

266

128

482

Net foreign exchange loss/(gain)

(74)

(1)

(204)

(279)

Capital expenditure

13,661

381

1,695

145

987

16,995

Property, plant and equipment

93,083

27,684

174,092

18,342

162,062

14,109

2,110

491,482

Other segment assets

95,550

2,524

15,560

10,491

7,490

8,826

140,492

Indebtedness under the Gas Transit Arbitration

57,125

Investments in associates and joint ventures

1,197

Cash and bank balances

23,093

Unallocated assets

9,735

Total assets

723,124

Segment liabilities

11,147

1,028

3,130

1,019

1,413

4,986

1,271

23,994

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

45,369

Total liabilities

282,605

Net working capital

79,477

1,313

6,618

9,183

(1,389)

1,716

1,013

97,931

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175

174

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

Geographical concentration of

sales

In millions

of Ukrainian

hryvnias

2018

2017

Ukraine

177,180

147,309

Russian

Federation

76,048

77,511

Egypt

505

457

Europe

2,579

2,201

Total revenue

256,312 227,478

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

2018 and 2017, 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 2018

amounted to UAH 72,344 million (2017:

UAH 73,937 million).

4. 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 operational

decisions. In considering each possible

related party relationship, attention

is directed to the substance of the

relationship, not merely the legal form.

As described in the Note 1, the Group is

ultimately controlled by the Government

of Ukraine, and therefore, all state-

controlled entities and institutions are

considered as related parties under

common control.

Transactions with related parties are

performed on terms that would not

necessarily be available to unrelated

parties.

Transactions with state-controlled

entities and institutions. 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 2018,

about 26% of the Group's revenue (2017:

30%) was 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 2018 and 2017 were

about 43% and 45%, respectively, of the

total trade accounts receivable balance.

Outstanding accounts payable, advances

and other current liabilities with

related parties as at 31 December 2018

and 2017 were about 58% and 25%,

respectively, of the total balance of these

liabilities.

Provisions in respect of the entities

controlled by the Government of Ukraine

as at 31 December 2018 and 2017 were

about 37% and 30%, respectively, of the

total provisions. Additionally, the Group

recognised provision in respect of the

portion of net profit attributable to the

State Budget of Ukraine (Note 12, 14).

As at 31 December 2018 and 2017,

about 96% and 98%, respectively, of cash

and bank balances were placed in the

banks controlled, jointly controlled or

influenced by the Government of Ukraine

and about 76% of borrowings were

provided by these banks (31 December

2017: 65%). About 75% of finance

income for the year ended 31 December

2018 related to balances in these banks

(2017: 55%) and about 97% of finance

costs for the year ended 31 December

2018 (2017: 70%) related to borrowings

from these banks.

Pledges. As at 31 December 2018 and

2017, borrowings from related parties

(State-owned banks) were secured

by property, plant and equipment,

inventories and proceeds from future

sales (Note 13).

Guarantees. Amount of guarantees,

provided by the Government of Ukraine,

as at 31 December 2018 and 2017

equalled to UAH 15,443 million and UAH

22,023 million, respectively (Note 13).

Transactions with the State are further

disclosed in Note 12.

Key management remuneration.

During 2018 and 2017, key management

personnel consisted on average of

6 Executive Board members and 9

directors. Compensation to the key

management personnel included into

other operating expenses consists of

salary and additional current bonuses

and comprises UAH 717 million in 2018

(2017: UAH 214 million).

During 2018 the Company also

incurred UAH 53 million of expenses

on operations of the Supervisory Board

(2017: UAH 25 million). This amount

includes UAH 46 million in service fees

accrued (2017: UAH 20 million), and UAH

7 million in compensation of expenses

incurred by the Board members during

performance of their duties (2017: 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.

