public joint stock company “national joint stock company ...€¦ · ukraine”, the “parent”...
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Public Joint Stock Company
“National Joint Stock Company
“NAFTOGAZ OF UKRAINE”
Unaudited Condensed Consolidated Interim
Financial Statements
as at and for the Three Months Ended
31 March 2018
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
CONTENTS
Page
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Interim Statement of Financial Position 2
Unaudited Condensed Consolidated Interim Statement of Profit or Loss 3
Unaudited Condensed Consolidated Interim Statement of Comprehensive Income 4
Unaudited Condensed Consolidated Interim Statement of Changes in Equity 5-6
Unaudited Condensed Consolidated Interim Statement of Cash Flows 7-8
Notes to the Unaudited Condensed Consolidated Interim Financial Statements
1. THE ORGANISATION AND ITS OPERATIONS ....................................................................... 9 2. OPERATING ENVIRONMENT .................................................................................................. 10 3. SEGMENT INFORMATION ....................................................................................................... 14 4. BALANCES AND TRANSACTIONS WITH RELATED PARTIES ......................................... 22 5. PROPERTY, PLANT AND EQUIPMENT .................................................................................. 23 6. OTHER NON-CURRENT ASSETS ............................................................................................ 25 7. INVENTORIES ............................................................................................................................ 25 8. TRADE ACCOUNTS RECEIVABLE ......................................................................................... 26 9. PREPAYMENTS MADE AND OTHER CURRENT ASSETS .................................................. 27 10. CASH AND BANK BALANCES ................................................................................................ 28 11. SHARE CAPITAL ........................................................................................................................ 28 12. BORROWINGS ............................................................................................................................ 29 13. PROVISIONS ............................................................................................................................... 31 14. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES ......................................... 33 15. COST OF SALES ......................................................................................................................... 33 16. OTHER OPERATING INCOME ................................................................................................. 34 17. OTHER OPERATING EXPENSES ............................................................................................. 34 18. FINANCE COSTS ........................................................................................................................ 34 19. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS ......................................... 35 20. FINANCIAL RISK MANAGEMENT ......................................................................................... 38 21. FAIR VALUE ............................................................................................................................... 39 22. SUBSEQUENT EVENTS ............................................................................................................ 39 23. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES ..................................................................................................................................... 40 24. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS ............................................. 42
The accompanying notes are integral part of these consolidated financial statements
2
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2018
In millions of Ukrainian hryvnias Note 31 March 2018 31 December 2017
ASSETS
Non-current assets
Property, plant and equipment 5 468,093 491,482
Investments in associates and joint ventures 1,428 1,197
Deferred tax assets 2,700 4,204
Other non-current assets 6 10,770 11,131
Total non-current assets 482,991 508,014
Current assets
Inventories 7 33,111 60,175
Trade accounts receivable 8 72,091 58,988
Prepayments made and other current assets 9 15,611 71,247
Prepaid corporate income tax 16 16
Cash and bank balances 10 30,804 23,093
Restricted cash 1,343 1,591
Total current assets 152,976 215,110
TOTAL ASSETS 635,967 723,124
EQUITY
Share capital 11 194,307 194,307
Revaluation reserve 397,373 411,261
Foreign currency translation reserve 3,121 3,462
Accumulated deficit (164,213) (168,057)
Equity attributable to owners of the Parent 430,588 440,973
