содержание .. 8 9 10 11 ..

НАК „НАФТОГАЗ УКРАЇНИ“. Річний звіт англійською (2018 рік) - 10

155

154

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

To the Shareholder of Joint Stock

Company “National Joint Stock

Company “Naftogaz of Ukraine”:

Report on the Audit of the

Consolidated Financial

Statements

Qualified Opinion

We have audited the consolidated financial

statements of Joint Stock Company

“National Joint Stock Company “Naftogaz

of Ukraine” and its subsidiaries (the

“Group”), which comprise the consolidated

statement of financial position as at 31

December 2018, the consolidated statement

of profit or loss, consolidated statement

of comprehensive income, consolidated

statement of changes in equity and

consolidated statement of cash flows for

the year then ended, and notes to the

consolidated financial statements, including

a summary of significant accounting policies.

In our opinion, except for the effects on

the corresponding figures of the matter

described in the Basis for Qualified Opinion

section of our report, the accompanying

consolidated financial statements

present fairly, in all material respects,

the consolidated financial position of the

Group as at 31 December 2018, and its

consolidated financial performance and its

consolidated cash flows for the year then

ended in accordance with International

Financial Reporting Standards (“IFRSs”)

and the preparation of the consolidated

financial statements requirements of

the Law of Ukraine “On accounting and

financial reporting in Ukraine” (“Law on

accounting and financial reporting”).

Basis for Qualified Opinion

As discussed in Note 22 to the

consolidated financial statements

until July 2018 the Group’s subsidiary

JSC “Ukrgasvydobuvannya” had joint

operation agreement with Misen

Enterprises AB and LLC “Karpatygas”. The

property, plant and equipment related to

joint operation as at 31 December 2017

amounted to UAH 1,455,640 thousand

were measured in the consolidated

financial statements using the cost

model, while the Group’s policy is to

use revaluation model for its property,

plant and equipment. This constitutes a

departure from IFRS which requires the

Group to use uniform accounting policies

for similar items. We were unable to

determine the effect of this departure

on the carrying amount of property,

plant and equipment related to this joint

operation agreement and revaluation

reserve as at 2017 and related effects

on total comprehensive income for the

year then ended. Our audit opinion on

the consolidated financial statements for

the year ended 31 December 2017 was

modified accordingly. Our opinion on the

current period’s consolidated financial

statements is also modified because of

the possible effects of these matters on

the comparability of the current period’s

figures and the corresponding figures.

We conducted our audit in accordance

with International Standards on Auditing

(“ISAs”). Our responsibilities under

those standards are further described

in the Auditor’s Responsibilities for the

Audit of the Consolidated Financial

Statements section of our report.

We are independent of the Group in

accordance with the International Ethics

Standards Board for Accountants’ Code

of Ethics for Professional Accountants

(the “IESBA Code”) together with the

ethical requirements that are relevant to

our audit of the consolidated financial

statements in Ukraine, and we have

fulfilled our other ethical responsibilities

in accordance with these requirements

and the IESBA Code. We believe that

the audit evidence we have obtained is

sufficient and appropriate to provide a

basis for our qualified opinion.

Emphases of Matters

Operating environment

We draw your attention to Note 2 to

the consolidated financial statements,

which describes that the impact of the

continuing economic crisis and political

turmoil in Ukraine and their final

resolution are unpredictable and may

adversely affect the Ukrainian economy

and the operations of the Group. Our

opinion is not modified in respect of this

matter.

Disputes with JSC “Gazprom”

We also draw your attention to Note 22

to the consolidated financial statements,

which describes material uncertainty

regarding the final resolution of the

Arbitration process between the Group

and JSC “Gazprom”. Our opinion is not

modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters

that, in our professional judgment, were

of most significance in our audit of the

consolidated financial statements of

the current period. These matters were

addressed in the context of our audit of

the consolidated financial statements

as a whole, and in forming our opinion

thereon, and we do not provide a

separate opinion on these matters. In

addition to the matter described in the

Basis for Qualified Opinion section, we

have determined the matters described

below to be the key audit matters to be

communicated in our report.

INDEPENDENT AUDITOR’S REPORT

Why the matter was determined to be a key audit matter

How the matter was addressed in the audit

Impairment of property, plant and equipment

As discussed in Note 5 “Property, plant and equipment” to the

consolidated financial statements during the year ended 31 December

2018 the Group recognized an impairment of its property, plant and

equipment in the total amount of UAH 76,013,989 thousand. The Group

determined the recoverable amount of the property, plant and equipment

through preparation of value in use projections.

Determining the recoverable amount requires management to make

significant estimates concerning the future cash flows based on

judgements and assumptions about future business prospect.

Based on the above we determined the assessment of the expected

recoverable amount of property, plant and equipment to be a key

audit matter.

Refer to Note 5 “Property, Plant and Equipment” as well as Note 27

“Critical accounting estimates and judgements” for further details.

Trade accounts receivable

IFRS 9 “Financial Instruments” (“IFRS 9”) has been adopted by the

Group for the first time and is effective from 1 January 2018. The

application of IFRS 9 has significant impact on the expected credit

losses on trade accounts receivable.

Estimate of provision for expected credit losses on trade accounts

receivable involves application of complex methodology, use of

management’s judgement and various assumptions.

Taking into account the significance of the trade accounts

receivable balance and high level of subjectivity of judgements

and assumptions we considered measurement of expected credit

losses on trade accounts receivable to be a key audit matter.