In millions

of Ukrainian

hryvnias

Explor

ation, e

valua

tion and drilling asse

Gas and oil up

str

eam

Gas tr

ansmission

Under

ound g

Cushion

gas

Oil tr

ansmission

Gas and oil r

efiner

Filling s

tions

Gas dis

tribu-tion

asse

LNG tr

ansport

ation

Other fix

ed asse

Cons

truction in pr

ress

Tot

Net book value

at 31 December

2016

2,705 63,936 264,209 29,081 153,566 14,714 2,834 5,309 156

171 3,484 11,496 551,661

Cost or valuation

3,354 71,576 277,383 33,056 155,422 15,491 3,011 5,759 168

181 8,489 13,117 587,007

Accumulated

depreciation and

impairment

(649) (7,640) (13,174) (3,975) (1,856)

(777) (177) (450)

(12)

(10) (5,005) (1,621) (35,346)

Additions and

transfers

620 5,711

1,362

232

321 183

265 6,740 15,540

Revaluation

852 32,597 (47,335) (15,479) (3,526)

173 129 (418)

- (33,007)

Disposals

(20)

(37)

(7)

(1)

(2)

(289)

(358)

Depreciation

charge

(743) (7,687) (29,695) (1,778)

(728) (253) (282)

(12)

(398)

- (41,588)

Impairment

(85)

(33)

(1)

(3)

(96)

(22)

(526)

(766)

Net book value at

31 December 2017 3,329 94,487 188,534 12,056 150,040 14,479 2,889 4,593 159 168 3,327 17,421 491,482

Cost or valuation

3,329 94,487 188,534 12,056 150,040 14,479 2,889 4,593 183

189 7,574 19,443 497,796

Accumulated

depreciation and

impairment

(24)

(21) (4,247) (2,022)

(6,314)

Additions and

transfers

1,921 12,249

(391)

1,745

92 136

675 13,726 30,224

Revaluation

- 36,457

36,457

Disposals

(101)

(47)

(1)

(35)

(383)

(567)

Depreciation

charge

(908) (10,731) (31,242) (1,228)

(888) (266) (256)

(11)

(12)

(274)

- (45,816)

Impairment

(937) (70,988)

- (5,025)

(62)

(97)

(9)

(54)

(238) (77,410)

Net book value at

31 December 2018 4,241 95,021 85,913 12,573 186,497 8,658 2,697 4,306 152 147 3,639 30,526 434,370

Cost or valuation

5,014 106,649 188,162 13,829 186,497 14,571 3,025 4,659 187

189 8,262 32,806 563,850

Accumulated

depreciation and

impairment

(773) (11,628) (102,249) (1,256)

- (5,913) (328) (353)

(35)

(42) (4,623) (2,280) (129,480)

5. PROPERTY, PLANT AND EQUIPMENT

Movements in the carrying amount of property, plant and equipment were as follows:

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177

176

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

As at 31 December 2018, the Group has

changed presentation of its property,

plant and equipment from grouping

by technical criteria to grouping by

functions based on cash generated units.

Management of the Group believes that

such presentation provides more relevant

and useful information for the users of

the consolidated financial statements, as

it presents additional information to the

user about Group's business structure

and investment flows. Comparative

information as at and for the year ended

31 December 2017 was restated to

reflect the changes in presentation.

The Group engaged independent

appraisers to determine the fair value

of its major groups of property, plant

and equipment as at 31 December

2017. The fair value was determined in

accordance with International Valuation

Standards. Taking into account the

nature of the Group’s property, plant and

equipment, fair value was determined

using depreciated replacement cost for

specialised assets, and using market-

based evidence for non-specialised

assets. The fair value of main producing

properties and equipment was

primarily determined using depreciated

replacement cost. This method considers

the cost to reproduce or replace the

property, plant and equipment, adjusted

for physical, functional and economic

depreciation, and obsolescence. The

depreciated replacement cost was

estimated based on internal sources and

analysis of available market information

for similar property, plant and equipment

(published information, catalogues,

statistical data etc), and information from

industry experts and suppliers.