Non-controlling interest in equity 96 (454)
TOTAL EQUITY 430,684 440,519
LIABILITIES
Non-current liabilities
Borrowings 12 12,596 14,736
Provisions 13 6,143 6,007
Deferred tax liabilities 63,750 67,304
Other long-term liabilities 12 12
Total non-current liabilities 82,501 88,059
Current liabilities
Borrowings 12 31,517 44,579
Provisions 13 52,451 52,551
Trade accounts payable 4,584 8,137
Advances received and other current liabilities 14 29,230 78,608
Corporate income tax payable 5,000 10,671
Total current liabilities 122,782 194,546
TOTAL LIABILITIES 205,283 282,605
TOTAL LIABIITIES AND EQUITY 635,967 723,124
The accompanying notes are integral part of these consolidated financial statements
3
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF PROFIT OR LOSS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
In millions of Ukrainian hryvnias Note
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Revenue 3 91,999 82,358
Cost of sales 15 (64,485) (56,998)
Gross profit 27,514 25,360
Other operating income 16 1,429 250
Other operating expenses 17 (14,602) (9,630)
Operating profit 14,341 15,980
Finance costs 18 (1,457) (2,136)
Finance income 324 337
Share of after-tax results of associates and joint-ventures (1,035) (64)
Net foreign exchange gain 140 402
Profit before income tax 12,313 14,519
Income tax expense (5,319) (3,053)
Net profit 6,994 11,466
Net profit is attributable to:
Equity holders of the Company 6,440 11,460
Non-controlling interest 554 6
Net profit 6,994 11,466
The accompanying notes are integral part of these consolidated financial statements
4
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE
INCOME FOR THE THREE MONTHS ENDED 31 MARCH 2018
In millions of Ukrainian hryvnias Note
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Net profit 6,994 11,466
Other comprehensive (loss)/income
Items that will not be reclassified subsequently to profit or
loss, net of income tax:
(Loss)/gain on revaluation of property, plant and equipment (net
of income tax effect of UAH 3,039 million (2017: UAH 2,546
million) (13,845) 11,597
Share of other comprehensive income of associates (net of
income tax effect of nil (2016: nil) 1,262 -
Items that may be reclassified subsequently to profit or loss,
net of income tax:
Foreign currency translation reserve (341) 652
Other comprehensive (loss)/income (12,924) 12,249
Total comprehensive (loss)/income (5,930) 23,828
Total comprehensive (loss)/income is attributable to:
Equity holder of the Company (6,482) 23,769
Non-controlling interests 552 59
Total comprehensive (loss)/income (5,930) 23,828
The accompanying notes are integral part of these consolidated financial statements
5
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED 31 MARCH 2018
Equity attributable to owners of the Parent
In millions of Ukrainian hryvnias Share
capital
Revaluation
reserve
Foreign currency
translation
reserve
Accumulated
deficit Total
Non-
controlling
interest
Total
equity
Balance at 31 December 2017 194,307 411,261 3,462 (168,057) 440,973 (454) 440,519
Effect of implementation of new standards
(Note 23) - - - (3,901) (3,901) - (3,901)
Balance at 1 January 2018 194,307 411,261 3,462 (171,958) 437,072 (454) 436,618
Profit - - - 6,440 6,440 554 6,994
Other comprehensive (loss)/income - (13,843) (341) 1,262 (12,922) (2) (12,924)
Total comprehensive (loss)/income - (13,843) (341) 7,702 (6,482) 552 (5,930)
Transfer of revaluation reserve - (45) - 45 - - -
Change in investments in joint operations - - - (2) (2) (2) (4)
Balance at 31 March 2018 194,307 397,373 3,121 (164,213) 430,588 96 430,684
The accompanying notes are integral part of these consolidated financial statements
6
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED 31 MARCH 2017
Equity attributable to owners of the Parent
In millions of Ukrainian hryvnias Share
capital
Revaluation
reserve
Unregistered
contributed
capital
Foreign
currency
translation
reserve
Accumulated
deficit Total
Non-
controlling
interest Total equity
Balance at 31 December 2016 164,607 437,510 29,700 3,164 (175,873) 459,108 1,164 460,272
Profit - - - - 11,520 11,520 59 11,579
Other comprehensive income - 11,597 - 652 - 12,249 - 12,249
Total comprehensive income - 11,597 - 652 11,520 23,769 59 23,828
Transfer of revaluation reserve - (32) - - 32 - - -
Change in investments in joint operations - - - - (7) (7) (7) (14)
Balance at 31 March 2017 164,607 449,075 29,700 3,816 (164,328) 482,870 1,216 484,086
The accompanying notes are integral part of these consolidated financial statements
7
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
In millions of Ukrainian hryvnias Note
Three months
ended
31 March 2018
Three months
ended
31 March 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before income tax 12,313 14,519
Adjustments for:
Depreciation of property, plant and equipment and
amortisation of intangible assets 12,101 6,016