Refer to the Note 9 “Trade account receivable” as well as Note

28 “Adoption of new or revised standards and interpretations” of

the accompanying consolidated financial statements for further

details.

We obtained understanding of the Group’s policy, processes and

control procedures for measurement of expected credit losses on

trade accounts receivable.

We assessed the Group’s methodology on the expected credit

losses calculation on a collective basis and its consistency with the

requirements of IFRS 9.

We tested the Group’s historical data based on a sample of trade

accounts receivable and performed alternative recalculations of

expected credit losses that are determined on a collective basis.

We also assessed the appropriateness of management’s judgment

regarding assessment of risk of default, the historical period for

which statistics can be used for calculating the probability of

default and loss given default for the expected credit losses that are

assessed on a collective basis.

We checked completeness and accuracy of the relevant disclosures

in the consolidated financial statements.

Based on the results of our tests, we have not identified any signifi-

cant issues.

We obtained an understanding of the revenue arrangements in

place across the Group.

We reviewed the revenue recognition accounting policy, and

checked whether it complies with IFRS 15 “Revenue from Contracts

with Customers”.

We assessed the key judgements made in respect of the revenue

recognition criteria per IFRS 15 “Revenue from Contracts with

Customers” based on the prior experience of the Group and infor-

mation available from the market.

We challenged the probability of collectability of consideration by

analyzing whether the Group historically collected consideration, to

which it was entitled in exchange for the rendered services, as well

as understanding the status of litigation over unsettled accounts

receivable both for the portfolio of contracts with similar character-

istics and in certain cases on individual basis.

We evaluated the completeness and accuracy of the disclosures

included in the consolidated financial statements.

Based on the results of our tests, we have not identified any signifi-

cant issues.

We obtained, understood, and evaluated the Group’s policies, pro-

cesses, methods and assumptions used to assess the recoverable

amount of property, plant and equipment.

With the involvement of our valuation experts we performed the fol-

lowing procedures in respect of the recoverable amount assessment:

• evaluated the identification of the cash-generating units;

• evaluated whether the methodology applied and the model used is in

line with the IFRS requirements;

• challenged the assumptions applied in the determination of the

discount rate and accuracy of its calculation;

• challenged management’s judgements and analyzed validity of the

assumptions and accuracy of projected cash flows used in the model;

assessed their consistency with plans approved by management and

with our accumulated knowledge of the Group and the industry in

which they operate;

• checked that the results were correctly recognized and presented in

the consolidated financial statements;

• assessed the completeness and correctness of the information dis-

closed in the consolidated financial statements.

Based on the results of our tests, we have not identified any significant

issues..

Revenue recognition from balancing services

The Group implemented for the first period of application of

IFRS 15 “Revenue from Contracts with Customers”. This standard

requires as part of identification of the contract to assess whether

it is probable to collect the consideration from customers. Taking

to account that balancing services are not settled in a full amount,

recognition of respective revenues requires to make significant

estimates in respect of future cash flows and management

judgement.

Based on the above we determined the revenue recognition from

balancing services to be a key audit matter.

Refer to Note 3 “Segment information” and Note 27 “Critical

accounting estimates and judgements” of the accompanying

consolidated financial statements for further details.

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

157

156

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

Other Information

Management is responsible for the other

information. The other information

comprises the information included in

the management report, which also

includes corporate governance report,

but does not include the consolidated

financial statements and our auditor’s

report thereon, which we obtained prior

to the date of this auditor’s report, the

annual report, which is expected to be

made available to us after that date.

Our opinion on the consolidated financial

statements does not cover the other

information and we do not and will not

express any form of assurance conclusion

thereon.

In connection with our audit of the

consolidated financial statements,

our responsibility is to read the other

information identified above and, in

doing so, consider whether the other

information is materially inconsistent

with the consolidated financial

statements or our knowledge obtained

in the audit, or otherwise appears to be

materially misstated. If, based on the

work we have performed on the other

information that we obtained prior to the

date of this auditor’s report, we conclude

that there is a material misstatement of

this other information, we are required

to report that fact. We have nothing to

report in this regard.

When we read the annual report, if

we conclude that there is a material

misstatement therein, we are required

to communicate the matter to those

charged with governance.

Responsibilities of Management and

Those Charged with Governance

for the Consolidated Financial

Statements

Management is responsible for the

preparation and fair presentation of

the consolidated financial statements

in accordance with IFRSs and Law on

accounting and financial reporting, and

for such internal control as management

determines is necessary to enable the

preparation of consolidated financial

statements that are free from material

misstatement, whether due to fraud or

error.

In preparing the consolidated financial

statements, management is responsible

for assessing the Group’s ability to

continue as a going concern, disclosing,

as applicable, matters related to going

concern and using the going concern

basis of accounting unless management

either intends to liquidate the Group or

to cease operations, or has no realistic

alternative but to do so.

Those charged with governance are

responsible for overseeing the Group’s

financial reporting process.

Auditor’s Responsibilities for the

Audit of the Consolidated Financial

Statements

Our objectives are to obtain reasonable

assurance about whether the

consolidated financial statements

as a whole are free from material

misstatement, whether due to fraud or

error, and to issue an auditor’s report

that includes our opinion. Reasonable

assurance is a high level of assurance,

but is not a guarantee that an audit

conducted in accordance with ISAs will

always detect a material misstatement

when it exists. Misstatements can arise

from fraud or error and are considered

material if, individually or in the

aggregate, they could reasonably be

expected to influence the economic

decisions of users taken on the basis of

these consolidated financial statements.