As at 31 December 2018, the Group

has performed impairment test for

certain cash generating units, using

discounted cash flow method. Expected

cash flows have been determined on

the basis of forecasts and assumptions

as of the date of these consolidated

financial statements. Forecasts

and assumptions were based on

market information, historical data,

macroeconomic expectations, forecasts

for the subsequent activity of the cash

generating units (Note 27).

As a result of this assessment, the

management came to the conclusion

that the recoverable value of “Gas

transmission system” and “Oil

transmission system” was lower than

their carrying amount and, accordingly,

recognised impairment of property, plant

and equipment in amount of UAH 1,082

million in other operating expenses and

in amount of UAH 74,931 million in other

comprehensive loss.

Additionally, the Group recognised

impairment loss in amount of UAH 371

million for other cash generating units,

taking total impairment loss of property,

plant and equipment in other operating

expenses to UAH 1,453 million.

In 2018, the depreciation and depletion

expenses of UAH 43,417 million (2017:

UAH 39,144 million) was included in cost

of sales, UAH 569 million (2017: UAH 604

million) in other operating expense, UAH

955 million (2017: UAH 775 million) were

capitalised in the cost of property, plant

and equipment, and UAH 875 million

were capitalised in cost of inventories

(2017: UAH 1,085 million).

As at 31 December 2018 and 2017, the

Group has pledged its property, plant

and equipment with carrying amount of

UAH 1,239 million and UAH 2,682 million,

respectively, to secure its borrowings

(Note 13).

Had the Group’s property, plant and

equipment been measured on a historical

cost basis, their carrying amounts would

have been as shown in the table below:

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Exploration, evaluation and drilling assets

2,585

802

Gas and oil upstream

30,164

21,032

Gas transmission system

8,894

9,600

Underground gas storages

1,453

1,620

Cushion gas

217

Oil transmission system

1,906

1,947

Gas and oil refinery

546

493

Filling stations

109

134

Gas distribution assets

144

145

LNG transportation

114

122

Other fixed assets

1,733

1,163

Total

47,865

37,275

6. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES

Details of each of the Group’s associates and joint ventures as at 31 December 2018 are as follows:

Name of associate/

joint ventures

Principal activity

Place of inc

orpor

ation and

principal place of business

oportion of

owner

ship in

ter

Additional in

ter

acquir

Shar

e of loss

Shar

e of other

compr

ehensiv

(loss)/inc

ome

Reclassific

ation t

other non-curr

asse

Carr

ying amoun

“Gaztransit” PJSC

Construction

works

Ukraine

40.2%

(10)

(32)

895

“Ukrtatnafta” PJSC

Oil refinery

Ukraine

43.05%

(1,090)

1,431

341

Other

miscella-

neous

Ukraine

miscel-

laneous

(216)

(29)

(1,316)

1,399

(29)

1,255

Details of each of the Group’s associates and joint ventures as at 31 December 2017 are as follows:

Name of associate/

joint ventures

Principal activity

Place of inc

orpor

ation and

principal place of business

oportion

of o

wner

ship

ter

Shar

e of loss

Dividends receiv

ed fr

om the

associa

Carr

ying amoun

“Gaztransit” PJSC

Construction works

Ukraine

40.2%

(1)

(84)

937

“Ukrtatnafta” PJSC

Oil refinery

Ukraine

43.05%

Other

miscellaneous

Ukraine

miscella-

neous

(46)

260

(47)

(84)

1,197

All of the above associates are accounted for using the equity method in these consolidated financial statements.