Loss on disposal of property, plant and equipment 33 34
Impairment of property, plant and equipment 2 -
Write down of inventories - 2
Net movement in provision for trade accounts receivable and
prepayments made, other current assets, financial
investments and VAT balances 17 10,176 6,336
Change in provisions 13 1,195 1,369
Write off of accounts payable and other current liabilities (2) (40)
Share of after-tax results of associates and joint-ventures 1,035 64
Foreign exchange gain (140) (402)
Finance costs, net 1,133 1,799
Operating cash flows before working capital changes 37,846 29,697
(Increase)/decrease in other non-current assets (87) 77
Decrease in inventories 27,064 12,716
Increase in trade accounts receivable (22,384) (12,443)
Increase in prepayments made and other current assets 2,581 (4,580)
Decrease in other long-term liabilities - (3)
Provisions paid or used 13 (1,303) (442)
(Decrease)/increase in trade accounts payable (3,623) 6,440
Increase/(decrease) in advances received and other current
liabilities 7,500 (5,581)
Cash generated from operations 47,594 25,881
Income taxes paid (10,000) (1,831)
Interest received 254 249
Net cash generated by operating activities 37,848 24,299
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment and intangible assets (5,496) (2,047)
Withdrawal of bank deposits - 483
Placement of restricted cash 248 -
Payments to acquire financial assets (3,365) -
Net cash used in investing activities (8,613) (1,564)
The accompanying notes are integral part of these consolidated financial statements
8
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED 31 MARCH 2018 (CONTINUED)
In millions of Ukrainian hryvnias Note
Three months
ended
31 March 2018
Three months
ended
31 March 2017
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 2,389 -
Repayment of borrowings (21,892) (10,968)
Interest paid (1,268) (2,008)
Net cash used in financing activities (20,771) (12,976)
Net increase in cash and cash equivalents 8,464 9,759
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE YEAR 23,093 21,853
Effect of exchange rates change on cash and cash equivalents (753) 68
CASH AND CASH EQUIVALENTS AT
THE END OF THE REPORTING PERIOD 10 30,804 31,680
Significant Non-Cash Transactions
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Payment for the natural gas acquired by a lending bank 5,465 -
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
9
1. THE ORGANISATION AND ITS OPERATIONS
Public Joint Stock Company “National Joint Stock Company “Naftogaz of Ukraine” (“Naftogaz of
Ukraine”, the “Parent” or the “Company”) was founded in 1998 in accordance with the Resolution of
the Cabinet of Ministers of Ukraine #747 dated 25 May 1998.
Naftogaz of Ukraine and its subsidiaries (hereinafter collectively referred to as the “Group”) are
beneficially owned by the State of Ukraine. The Government of Ukraine, as represented by the Cabinet
of Ministers of Ukraine, executes government functions over the Company through participation in the
shareholders’ meetings, as well as through the appointment of the Supervisory Board members, the
Chairman of the Executive Board and the Executive Board members.
Naftogaz of Ukraine is a vertically integrated oil and gas company engaged in 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, 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 Country of
registration 31 March
2018
31 December
2017
Production of gas, oil and refinery products
Ukrgasvydobuvannya, JSC 100.00 100.00 Ukraine
Ukrnafta, PJSC
50.00+1
share
50.00+1
share Ukraine
Petrosannan Company, Joint operations with the Arab Republic
of Egypt and Egyptian General Petroleum Corporation 50.00 50.00 Egypt
Zakordonnaftogaz, Subsidiary Enterprise 100.00 100.00 Ukraine
Karpatygaz, LLC, Joint operations with Misen Enterprises AB 49.99 49.99 Ukraine
Oil and gas transportation
Ukrtransgaz, JSC 100.00 100.00 Ukraine
Ukrtransnafta, JSC 100.00 100.00 Ukraine
Ukrspectransgaz, JSC 100.00 100.00 Ukraine
Wholesale and retail distribution of oil, gas and refinery
products
Gaz Ukraiiny, Subsidiary Enterprise 100.00 100.00 Ukraine
Naftogaz Trading Europe S.A. 100.00 100.00 Switzerland
Kirovogradgaz, Open JSC 51.00 51.00 Ukraine
Ukravtogaz, Subsidiary Enterprise 100.00 100.00 Ukraine
Other
Vuglesyntezgaz Ukraiiny, Subsidiary Enterprise 100.00 100.00 Ukraine
Naftogaz-Energoservice, Subsidiary Enterprise 100.00 100.00 Ukraine
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
10
2. OPERATING ENVIRONMENT
In the recent years, Ukraine has been in a political and economic turmoil. Crimea, an autonomous
republic of Ukraine, was effectively annexed by the Russian Federation. An armed conflict continues
in certain parts of Luhansk and Donetsk regions. These events resulted in higher inflation, devaluation
of the national currency against major foreign currencies, decrease of GDP, illiquidity, and volatility of
financial markets.