As part of an audit in accordance with

ISAs, we exercise professional judgment

and maintain professional skepticism

throughout the audit. We also:

• Identify and assess the risks of material

misstatement of the consolidated

financial statements, whether due to

fraud or error, design and perform

audit procedures responsive to those

risks, and obtain audit evidence that is

sufficient and appropriate to provide

a basis for our opinion. The risk of not

detecting a material misstatement

resulting from fraud is higher than for

one resulting from error, as fraud may

involve collusion, forgery, intentional

omissions, misrepresentations, or the

override of internal control.

• Obtain an understanding of internal

control relevant to the audit in order

to design audit procedures that are

appropriate in the circumstances, but

not for the purpose of expressing an

opinion on the effectiveness of the

Group’s internal control.

• Evaluate the appropriateness of

accounting policies used and the

reasonableness of accounting estimates

and related disclosures made by

management.

• Conclude on the appropriateness

of management’s use of the going

concern basis of accounting and,

based on the audit evidence obtained,

whether a material uncertainty exists

related to events or conditions that

may cast significant doubt on the

Group’s ability to continue as a going

concern. If we conclude that a material

uncertainty exists, we are required

to draw attention in our auditor’s

report to the related disclosures in the

consolidated financial statements or,

if such disclosures are inadequate, to

modify our opinion. Our conclusions

are based on the audit evidence

obtained up to the date of our auditor’s

report. However, future events or

conditions may cause the Group to

cease to continue as a going concern.

• Evaluate the overall presentation,

structure and content of the

consolidated financial statements,

including the disclosures, and whether

the consolidated financial statements

represent the underlying transactions

and events in a manner that achieves

fair presentation.

• Obtain sufficient appropriate audit

evidence regarding the financial

information of the entities or business

activities within the Group to express

an opinion on the consolidated financial

statements. We are responsible for the

direction, supervision and performance

of the group audit. We remain solely

responsible for our audit opinion.

We communicate with those charged

with governance regarding, among other

matters, the planned scope and timing of

the audit and significant audit findings,

including any significant deficiencies in

internal control that we identify during

our audit.

We also provide those charged with

governance with a statement that we

have complied with relevant ethical

requirements regarding independence,

and to communicate with them all

relationships and other matters that may

reasonably be thought to bear on our

independence, and where applicable,

related safeguards.

From the matters communicated with

those charged with governance, we

determine those matters that were of

most significance in the audit of the

consolidated financial statements of the

current period, which constitute the

key audit matters included herein. We

describe these matters in our auditor’s

report, except for the cases when a law

or regulation prohibits a public disclosure

of a specific matter or, in extremely

adverse circumstances, we determine

that such an matter should not be

addressed in our report, as negative

consequences from such a disclosure

may predictably outweigh its usefulness

for interests of the public.

Report on Other Legal Requirements

We have been appointed as auditor of

the Group by the Supervisory Board on 22

December 2017. In view of the previous

renewals and reappointments, we

conducted audit from 12 September 2014

to the date of this report.

We confirm that the audit opinion is

consistent with the additional report to

the audit committee.

We confirm that the prohibited non-

audited services referred to ISA or

requirements of Article 6, paragraph

4 of Law of Ukraine «On Audit of

Consolidated financial statements and

Audit Activities» were not provided and

that the audit engagement partner and

audit firm remains independent of the

Group in conducting the audit.

Basic information about audit firm

Name: PJSC “Deloitte & Touche

Ukrainian Services Company”.

Address of registration and location of

audit firm: 48, 50a Zhylianska Str., Kyiv,

01033, Ukraine.

“Private Joint Stock Company “Deloitte &

Touche Ukrainian Services Company” was

enrolled to Sections of “Audit Entities”,

“Audit Entities and Auditors That Have

the Right to Conduct Statutory Audits of

Consolidated financial statements”, and

“Audit Entities and Auditors That Have

the Right to Conduct Statutory Audits

of Consolidated financial statements of

Public Interest Entities” of the Register

of Auditors and Auditing Entities of the

Audit Chamber of Ukraine under #1973.”

Certified Auditor

Sergey Kulyk

Auditor’s Certificate Series А # 007492

Issued by the Audit Chamber of Ukraine on 27 December 2017

on the basis of Resolution of the Audit Chamber of Ukraine # 353/2,

valid until 21 December 2022

19 April 2019

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

159

158

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

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

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS OF 31 DECEMBER 2018

In millions of Ukrainian hryvnias

Note

31 December

2018

31 December

2017

ASSETS

Non-current assets

Property, plant and equipment

434,370

491,482

Investments in associates and joint ventures

1,225

1,197

Deferred tax assets

5,119

4,204

Other non-current assets

8,988

11,131

Total non-current assets

449,732

508,014

Current assets

Inventories

65,571

60,175

Trade accounts receivable

65,942

58,988

Prepayments made and other current assets

6,888

71,247

Prepaid corporate income tax

Cash and bank balances

14,224

23,093

Restricted cash

1,338

1,591

Total current assets

153,980

215,110

TOTAL ASSETS

603,712

723,124

EQUITY

Share capital

194,307

Revaluation reserve

379,022

411,261

Foreign currency translation reserve

4,027

3,462

Accumulated deficit

(165,342)