7. OTHER NON-CURRENT ASSETS

The Group’s investments in associates and joint ventures

were as follows:

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Investments in associates

1,236

937

Investments in joint ventures

260

Total

1,255

1,197

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Accounts receivable on product sharing agreement

4,793

4,866

Intangible assets

2,751

2,318

Restructured accounts receivable of gas consumers

1,645

1,242

Other

3,545

3,463

Less: provision for impairment

(3,746)

(758)

Total

8,988

11,131

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179

178

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

Accounts receivable on product sharing

agreement. The Company entered into

a concession agreement for hydrocarbon

exploration and development with the

Arab Republic of Egypt and Egyptian

General Petroleum Corporation (“EGPC”)

on 13 December 2006. Under the

terms of the concession agreement

the Company has the right to recover

all exploration and development

costs incurred in connection with the

concession agreement (Note 26). The

amount presented in the table above

represents such costs claimed by the

Group for recovery, and which are

expected to be refunded after one year

since the reporting date.

As at 31 December 2018 the Company

recognised an impairment loss in respect

of accounts receivable on product sharing

agreement and other non-current assets

in other operating expenses amounting to

UAH 3,069 million (Note 18).

Intangible assets. As at 31 December 2018

and 2017, included in intangible assets are

licenses for exploration and extraction of oil

and natural gas amounting to UAH 1,826

million and UAH 1,641 million, respectively.

Restructured accounts receivable

of gas consumers. In May 2011, the

Law of Ukraine “On certain matters on

indebtedness for natural gas and electricity

consumed” #3319-VI was approved.

According to this Law, accounts receivable

due from entities supplying natural gas

under the regulated tariff that were

originated in 2010, were restructured

for the period from 1 to 20 years and are

stated at amortised cost using effective

interest rate which at the restructuring

dates varied from 15% to 24% per annum.

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 (Note 2). According to this Law,

accounts receivable due from municipal

heat generating entities and distribution

were restructured for 5 years and are

stated at amortised cost using effective

interest rate which at the restructuring

dates varied from 13.5% to 16.4% per

annum.

Other. As at 31 December 2018 and 2017,

included in other non-current assets are

research and development expenditures

amounting to UAH 1,277 million and UAH

1,171 million, respectively, that were

incurred within the concession agreement

for oil exploration and development with

the EGPC on 13 December 2006, but not

yet claimed for recovery (Note 26).

Movements in provision for impairment

of non-current accounts receivable were

as follows:

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Accounts receivable for natural gas

74,683

66,265

Accounts receivable for gas balancing services

34,009

20,033

Accounts receivable for crude oil

13,693

8,427

Accounts receivable for gas transportation services

9,036

9,360

Other accounts receivable

4,296

4,822

Less: provision for impairment

(69,775)

(49,919)

Total

65,942

58,988

Movements in provision for impairment of trade accounts receivable were as follows:

In millions of Ukrainian hryvnias

2018

2017

Balance at 1 January

49,919

37,229

Effect of adoption of new standard (Note 28)

3,666

Provision for impairment recognised during the year

39,751

15,053

Reversal of provision for impairment

(23,469)

(2,480)

Amounts written off during the year as uncollectible

(138)

(11)

Other movements

128

Balance at 31 December

69,775

49,919

Increase in provision for impairment charged and reversed during the year ended 31 December 2018 is a result of Interantional

Financial Reporting Standard 9 “Financial Instruments” adoption by the Group (Note 28).

Other movements in provision for impairment of trade accounts receivable relate to reclassification of provision between current and

non-current accounts receivable and to difference in proportion of assets and profits consolidation related to joint ventures of one of

the Group's subsidiaries, recognised in equity movement.

Analysis of credit quality of trade accounts receivable is as follows:

31 December 2018

In millions of Ukrainian hryvnias

Trade accounts receivable - days past due

Not past due

1 - 90

91 - 180

181 - 270

271 - 365

>365

Total

Gross carrying amount

38,830

20,443

3,998

15,828

10,107

46,511

135,717

Provision for impairment

(3,226)

(3,377)

(1,226)

(7,834)

(7,800)

(46,312)

(69,775)

Expected credit loss rate, %

17%

31%

49%

77%

100%

31 December 2017

In millions of Ukrainian hryvnias

Trade accounts receivable - days past due

Not past due

1 - 90

91 - 180

181 - 270

271 - 365

>365

Total

Gross carrying amount

27,333

22,527

5,739

16,003

3,789

33,516

108,907

Provision for impairment

(49,919)

In millions of Ukrainian hryvnias

2018

2017

Balance at 1 January

758

714

Provision for impairment recognised during the year

3,069

Other movements

(81)

Balance at 31 December

3,746

758

Other movements in provision for impairment of non-current accounts receivable relate to reclassification of provision

between current and non-current accounts receivable.