In 2017, annual inflation rate amounted to 13.7%. The Ukrainian economy proceeded recovery from the
economic and political crisis of previous years that resulted in real GDP smooth growth of around 2.5%
and stabilisation of national currency. From trading perspective, the economy was demonstrating
refocusing on the European Union (“EU”) market, which was a result of the signed Association
Agreement with the EU in January 2016 that established the Deep and Comprehensive Free Trade Area
(“DCFTA”).
In March 2015, Ukraine signed four-year Extended Fund Facility (“EFF”) with the International
Monetary Fund (“IMF”) that will last until March 2019. The total program amounted to
USD 17.5 billion, while Ukraine has so far received only USD 8.7 billion out of the total amount. In
September 2017, Ukraine successfully issued USD 3 billion of Eurobonds, of which USD 1.3 billion is
new financing, with the remaining amount aimed to refinance bonds due in 2019. The NBU expects that
Ukraine will receive another USD 3.5 billion from the IMF in 2018. To receive next tranches, the
government of Ukraine has to implement certain key reforms, including in such areas as pension system,
anti-corruption regulations, and privatisation, as well as transition to market pricing for natural gas.
Further stabilisation of the economic and political situation depends to a large extent upon success of
the Ukrainian government’s efforts, yet further economic and political developments are currently
difficult to predict.
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
Starting from 1 October 2015 model of the gas market has switched to the principles of free, fair
competition and ensuring a high level of protection of customer rights and interests from the regulated
tariffs market model.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
11
2. OPERATING ENVIRONMENT (Continued)
At the same time, the Cabinet of Ministers of Ukraine has issued Resolution #758 dated 1 October 2015,
imposing public service obligations (“PSO”) on the Company during the transitional period from
1 October 2015 to 31 March 2017 in respect of gas purchase of domestic production from
“Ukrgasvydobuvannia” JSC and gas supply for the needs of households, municipal heat generating
entities and religious organisations.
Public service obligations imposed on the Company were prolonged up to 1 April 2018 according to the
Resolution of the Cabinet of Ministers of Ukraine #187 dated 22 March 2017 and up to 1 June according
to the Resolution of the Cabinet of Ministers of Ukraine #228 dated 28 March 2018 (“PSO Resolution”).
This Resolution contains, amongst others, a series of differences from the previous one, in particular:
Both “Ukrgasvydobuvannia” JSC and “Chornomornftogaz” JSC are obliged to sell gas to the
Company for the needs of households, religious organisations, municipal heat generating entities
for heat distribution and hot water supply for households and religious organisations.
The Company is obliged to sell gas to municipal heat generating entities for all groups of customers,
as well as for producing electricity by these companies.
Starting from 1 April 2017 the Company sells gas for the needs of households, religious
organisations and municipal heat generating entities at the price of UAH 4,942 for 1,000 cubic
meters (excluding VAT, transportation and distribution tariffs and trade mark-up). In setting
wholesale price for religious organisations and municipal heat generating entities for the needs of
religious organisations a ratio of 0.5 is applied to the price defined above; in setting wholesale price
for gas for municipal heat generating entities for all customers, except for the needs of religious
organisations and households, and for electricity production by municipal heat generating entities
a ratio of 1.6 is applied.