(168,057)

Equity attributable to owners of the Parent

412,014

440,973

Non-controlling interest in equity

1,844

(454)

TOTAL EQUITY

413,858

440,519

LIABILITIES

Non-current liabilities

Borrowings

11,299

14,736

Provisions

6,943

6,007

Deferred tax liabilities

50,544

67,304

Other long-term liabilities

221

Total non-current liabilities

69,007

88,059

Current liabilities

Borrowings

44,700

44,579

Provisions

41,072

52,551

Trade accounts payable

5,500

8,137

Advances received and other current liabilities

23,269

78,608

Corporate income tax payable

6,306

10,671

Total current liabilities

120,847

194,546

TOTAL LIABILITIES

189,854

282,605

TOTAL LIABILITIES AND EQUITY

603,712

723,124

These consolidated financial statements were authorised for issue on 15 April 2019.

Andriy Kobolyev,

Chairman of the Executive Board

Sergiy Konovets,

Deputy Chairman of the Executive Board

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

CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2018

In millions of Ukrainian hryvnias

Note

2018

2017

Revenue

256,312

227,478

Cost of sales

(178,829)

(157,147)

Gross profit

77,483

70,331

Other operating income

4,641

5,092

Income recognised per results of Gas Transit Arbitration

57,125

Other operating expenses

(55,727)

(27,475)

Expense recognised per results of Gas Sales Arbitration

(44,528)

Operating profit

26,397

60,545

Finance costs

(6,201)

(8,302)

Finance income

2,128

1,598

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

(1,316)

(47)

Net foreign exchange loss

(471)

(1,043)

Profit before income tax

20,537

52,751

Income tax expenses

(8,970)

(13,302)

Net profit for the year

11,567

39,449

Net profit/(loss) is attributable to:
Equity attributable to owners of the Company

8,696

39,644

Non-controlling interest

2,871

(195)

Net profit for the year

11,567

39,449

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

161

160

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

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

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018

In millions of Ukrainian hryvnias

Note

2018

2017

Net profit for the year

11,567

39,449

Other comprehensive (loss)/income
Items that will not be reclassified subsequently to profit or loss, net of

income tax:
Loss on revaluation of property, plant and equipment (net of income tax

effect of UAH 7,110 million (2017: UAH 5,488 million)

(32,390)

(24,907)

Share of other comprehensive income of associates (net of income tax

effect of nil (2017: nil)

1,399

Remeasurement of defined benefit obligation (net of income tax effect of

UAH 2 million (2017: UAH 68 million)

(7)

(312)

Remeasurement of decommissioning liability (net of income tax effect of

UAH 2 million (2017: UAH 24 million)

(115)

Items that may be reclassified subsequently to profit or loss, net of

income tax:
Foreign currency translation reserve

565

298

Other comprehensive loss for the year

(30,422)

(25,036)

Total comprehensive (loss)/income for the year

(18,855)

14,413

Total comprehensive (loss)/income is attributable to:
Equity attributable to owners of the Company

(21,181)

13,697

Non-controlling interests

2,326

716

Total comprehensive (loss)/income for the year

(18,855)

14,413

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2018

Equity attributable to owners of the Parent

In millions of Ukrainian

hryvnias

Share

capital

Reval-

uation

reserve

Unreg-

istered

contributed

capital

Foreign

currency

transla-

tion re-

serve

Accu-

mulated

deficit

Total

Non-

controlling

interest

Total

equity

Balance at 31 December

2016

164,607 437,510

29,700

3,164 (178,214) 456,767

(1,177)

455,590

Profit/(loss) for the year

39,644

(195)

39,449

Other comprehensive (loss)/

income for the year

- (26,032)

298

(213) (25,947)

911

(25,036)

Total comprehensive (loss)/

income for the year

- (26,032)

298

39,431

13,697

716

14,413

Transfer of revaluation

reserve

(217)

217

Change in investments in joint

operations

Provision for dividends

payable to the State Budget

(Note 14)

(29,498) (29,498)

(29,498)

Registration of shares

29,700

(29,700)

Balance at 31 December

2017

194,307 411,261

3,462 (168,057) 440,973

(454)

440,519

Effect of implementation of

new standard (Note 28)

(3,666)

Balance at 1 January 2018

194,307 411,261

3,462 (171,723) 437,307

(454)

436,853

Profit for the year

8,696

2,871

11,567

Other comprehensive (loss)/

income for the year

- (31,988)

565

1,546 (29,877)

(545)

(30,422)

Total comprehensive (loss)/

income for the year

- (31,988)

565

10,242 (21,181)

2,326

(18,855)

Transfer of revaluation

reserve

(251)

251

Change in investments in joint

operations

(9)

(18)

Provision for dividends

payable to the State Budget

(Notes 12 and 14)

(4,084)

Profit share paid to the State

Budget (Note 12)

(19)

(38)

Balance at 31 December

2018

194,307 379,022

4,027 (165,342) 412,014

1,844

413,858

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

163

162

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

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

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018

In millions of Ukrainian hryvnias

Note

2018

2017

CASH FLOWS FROM OPERATING ACTIVITIES
Profit before income tax

20,537

52,751

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

intangible assets

44,160

39,824

Loss on disposal of property, plant and equipment

325

132

Impairment of property, plant and equipment and intangible assets

1,466

3,399

Write down of inventories

5,781

1,903

Net movement in provision for trade accounts receivable, prepayments

made and other assets

19,361

12,613

Net result of Gas Sales and Gas Transit Arbitrations

(12,597)