8. INVENTORIES

9. TRADE ACCOUNTS RECEIVABLE

The Group’s inventories were as follows:

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Natural gas

52,461

48,472

Crude oil and petroleum products

6,039

4,299

Spare parts

1,976

2,829

Oil for industrial and technological needs

1,829

1,954

Raw materials

1,627

1,500

Other

1,639

1,121

Total

65,571

60,175

Management estimates the necessity of

write-down of inventories to their net

realisable value taking into consideration

indicators of economical and physical

obsolescence. In 2018 write-down

adjustment amounted to UAH 5,717

million was included in cost of sales and

UAH 64 million was included in other

operating expenses (2017: UAH 1,452

million included in cost of sales and UAH

451 million included in other operating

expense). Amount included in cost of

sales represents write down adjustment

to imported gas subsequently sold for

households needs at regulated prices.

As at 31 December 2018 and 2017,

inventories with carrying amount of UAH

43,287 million and UAH 38,208 million,

respectively, were pledged as collateral

for borrowings (Note 13).

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181

180

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

10. PREPAYMENTS MADE AND OTHER CURRENT ASSETS

The Group’s prepayments made and other current assets were as follows:

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Prepayments to suppliers for materials, works and services

10,549

10,834

VAT recoverable

1,950

2,175

Receivables under assignation agreements in respect of natural gas sales

1,618

1,637

Promissory notes receivable

1,436

1,468

Prepayments for pipelines construction

1,346

1,348

Taxes prepaid, other than income tax

876

8,935

Prepayments to suppliers for natural gas

109

649

Indebtedness under the Gas Transit Arbitration

57,125

Other

7,289

5,385

Less: provision for impairment

(18,285)

(18,309)

Total

6,888

71,247

On 28 February 2018, the Arbitral

Tribunal rendered the Final Award in the

Gas Transit Arbitration, where, amongst

other, supported respective request of

the Company to receive a legal right

to set-off the amounts owing between

the parties pursuant to the Gas Sales

Arbitration and Gas Transit Arbitration. As

a result, the Company has reflected such

set-off at this date.

As at 31 December 2018 included in

other current assets is gas balance of

UAH 991 million (31 December 2017:

UAH 6 million), arrested according to

the court decision. The Company has

also created a provision in respect of this

court decision (Note 14).

Movements in the provision for

impairment of prepayments made and

other current assets were as follows:

In millions of Ukrainian hryvnias

2018

2017

Balance at 1 January

18,309

18,962

Provision for impairment recognised during the year

179

116

Reversal of provision for impairment

(176)

(317)

Amounts written off during the year as uncollectible

(118)

(129)

Other movements

(323)

Balance at 31 December

18,285

18,309

Other movements in provision for impairment of prepayments made and other current assets relate to reclassification of provision

between current and non-current accounts receivable and to difference in proportion of assets and profits consolidation related to joint

ventures of one of the Group's subsidiaries, recognised in equity movement.

11. CASH AND BANK BALANCES

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Cash in banks

12,421

22,895

Term deposits

1,465

Other

338

198

Total

14,224

23,093

As at 31 December 2018, included

in term deposits are bank deposits

amounting to UAH 1,465 million with

original maturity of more than three

months and less than one year, which are

excluded from cash and cash equivalents

for the purpose of cash flow statement.

As at 31 December 2018, the Group has

pledged its term deposits with carrying

amount of UAH 1,457 million to secure

its borrowings (Note 13).