In case gas wholesale price calculated at 100% import parity before 1 July 2017 is more than 10%
higher than currently effective price, selling price should be calculated at 100% import parity for
the period from 1 October 2017 up to 1 April 2018 for gas sales to households, religious
organisations and municipal heat generating entities. Concurrently with the resolution on the
Company’s gas sales price change for the specified categories, gas purchase price from
“Ukrgasvydobuvannia” JSC and “Chornomornftogaz” JSC should be revised.
Nevertheless, despite all preconditions for such price revision in 2017 after recalculations performed by
the Ministry of Energy and Coal of Ukraine, final decision was not approved.
Other customers outside the Resolution buy imported natural gas under the prices set discretionary by
the gas market participants, including the Company.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
12
2. OPERATING ENVIRONMENT (Continued)
The following tariffs and prices were set:
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.
31 March
2018
31 December
2017
Natural gas prices for households, including VAT, tariffs for gas
transmission and distribution and mark up on price.
Starting from 1 April 2017, the Resolution of the Cabinet of
Ministers of Ukraine #187 dated 22 March 2017 sets maximum
level of mark up on price of 2.5% from the retail price for gas
suppliers.
UAH 6.96 per
cubic meter
From 1 April 2017:
UAH 6.96 per
cubic meter
Natural gas prices for municipal heat generating entities
producing heat for households, excluding VAT and tariffs for
gas transmission and distribution.
UAH 4.94 per
cubic meter
UAH 4.94 per
cubic meter
Gas selling prices for industrial customers and entities
financed from the State or municipal budgets, excluding VAT
and tariffs for gas transmission and distribution. These selling
prices are set discretionary by the Company depending on
monthly consumption levels and terms of payments.
From UAH 6,580
to UAH 8,944 per
1,000 cubic meters
From UAH 7,516
to UAH 8,265 per
1,000 cubic meters
General tariff for gas storage (storage, injection, and
withdrawal), excluding VAT, UAH per thousand cubic meters
for one season of storage.
UAH 112.0 UAH 112.0
Tariff for entry and exit points of Ukrainian gas transmission
network, excluding VAT, USD per thousand cubic meters per
day
USD 12.47 USD 12.47
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
13
2. OPERATING ENVIRONMENT (Continued)
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.
As at 31 March 2018 the Company signed gas debts restructuring agreements according to this Law in
amount of UAH 793 million (31 December 2017: UAH 432 million). Fulfilment 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 condensed
consolidated interim financial statements.
Compensation of price difference between sales tariffs and price of imported gas
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.
As at the date of these condensed consolidated interim financial statements such resolution has not been
adopted. Accordingly, the Company did not receive any compensation as a gas market player with public
service obligations during the three months ended 31 March 2018 and during 2017.
Gas transmission unbundling process
As at 31 March 2018 and 31 December 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 19).
Under the Gas Transit Contract Naftogaz is responsible for reliable and uninterrupted functioning of the
Ukrainian gas transmission system. Technical realisation of such Naftogaz’s obligations is performed
by “Ukrtransgaz” 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” PJSC
(“Gazprom”) consent. Gazprom is reluctant to give such consent and has filed a Request for Arbitration
to The Arbitration Institute of the Stockholm Chamber of Commerce (“Arbitral Tribunal”) requesting
revision or, alternatively, setting aside of the Gas Transit and Gas Sales Contracts (Note 19).
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
14
2. OPERATING ENVIRONMENT (Continued)
Therefore, management believes that legal ownership unbundling is not an option, because it would
deprive Naftogaz of control of the assets, which provides the basis for Naftogaz’s legal interest in
defending its rights under the Gas Transit Contract according to the Swedish law. Meanwhile,
implementation of the ISO (Independent System Operator) unbundling model, which would require
separation of transit and domestic transmission if aiming at unbundling to be done before 2020, also
cannot be physically finalised until the Gas Transit Contract expires. ITO (Independent Transmission
Operator) unbundling model is not envisaged in the Law on Gas Market.
Given the above, management believes that the transfer of gas transmission activity is unlikely to be
completed before 2020.