Change in provisions

18,188

(834)

Write off of accounts payable and other current liabilities

(46)

(48)

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

1,316

Net foreign exchange loss

471

1,043

Finance costs, net

4,073

6,704

Operating cash flows before working capital changes

115,632

104,937

Decrease/(increase) in other non-current assets

281

(338)

Increase in inventories

(12,408)

(10,749)

Increase in trade accounts receivable

(27,162)

(24,981)

Decrease in prepayments made and other current assets

7,217

2,277

Increase in other long-term liabilities

Provisions paid or used

(4,134)

(1,581)

Increase in trade accounts payable

14,993

18,702

Decrease in advances received and other current liabilities

(563)

(5,199)

Cash generated from operations

93,871

83,076

Income taxes paid

(23,901)

(13,719)

Interest received

1,673

1,244

Net cash generated by operating activities

71,643

70,601

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment and intangible assets

(24,904)

(14,438)

Proceeds from sale of property, plant and equipment

(Placement)/withdrawal of bank deposits

(1,448)

495

Withdrawal of restricted cash

253

Proceeds from sale of the State treasury bonds and other financial

investments

145

Dividends received

Net cash used in investing activities

(25,941)

(13,857)

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

CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2018

In millions of Ukrainian hryvnias

Note

2018

2017

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings

14,304

12,941

Repayment of borrowings

(35,192)

(49,469)

Interest paid

(5,163)

(7,378)

Profit share and dividends paid

12, 14

(29,536)

(13,264)

Net cash used in financing activities

(55,587)

(57,170)

Net decrease in cash and cash equivalents

(9,885)

(426)

CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR

23,093

21,853

Effect of exchange rates change on cash and cash equivalents

(449)

1,666

CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR

12,759

23,093

SIGNIFICANT NON-CASH TRANSACTIONS

In millions of Ukrainian hryvnias

2018

2017

Payment for the natural gas purchase by a lending bank

17,699

21,850

Dividends set off with accounts receivable

3,242

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

165

164

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

1. THE ORGANISATION

AND ITS OPERATIONS

Joint Stock Company “National Joint

Stock Company “Naftogaz of Ukraine”

(“Naftogaz”, 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. According

to the Resolution of the Cabinet of

Ministers of Ukraine dated 6 March

2019 the Company was changed

from Public to Private Joint Stock

Company.

Naftogaz and its subsidiaries (hereinafter

collectively referred to as the “Group”)

are owned by the State of Ukraine. The

Cabinet of Ministers of Ukraine executes

the State corporate rights and the

shareholders’ meetings and appoints

the Supervisory Board that controls and

regulates the Executive Board activities.

Naftogaz is a vertically integrated oil and

gas company engaged in the 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, 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

Subsidiary/ Joint

operations

Country

of regis-

tration

2018

2017

Production of gas, oil and refinery products
Ukrgasvydobuvannya, JSC

100.00

Subsidiary

Ukraine

Ukrnafta, PJSC

50.00 +

1 share

50.00 +

1 share

Subsidiary

Ukraine

Petrosannan Company, Joint operations with the Arab Republic of

Egypt and Egyptian General Petroleum Corporation

50.00

Joint operations

Egypt

Zakordonnaftogaz, Subsidiary Enterprise

100.00

Subsidiary

Ukraine

Karpatygaz, LLC, Joint operations with Misen Enterprises AB (Note

22)

49.99

Joint operations

Ukraine

Oil and gas transportation
Ukrtransgaz, JSC

100.00

Subsidiary

Ukraine

Ukrtransnafta, JSC

100.00

Subsidiary

Ukraine

Ukrspectransgaz, JSC

100.00

Subsidiary

Ukraine

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

100.00

Subsidiary

Ukraine

Gas supply company Naftogaz of Ukraine, LLC

100.00

Subsidiary

Ukraine

Gas supply company Naftogaz Teplo, LLC

100.00

Subsidiary

Ukraine

Gas supply company Naftogaz Trading, LLC

100.00

Subsidiary

Ukraine

Naftogaz Trading Europe AG

100.00

Subsidiary

Switzer-

land

Kirovogradgaz, Open JSC

51.00

Subsidiary

Ukraine

Ukravtogaz, Subsidiary Enterprise

100.00

Subsidiary

Ukraine

2. OPERATING

ENVIRONMENT

The Ukrainian economy is showing signs

of stabilisation after years of political and

economic tensions. The year over year

inflation rate in Ukraine has decreased to

9.8% during 2018 (as compared to 13.7% in

2017) while GDP continued to grow at 3.4%

(after 2% growth in 2017).

The National Bank of Ukraine (“NBU”)

continued its inflation targeting policy and

periodically raised its key policy rate from

12.5% in May 2017 to 18% in September

2018. This has helped restrain inflation

below 10%, although the cost of domestic

funding has increased significantly. NBU

adhered to floating hryvnia exchange rate

and it finished the year of 2018 at UAH

27.69 per USD, compared to UAH 28.07

per USD as at 31 December 2017. Among

the key stabilizing factors for the hryvnia

were the successful unlocking of the

IMF programme, strong revenues of agri

exporters, tight UAH liquidity and growth in

remittances from labor migrants.