As at 31 December 2018 and 2017,

nominal amount of registered, issued and

fully paid share capital of the Company

was UAH 190,150 million, comprising

190,150,481 ordinary shares, with a par

value of UAH 1,000 per share.

Also, as at 31 December 2018 and

2017, share capital of the Company

has been adjusted for the effect of

hyperinflation in accordance with IAS 29

“Financial Reporting in Hyperinflationary

Economies” by UAH 4,157 million.

Therefore the total amount of share

capital of the Company as at 31

December 2018 and 2017 was UAH

194,307 million.

Distribution of profits

Profit available for distribution to the

shareholders for each reporting period

is determined by reference to the

stand alone financial statements of

the Company prepared in accordance

with International Financial Reporting

Standards. Under Ukrainian legislation,

the amount of dividends is limited to net

profit of the reporting period or other

distributable reserves but not more

than retained earnings as per the stand

alone financial statements prepared in

accordance with International Financial

Reporting Standards.

According to the Resolutions of the

Cabinet of Ministers of Ukraine #384-p

dated 25 April 2018 and #535-p dated

26 July 2018, 75% of the net profit of the

Company for 2017 amounting to UAH

29,498 million was paid as dividends due

to the State Budget of Ukraine.

Additionally, certain subsidiaries paid

UAH 38 million as profit share payable to

the State Budget of Ukraine during 2018.

According to the Law of Ukraine “On

Management of State Property Objects”

#185-V dated 21 September 2006,

entities where the State holds stakes

should distribute at least 30% of their

net profits as dividends attributable to

the State Budget of Ukraine by 1 May

of the year following the reporting year.

The Company has accrued a provision in

amount of UAH 4,084 million in respect

of the portion of net profit attributable

to the State Budget of Ukraine in current

provisions (Note 14). According to the

Ukrainian legislation, the Company has

to make a decision in respect of profit

distribution up to 30 April, and make

payment to the State Budget of Ukraine

up to 30 June of the year following the

reporting year.

13. BORROWINGS

The Group’s borrowings were as follows:

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Non-current
Bank borrowings

11,425

14,927

Unamortised discount

(126)

(191)

Total non-current portion

11,299

14,736

Current
Bank borrowings

44,153

43,993

Interest accrued

547

586

Total current portion

44,700

44,579

Total

55,999

59,315

In 2018 the Group has concluded

additional agreements with state-

owned banks in respect of interest rates

change and changes to the borrowings

repayment schedules prolonging their

maturities up to 2019. International Bank

for Reconstruction and Development

waived that the Company makes a

payment that is due in December 2018

of EUR 79 million on 31 March 2019.

The management has analyzed impact of

these changes and concluded that they

do not represent significant changes to

the financial liabilities.

The effective interest rates and currency

denomination of borrowings were as

follows:

In millions of Ukrainian hryvnias

31 December 2018

31 December 2017

Balance

% per annum

Balance

% per annum

UAH

24,815

20%

21,162

18%

USD

17,829

26,706

EUR

13,355

11,447

Total

55,999

59,315

12. SHARE CAPITAL

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183

182

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

Pledges

All the Group’s borrowings were secured as at 31 December 2018 and 2017.

The Group’s borrowings were secured by the following pledges:

31 December

2018

31 December

2017

Proceeds from future sales

28,229

43,393

Inventories (Note 8)

43,287

38,208

Cash and bank balances (Note 11)

1,457

Property, plant and equipment (Note 5)

1,239

2,682

Total

74,212

84,283

Guarantees. As at 31 December 2018, the Group’s borrowings in the amount of UAH 15,443 million were guaranteed by the State (31

December 2017: UAH 22,023 million).