Assets located at temporarily occupied territories
In early 2014, Ukraine suffered from the military aggression of the Russian Federation which resulted
in the occupation of the Autonomous Republic of Crimea (“Crimea”) and unlawful military take-over
of certain areas in Luhanska and Donetska regions by armed terrorist groups that are controlled, directed,
and financed by the Russian Federation, as well as а result of the unconcealed intrusion of regular armed
forces of the Russian Federation.
As a result, by 1 January 2016, the Company has recognised a provision for impairment for assets
located on anti-terrorist operation (“ATO”) as stipulated by the Law of Ukraine „On Provisional
Measures during ATO” #1669 dated 2 September 2014.
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 19).
3. SEGMENT INFORMATION
The Executive Board is the Group’s chief operating decision maker. As at 31 December 2017, the Group
has changed presentation of segment information in line with performance management approach to its
subsidiaries. Comparative information as at 31 March 2017 was restated to reflect the changes in
presentation.
Management vision of the Group performance is viewed through the following business areas:
Gas production, imports, sales and supply to different groups of customers. Management identified four
main groups of customers in respect of gas sales and supply:
Gas production, imports and sales to the regional gas 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,
Gas imports and supply to the other customers outside PSO.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
15
3. SEGMENT INFORMATION (Continued)
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.
As described in Note 2, “Ukrgasvydobuvannia” JSC and “Chornomornftogaz” 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. Natural gas production is mainly performed in Poltava,
Kharkiv, Sumy, Dnipro, Lviv and Zakarpattya regions. Exploration works are mainly performed in
Carpathian and Dnipro-Donetsk regions. The Group controls about 80% of all natural gas production in
Ukraine.
Demand in gas for other customers outside PSO is satisfied from gas imports.
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 manly 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 45% of
natural gas supplies from the Russian Federation to European countries were delivered through
Ukrainian gas transmission system in 2017 and 2016.
This segment also includes result of market-based gas 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.
Petroleum products sales. The Group sells purchased and domestically refined petroleum products
through filling stations network in the most of Ukraine. Domestic refinery of petroleum products is
performed at oil and gas refineries controlled by the Group. This segment includes both wholesale and
retail sales of petroleum products. Wholesale activities are performed through electronic auctions, while
retail sales are done through own network of fuel filling stations.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
16
3. SEGMENT INFORMATION (Continued)
Oil and gas condensate. The Group sells oil and gas condensate at exchange auctions in accordance
with the Law of Ukraine “On oil and Gas” #2665-III dated 12 July 2001 and the procedure for organising
and holding exchange auctions for sale of domestically produced crude oil, gas condensate and LNG,
approved by the Cabinet of Ministers of Ukraine Regulation #570 dated 16 October 2014.
Oil domestic transmission and transit. These segments are presented by oil transmission pipelines and 11 oil
reservoirs operated by the Group. Total length of oil transmission pipelines in Ukraine is 4.7 thousand km.
Other. Revenues of this segment include revenues from sales of materials, services and chemical
products. The segment also includes results of joint operations under the concession agreement for
exploration and development with the Arab Republic of Egypt.
Management assesses 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 also uses adjusted
operating result net of income taxes (NOPLAT) to measure segment operational efficiency. Income
taxes at nominal tax rate are deducted from adjusted operating profit to arrive to NOPLAT. Adjusted
operating loss is not corrected for income taxes.