As part of foreign currency transaction

regulations, the NBU continued its policy

of reducing the currency restrictions and

decreased share of mandatory sale of

foreign currency proceeds from 50% down

to 30% with effect from March 2019,

increased foreign currency denominated

export/import transactions settlement

period from 180 up to 365 days, and

increased the limit for dividends payment

from USD 2 million to EUR 7 million for the

year 2018.

In December 2018, the IMF Board of

Directors approved the stand-by assistance

(“SBA”) 14-month programme for Ukraine

in amount of USD 3.9 billion. In December,

Ukraine has already received USD 2

billion from the IMF and the EU, as well

as USD 750 million credit guarantees

from the World Bank. IMF program’s

approval significantly increases the chance

of Ukraine to meet foreign currency

obligations in 2019, and thus will support

the financial and macroeconomic stability

of the country.

The IMF will decide on further tranches

in May and November 2019, depending

on Ukraine’s success in fulfilling the terms

of the Memorandum on Economic and

Financial Policies, which Ukraine plans

to follow during the SBA programme's

implementation.

In 2019-2020, Ukraine faces major public

debt repayments, which will require

mobilizing substantial domestic and

external financing in an increasingly

challenging financing environment for

emerging markets. Also, Ukraine faces

presidential elections at the end of April

2019, and then parliamentary elections in

October 2019. Amid double elections, the

degree of uncertainty in 2019 will remain

very high. Despite certain improvements in

2018, the final resolution and the ongoing

effects of the political and economic

situation are difficult to predict but they

may have further severe effects on the

Ukrainian economy and the Group’s

business.

Gas market reform in Ukraine started with

adoption of the Law of Ukraine “On Natural

Gas Market” #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 of Ukraine and the

Group are undertaking active measures

in the open European natural 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 Development

Strategy, the Corporate Governance Action

Plan, and the Plan for Implementation of

the Gas Sector Reform approved by the

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 operations 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

The Law on Gas Market has defined

the work of natural gas market on the

principles of free, fair competition and state

non-interference with the operations of

the natural gas market, except when it is

necessary to eliminate market constraints

or to insure public interest, and taking

that actions by the State are carried at a

minimum sufficient level.

Prices for a natural gas supply should be

defined between the supplier and the

customer on an arm’s length, except for the

certain cases, as prescribed by the para 12,

part 2, of the Law. In particular, such cases

include imposing public service obligations

(“public service obligations” or “PSO”) on

the Company by the Cabinet of Ministers of

Ukraine (“CMU”) to insure public interest

on the natural gas market in accordance

with para 11 of the Law.

Public service obligations were imposed

on the Company according to the CMU

Resolutions, in particular:

● by the Resolution #758 dated 1 October

2015 “On Approval of the Provisions

for Imposing Special Obligations on the

Natural Gas Market Participants for

Ensuring Public Interests in the Natural

Gas Market Functioning” effective from

1 October 2015 to 31 March 2017

(“Resolution #758”);

● by the Resolution #187 dated 22 March

2017 “On Approval of the Provisions

for Imposing Special Obligations on the

Natural Gas Market Participants for

Ensuring Public Interests in the Natural

Gas Market Functioning” effective

from 1 April 2017 to 31 October 2018

(“Resolution #187”);

● by the Resolution #867 dated 19 October

2018 “On Approval of the Provisions

for Imposing Special Obligations on the

Natural Gas Market Participants for

Ensuring Public Interests in the Natural

Gas Market Functioning” effective

from 1 November 2018 to 1 May 2020

(“Resolution #867”).

Resolutions #187 and #867 set the

following, in particular:

● conditions for buying natural gas by the

Company from “Ukrgasvydobuvannya”

JSC and “Chornomornaftogaz” JSC

to create sufficient gas stocks when

performing public service obligations;

● conditions for selling / supplying natural

gas by the Company when performing

the public service obligations, including

setting gas selling prices.

Certain provisions of the Resolution #867

differ significantly from the Resolution

#187, in particular:

● Resolution #867 provides a formula for

the gas selling price determination by

the Company as an arithmetic mean

value of the gas selling price set by the

Company for industrial customers for

supplies made on a prepayment basis

during July-September 2018, adjusted

for the multiplier (so-called “discount”).

This multiplier amounts to 0.6943 from

1 November 2018, and 0.8 starting from

1 May 2019.

● Resolution #867 provides that starting

from 1 January 2020, the Company will

sell / supply natural gas within the public

service obligations at prices defined

between the supplier and the customer

on an arm’s length, but not higher than

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

167

166

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

The following tariffs and prices were set:

31 December

2018

31 December

2017

Natural gas price for sale to the regional gas supply companies for the

needs of households, excluding VAT and tariffs for gas transmission and

distribution and trade mark up.

Starting from 1 November

2018:

UAH 6,235.51 per

1,000 cubic meters

Starting from 1 April

2017:

UAH 4,942 per

1,000 cubic meters

Natural gas price for supply to the municipal heat generating

entities for the needs of households, excluding VAT and tariffs for gas

transmission and distribution.

Starting from 1 November

2018:

UAH 6,235.51 per

1,000 cubic meters

Starting from 1 April

2017:

UAH 4,942 per

1,000 cubic meters

Natural gas price for sale to the regional gas supply companies for the

needs of religious organisations (excluding volumes used in commercial

activities), excluding VAT and tariffs for gas transmission and distribution

and trade mark up.