Reconciliation of financial liabilities from financing activities

In millions of Ukrainian

hryvnias

31 December

2017

Net cash flows from

financing activities

Non-cash

transactions

Interest expense

(Note 19)

31 December

2018

Bank borrowings

59,315

(26,051)

17,719

5,016

55,999

Total

59,315

(26,051)

17,719

5,016

55,999

In millions of Ukrainian

hryvnias

1 January

2017

Net cash flows from

financing activities

Non-cash

transactions

Interest expense

(Note 19)

31 December

2017

Bank borrowings

66,044

(38,627)

25,069

6,829

59,315

Bonds

4,800

(5,279)

479

Total

70,844

(43,906)

25,069

7,308

59,315

Non-cash transactions relate to payment for the natural gas acquired by a lending bank and foreign exchange differences.

14. PROVISIONS

Movements in provisions for the years ended 31 December 2018 and 2017 were as follows:

In millions of Ukrainian

hryvnias

ovisions f

litig

ations

Emplo

yee bene

fit

oblig

ations

Dec

ommissioning

ovision

ovision f

or fines and

penalties

Portion of ne

t pr

ofit

attribut

able t

o the

e Budg

et of Ukr

aine

(Not

e 12)

Other pr

ovisions

Tot

Balance at 31 December 2016

11,844

4,510

1,771

11,154

13,264

989

43,532

Provision for dividends payable

to the State Budget

29,498

(Reversed)/charged during the

year

(6,083)

1,809

235

2,997

221

(821)

Unwinding of discount (Note

19)

521

152

673

Used or paid during the year

(1,553)

(1)

(18)

(13,264)

(9)

(14,845)

Remeasurements

381

140

521

Balance at 31 December 2017

5,761

5,668

2,297

14,133

29,498

1,201

58,558

Non-current

3,907

2,100

6,007

Current

5,761

1,761

197

14,133

29,498

1,201

52,551

Provision for dividends payable

to the State Budget (Note 12)

4,084

Charged during the year

11,083

3,636

2,530

843

18,188

Unwinding of discount (Note

19)

597

224

821

Used or paid during the year

(1,590)

(2,432)

(1)

(2)

(29,498)

(109)

(33,632)

Remeasurements

(13)

(4)

Balance at 31 December 2018

15,254

7,478

2,603

16,661

4,084

1,935

48,015

Non-current

4,403

2,540

6,943

Current

15,254

3,075

16,661

4,084

1,935

41,072

Provisions for Litigations

The Group is involved into a number

of litigations both as a plaintiff and as

a defendant. Provision for litigations

represents management assessment

of the probable outflow of the Group’s

resources arising from an adverse

outcome of the court and arbitration

procedures.

In 2017 provision for litigations

amounting to UAH 7,300 million was

reversed after the court decision was

received in favour of the Company.

Employee Benefit Obligations

The Group companies have certain

obligations to its employees according to

the collective agreements.

Current provisions for employee benefits

include provision for performance

bonuses and provision for employees’

unused vacations.

Non-current provisions for employee

benefits include lump sum benefits

payable upon retirement and post-

retirement benefit programs. These

benefits plans are not funded, and there

are no plan assets.

The principal actuarial assumptions used

were as follows:

2018

2017

Nominal discount rate, %

14.0-14.4

14.5-14.6

Long-term inflation, %

6.5

6.7

Nominal salary increase rate, %

10.0-26.2

10.0-16.0

Staff turnover ratio, %

1.4-6.7

1.5-5.3

The sensitivity of the non-current employee benefit obligations to changes in the principal assumptions is as follows:

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185

184

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

2017

Nominal discount rate increase/decrease by 1%, %

(7.56) / 8.15

(7.68) / 8.84

Nominal salary increase/decrease by 1%, %

5.50 / (5.52)

7.22 / (6.46)

Staff turnover increase/decrease by 1%, %

(3.21) / 3.19

(4.68) / 5.44

The sensitivity analysis presented above

may not be representative of the actual

change in the non-current employee

benefit obligations as it is unlikely that

the change in assumptions would occur

in isolation of one another as some of

the assumptions may be correlated.