The accounting policies of the reportable segments are the same as the Group’s accounting policies
described in Note 23 other than presentation of payments for natural gas made directly by lending bank
to suppliers within cash flows from operating activities.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED 31 MARCH 2018
17
3. SEGMENT INFORMATION (Continued)
Segment information for the reportable business segments of the Group for the three months ended 31 March 2018 is as follows:
In millions of Ukrainian hryvnias
Gas
production,
import and
sales to RSC's
for resale to
households
Gas production,
imports and
supply to MHE's
for the needs of
house-
holds
Gas production,
imports and
supply to other
customers under
PSO
Gas supply
outside
PSO
Gas
transit
Gas
domestic
transmis-
sion
Gas
storage
Petroleum
products
sales
Oil and gas
condensate
Oil
transit
Oil
domestic
transmis-
sion Other
Elimi-
nation Total
Sales – external 27,955 12,974 7,747 3,928 15,665 11,810 56 4,561 4,808 943 33 1,519 - 91,999
Sales to other segments - - - 9,819 - 314 355 - - - 8 - (10,496) -
Total revenue 27,955 12,974 7,747 13,747 15,665 12,124 411 4,561 4,808 943 41 1,519 (10,496) 91,999
Segment result 10,928 (544) 1,926 554 1,455 1,637 (22) 1,112 2,782 503 (237) 118 - 20,212
Non-refundable VAT recognised
according to the Gas Transit
Arbitration (Note 19) (4,751) Change in provisions for litigations and
other provisions (786)
Impairment of property, plant and equipment (1,457)
Finance income/ (expense) 324
Share of after-tax results of associates (1,035)
Net foreign exchange loss/gain (49)
Unallocated income/ (expense), net (145)
Profit before income tax 12,313
NOPLAT 8,961 (544) 1,579 454 1,193 1,342 (22) 912 2,281 412 (237) 97 - 16,428
Net segment cash flows from operating
activities 28,826 7,898 (3,188) 531 934 671 (44) 1,988 60 877 (52) (112) - 38,389
Non-refundable VAT recognised
according to the Gas Transit
Arbitration (Note 19) (4,751) Payments for natural gas made directly
by lending bank to suppliers 5,465
Unallocated cash flows from operating activities (1,255)
Net cash flows from operating
activities 37,848
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED 31 MARCH 2018
18
3. SEGMENT INFORMATION (Continued)
In millions of Ukrainian hryvnias
Gas
production,
import and
sales to RSC's
for resale to
households
Gas
production,
imports and
supply to
MHE's for the
needs of house-
holds
Gas
production,
imports and
supply to
other
customers
under PSO
Gas
supply
outside
PSO
Gas
transit
Gas
domestic
transmis-
sion
Gas
storage
Petroleum
products
sales
Oil and gas
condensate
Oil
transit
Oil
domestic
transmis-
sion Other
Elimi-
nation Total
Material non-cash items included
in segment results:
Depreciation, depletion and amortisation 2,886 599 7 5 6,880 938 42 173 248 152 66 105 - 12,101
Net movement in provision for trade
and other receivables and prepayments made and other
current assets 699 1,067 (46) (150) - 3,895 - - (34) - - (53) - 5,378
Net foreign exchange (loss)/gain 12 27 16 9 100 - - - - - - 26 190
Capital expenditure 2,390 1,111 418 4 120 5 3 415 309 32 15 186 5,008
Property, plant and equipment 86,247 21,153 449 1,456 162,694 11,128 140,738 17,307 9,645 6,999 7,682 2,595 468,093 Other segment assets 46,423 13,404 6,064 562 17,988 11,950 37 4,616 4,072 871 1,231 9,741 116,958
Investments in associates and joint
ventures
1,428
Cash and bank balances 30,804
Unallocated assets 18.684
Total assets 635,967
Segment liabilities 10,265 3,145 1,033 2,869 5,376 2,096 1,633 4,143 3,704 330 582 1,853 37,029
Borrowings 44,113
Portion of net profit attributable to the State Budget of Ukraine 29,498
Deferred tax liabilities 63,750
Unallocated liabilities 30,893
Total liabilities 205,283
Net working capital 37,580 10,977 5,317 (479) 12,092 9,726 (1,597) 473 368 541 636 1,729 77,363
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED 31 MARCH 2018
19
3. SEGMENT INFORMATION (Continued)
Segment information for the reportable business segments of the Group for the three months ended 31 March 2017 is as follows:
In millions of Ukrainian hryvnias
Gas