Starting from 1 November

2018:

UAH 6,235.51 per

1,000 cubic meters

Starting from 1 April

2017:

UAH 2,471 per

1,000 cubic meters

Natural gas price for supply to the municipal heat generating entities

for the needs of religious organisations (excluding volumes used in

commercial activities), excluding VAT and tariffs for gas transmission and

distribution.

Starting from 1 November

2018:

UAH 6,235.51 per

1,000 cubic meters

Starting from 1 April

2017:

UAH 2,471 per

1,000 cubic meters

Natural gas price for supply to the municipal heat generating entities

for the needs of customers other than households and religious

organisations, including those producing electricity, excluding VAT and

tariffs for gas transmission and distribution.

Starting from 1 November

2018:

UAH 6,235.51 per

1,000 cubic meters

Starting from 1 April

2017:

UAH 7,907 per

1,000 cubic meters

Natural gas price for supply to 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 9,294 to

UAH 10,150 per 1,000 cubic

meters

From

UAH 7,516 to

UAH 8,265 per 1,000

cubic meters

Tariff for entry points of Ukrainian gas transmission network located at

the state border of Ukraine, excluding VAT.

USD 12.47 per 1,000 cubic

meters per day

USD 12.47 per 1,000

cubic meters per day

Single gas transmission and distribution tariff via territory of Ukraine,

excluding VAT.

UAH 732.7 per 1,000 cubic

meters

UAH 732.7 per 1,000

cubic meters

Gas storage tariff, excluding VAT.

Starting from 1 August 2018

UAH 0.172 per 1,000 cubic

meters per day

UAH 46.20 per 1,000

cubic meters

Gas injection tariff, excluding VAT.

Starting from 1 August 2018

UAH 64.40 per 1,000 cubic

meters per day

UAH 32.90 per 1,000

cubic meters

Gas withdrawal tariff, excluding VAT.

Starting from 1 August 2018

UAH 67.10 per 1,000 cubic

meters per day

UAH 32.90 per 1,000

cubic meters

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 current procedure, gas suppliers

with public service obligations open

special purpose bank accounts to

receive payments for the 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

suppliers with public service obligations

according to the 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

purpose 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

purpose bank accounts is then allocated,

among others, to current bank accounts

of the gas suppliers with public service

obligations according to the 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 settling principles

for municipal heat generating entities

and distribution and water supply

companies payables for gas 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

for gas consumed. The list of companies

entitled for debt settling procedures

is approved by the central body of

the government executive authority

responsible for pursuing the State policy

in housing and utilities.

Fulfillment of gas debt restructuring

agreements is guaranteed by municipal

executive government bodies

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 counterparty. There were no such

agreements terminated up to the date of

these consolidated financial statements.

As at 31 December 2018 outstanding

nominal amount of such restructured

agreements is UAH 1,655 million (31

December 2017: UAH 400 million) (Note

23).

Compensation for performing

public service obligations

In accordance with Para 7, Article 11

of the Law of Ukraine “On Natural

Gas Market”, a gas market player with

public service 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

profit margin. The level of profit margin

should be calculated following the

relevant resolution approved by the

Cabinet of Ministers of Ukraine.

In July 2017, Kyiv county administrative

court supported the Company’s claim

against the Cabinet of Ministers of

Ukraine, and admitted 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. Further, the Cabinet of

Ministers of Ukraine has appealed to

this decision, however, it was rejected

by the Kyiv Court of Appeal in October

2017. Then the Cabinet of Ministers of

Ukraine filed a cassational appeal that

is under review as at the date of these

consolidated financial statements. As at

the date of these consolidated financial

statements such resolution has not been

adopted.

Further, in October 2018 the

Company initiated a claim to request a

compensation of the damages incurred

by the Company during performing

public service obligation in the fourth

quarter of 2015. The amount claimed by

the Company states at UAH 6.6 billion. In

March 2019 the Kyiv Commercial Court

has rejected the Naftogaz claim. The

Company has appealed this decision in

respective court instance.

Taking the significant uncertainty in

respect of receiving the compensation

for performing public service obligations

as at the date of these consolidated

financial statements, the Company

did not recognise any incomes in this

respect during 2017 and 2018, and

did not receive any compensation as a

gas market player with public service

obligations during these periods.

The Company estimates the amount

of compensation for performing public

service obligations up to 31 December

2018 at the level of UAH 27.1 billion

(unaudited) (31 December 2017: UAH

36.2 billion, unaudited). This amount

does not include compensation

attributable to other gas market players

with public service obligations, inter alia

“Ukrgasvydobuvannya” JSC. Total amount

of compensation to all gas market players

named above comprises UAH 114 billion

(unaudited) (31 December 2017: UAH

111 billion unaudited) according to

Company’s calculations.

Gas transmission unbundling

process

As at 31 December 2018 and 2017,

the Company executed control

over transmission system operator

“Ukrtransgaz” JSC.

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 22).

Under the Gas Transit Contract

with “Gazprom” PJSC (“Gazprom”),

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” JSC. 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 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 (“Tribunal”)

requesting revision or, alternatively,

setting aside of the Gas Transit and Gas

Sales Contracts (Note 22).

Therefore, management believes that

legal separation of transit and domestic

transmission is unlikely to be completed

until the Gas Transit Contract expires on

1 January 2020.

Gas storage (injection,

withdrawal) tariffs

In June 2018, the NCREU has issued the

Resolution #480 to set new tariffs for

the arithmetic mean value of the gas

selling price set by the Company for

industrial customers for gas supplies

made on a prepayment basis.