Furthermore, in presenting the above

sensitivity analysis, the present value of

the employee benefit obligations has

been calculated using the projected

unit credit method at the end of the

reporting period, which is the same as

that applied in calculating the obligation

recognised in the consolidated

statement of financial position.

There were no changes in the methods

and assumptions used in preparing the

sensitivity analysis from prior years.

Decommissioning Provision

In accordance with the legislation

requirements, the Group is obliged

to restore the lands that underwent

changes in the relief structure,

environmental state of soils and parent

rocks, as well as hydrological regime due

to drilling, geological survey, constructing

and other works. The decommissioning

provision represents present value of

decommissioning costs relating to oil and

gas properties.

Provision for fines and penalties

As a result of non-payment and late

payment by “Ukrnafta” PJSC of subsoil

royalty, income tax and VAT, the Group

accrued provision for fines, penalties and

late payment interest in respect of such

tax liabilities.

15. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES

The Group’s advances received and other current liabilities were as follows:

In millions of Ukrainian hryvnias

31 December

2018

31 December

2017

Advances for natural gas

1,560

1,461

Advances for natural gas transportation

338

448

Advances for oil transportation

302

301

Advances received for geophysical surveys

213

237

Advances for petroleum products

206

149

Other advances received

136

Total advances received

2,755

2,681

Taxes payable other than income tax

10,900

10,347

Liabilities for purchase of property, plant and equipment

4,178

2,002

VAT payable

2,350

4,138

Wages, salaries and related social charges payable

726

348

Dividends payable to non-controlling shareholders of "Ukrnafta" PJSC

431

475

Recognised liabilities for litigations

Indebtedness according to the Gas Sales Arbitration

57,125

Other current liabilities

1,872

1,445

Total other current liabilities

20,514

75,927

Total

23,269

78,608

As at 31 December 2018, taxes payable other than income tax included UAH 10,629 million of subsoil royalty payable (31 December

2017: UAH 10,128 million).

16. COST OF SALES

In millions of Ukrainian hryvnias

2018

2017

Cost of gas supplied

61,172

52,527

Depreciation, depletion and amortisation

43,519

39,191

Subsoil royalty and other taxes other than on income

32,354

24,999

Non-refundable VAT on gas transit via Ukraine in customs regime

14,644

14,788

Cost of purchased oil and petroleum products

9,006

8,782

Staff costs and related social charges

7,238

7,781

Repair and maintenance costs

1,249

861

Oil and gas transportation costs

185

407

Other

9,462

7,811

Total

178,829

157,147

Subsoil royalty and rent tax are calculated with reference to the volume of crude oil, gas condensate or natural gas produced, and

volume of crude oil transportation.

17. OTHER OPERATING INCOME

In millions of Ukrainian hryvnias

2018

2017

Fines and penalties received

1,454

259

Income from sale of inventories and other current assets

1,279

1,594

Change in provisions for litigations and other provisions (Note 14)

2,787

Other

1,908

452

Total

4,641

5,092

18. OTHER OPERATING EXPENSES

In millions of Ukrainian hryvnias

2018

2017

Net movement in provision for trade accounts receivable, prepayments made and other

assets and direct write-offs

19,361

12,353

Change in provisions for litigations and other provisions (Note 14)

14,530

Staff costs and related social charges

7,865

5,227

Non-refundable VAT recognised according to the Gas Transit Arbitration (Note 22)

4,751

Impairment of property, plant and equipment and intangible assets

1,466

3,399

Professional fees

1,284

716

Fines and penalties

1,052

1,356

Research, development and exploration costs

942

387

Depreciation and amortisation

641

633

Transportation costs

331

449

Write down of inventories to net realisable value

451

Other

3,440

2,504

Total

55,727

27,475

Additionally to the audit fees related to the compulsory audit as included to the professional fees, are other audit fees for 2018

amounting to UAH 15 million.

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