For customers outside the PSO, imported

natural gas is sold under the prices

set discretionary by the gas market

participants. The prices for natural gas set

by the Company are differentiated based

on the monthly consumption volumes and

payment method by the customer.

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

169

168

FINANCIAL STATEMENTS

ANNUAL REPORT 2018

2018

gas storage, injection and withdrawal

that became effective from 1 August

2018. New tariffs introduce payments

for booking storage capacities instead

of payments for the actual gas volumes

stored. The NCREU has also introduced

a system of multipliers applied to these

tariffs depending on the booking period:

for a month ahead booking a ratio of 1.1

is applied, for a day ahead bookings – 1.2.

Assets located at temporarily

occupied territories

In early 2014, Ukraine suffered

from the military aggression of the

Russian Federation which resulted

in the purported annexation of the

Autonomous Republic of Crimea

(“Crimea”) and unlawful military take-

over of certain areas in Luhanska and

Donetska regions by armed terrorist

groups as well as the collapse of law

enforcement in such areas. Management

of the Group continues to undertake all

possible legal and diplomatic measures to

reimburse for losses and recover control

of the Group’s assets in Crimea (Note 22).

3. SEGMENT

INFORMATION

The Executive Board is the Group’s

chief operating decision maker. In 2018

the Group started the organisational

transformation into efficient integrated

national oil and gas company. Operating

model selected assumes that operations

of the Group are organised into Business

Delivery Units, Business Enabling

Units and corporate functions based

on portfolio of assets and processes.

Business Delivery Units (“BDUs”) focus

on the Group’s principal activities and

achieving financial and operational

goals. Enabling units and corporate

functions should support BDUs in order

to maximize value of the Group.

Following these changes and expected

developments, the Group has changed

presentation of segment information

as at 31 December 2018. Comparative

information for the year ended 31

December 2017 was restated to reflect

the changes in presentation.

Management vision of the Group

performance is viewed through the

following business units:

Integrated gas. Integrated gas includes

gas production, imports, sales and supply

to different groups of customers and

other byproducts sales. Management

identified four main groups of customers

in respect of gas sales and supply:

● Gas production, imports and sales to

the regional gas supply 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,

● ІGas imports and supply to the other

customers outside PSO and byproducts

sales.

Each group of customers has its own

selling price setting procedure 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 performed within the current PSO

Resolution (Note 2). Gas supply for

other groups of customers is performed

at prices established independently by

Naftogaz.

The Group controls about 75%

of all natural gas production in

Ukraine. As described in Note 2,

“Ukrgasvydobuvannya” JSC and

“Chornomornaftogaz” JSC are obliged

to sell gas to Naftogaz for the needs

of households, religious organisations,

municipal heat generating entities

and distribution and water supply

companies for households and religious

organisations. Therefore, management

views performance from gas production

up to its sale to one of the groups of

customers named above as a single

reporting segment.Demand in gas for

other customers outside PSO is satisfied

from gas import.

Byproducts sales include production

of oil and gas condensate by

“Ukrgasvydobuvannya” JSC which

is consumed by Oil midstream and

downstream segment at intra-group

prices.

Oil midstream and downstream. This

segment includes activities related to

transportation, sale and supply of oil, gas

condensate, petroleum products, and

related services.

The Group sells purchased and

domestically refined petroleum

products through filling stations

network throughout Ukraine. Domestic

refinery of petroleum products is

performed at oil and gas refineries

controlled by the Group. Oil transit and

transmission operations are presented

by oil transmission pipelines and 11 oil

reservoirs operated by the Group.

Gas domestic transmission and gas

transit. These segments are presented by

the gas transmission pipelines operated

by the Group. Management considers gas

transit and gas transmission as separate

business segments as gas transit is mainly

represented by a contract with a single

counterparty and is being assessed

separately.

Ukrainian gas transmission system is one

of the largest in the world in terms of

its transportation capacities. The total

length of gas transmission pipelines in

Ukraine is 38.5 thousand km. Over 40%

of natural gas supplies from the Russian

Federation to European countries

were delivered through Ukrainian gas

transmission system in 2018 and 2017.

Gas domestic transmission segment

also includes result of market-based

gas balancing operations introduced

by the Code of the Gas Transmission

System. Market-based gas balancing

operations is an activity to balance gas

volumes entered the gas transmission

system at entry point and volumes

taken out at exit point. Gas balancing

services are provided to consumers of

gas transmission services. Currently

this type of activities is performed by

“Ukrtransgaz” JSC.

Gas storage. Ukrainian gas transportation

system includes 12 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.

“Ukrnafta” PJSC. “Ukrnafta” PJSC is

the biggest oil producing company in

Ukraine. “Ukrnafta” PJSC is composed

of several production and maintenance

units, which are currently in the process

of corporate restructuring, including six

oil and gas production units, one well

drilling division and three gas processing

plants.

“Ukrnafta” PJSC also owns one of the

largest filling stations network in Ukraine

located in different regions of Ukraine.

Other. Revenues of this segment include

revenues from sales of materials and

services. The segment also includes

results of joint operations under the

concession agreement for exploration

and development with the Arab Republic

of Egypt.

Management assesses performance 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 uses adjusted operating

result net of income taxes (NOPLAT) as

an additional measure of the 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