production,
import and
sales to RSC's
for resale to
households
Gas
production,
imports and
supply to
MHE's for the
needs of house-
holds
Gas
production,
imports and
supply to
other
customers
under PSO
Gas supply
outside PSO Gas transit
Gas
domestic
transmis-
sion
Gas
storage
Petroleum
products
sales
Oil and gas
condensate
Oil
transit
Oil
domestic
transmis-
sion Other
Elimi-
nation Total
Sales – external 27,217 11,489 2,111 2,098 17,981 11,721 46 4,229 3,148 853 20 1,444 - 82,358
Sales to other segments - - - 11,165 - 1,059 200 - - - 6 - (12,430) -
Total revenue 27,217 11,489 2,111 13,263 17,981 12,780 246 4,229 3,148 853 26 1,444 (12,430) 82,358
Segment result 9,412 (709) (331) 367 7,632 (1,602) (101) 1,219 1,184 533 (220) 290 - 17,674
Change in provisions for litigations
and other provisions (1,017)
Finance income/ (expense) (1,799)
Share of after-tax results of
associates (64)
Net foreign exchange loss/gain 402
Unallocated income/ (expense), net (677)
Profit before income tax 14,519
NOPLAT 7,718 (709) (331) 301 6,258 (1,602) (101) 1,000 971 437 (220) 326 - 13,959
Net segment cash flows from operating activities 23,273 333 (1,418) (2,453) 9,682 (3,482) (123) 480 1,002 240 2 528 - 28,063
Unallocated cash flows from
operating activities (2,182)
Net cash flows from operating
activities 25,881
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED 31 MARCH 2018
20
3. SEGMENT INFORMATION (Continued)
In millions of Ukrainian hryvnias
Gas
production,
import and
sales to RSC's
for resale to
households
Gas
production,
imports and
supply to
MHE's for the
needs of house-
holds
Gas
production,
imports and
supply to
other
customers
under PSO
Gas
supply
outside
PSO
Gas
transit
Gas
domestic
transmis-
sion
Gas
storage
Petroleum
products
sales
Oil and gas
condensate
Oil
transit
Oil
domestic
transmis-
sion Other
Elimi-
nation Total
Material non-cash items included
in segment results:
Depreciation, depletion and
amortisation 1,966 3 1 14 2,814 383 92 354 154 118 57 60 6,016 Net movement in provision for trade
and other receivables and
prepayments made and other current assets (47) (172) - (12) - 6,506 - - - - - 20 6,295
Net foreign exchange (loss)/gain (28) (43) (8) (5) 6 - - - - (28) - 38 (68)
Capital expenditure 1,158 489 91 9 405 15 10 183 151 18 8 71 2,608
Property, plant and equipment 83,984 - - 1,540 230,203 15,746 194,236 8,451 9,429 7,211 7,915 3,412 562,127
Other segment assets 42,673 19,151 3,454 5,937 12,313 6,135 609 5,107 1,244 829 1,160 10,919 109,531
Investments in associates and joint ventures
1,257
Cash and bank balances 31,680
Unallocated assets 13,570
Total assets 718,165
Segment liabilities 12,647 12,147 2,736 2,512 2,064 634 1,218 8,534 2,919 65 340 3,308 49,124
Borrowings 59,529
Portion of net profit attributable to the State Budget of Ukraine 13,264
Deferred tax liabilities 84,597
Unallocated liabilities 32,360
Total liabilities 238,874
Net working capital 34,516 15,699 2,403 4,539 10,304 5,807 (1,223) 1,386 (2,712) 692 819 2,836 75,066 ;t
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
21
3. SEGMENT INFORMATION (Continued)
Geographical concentration of sales
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Ukraine 75,265 63,390
Russian Federation 16,608 18,834
Egypt 126 134
Europe - -
Total revenue 91,999 82,358
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 three months ended 31 March 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 during three months ended 31 March 2018 amounted to UAH 15,665 million (three months
ended 31 March 2017: UAH 17,981 million).
Revenues, operating profit/(loss) and receivables of the segments “Gas transit” and “Gas transmission”
by main types of services are as follows:
31 March 2018
In millions of
Ukrainian hryvnias Revenue
Operating
profit/(loss) NOPLAT
Trade accounts receivable
gross
amount
provision for
impairment
carrying
amount
International transit 15,665 1,453 1,193 6,366 - 6,366
Domestic transmission 12,124 1,637 1,342 29,832 (19,455) 10,377
including gas
balancing
operations 8,477 474 389 26,729 (18,426) 8,303 Total 27,789 3,092 2,535 36,198 (19,455) 16,743
31 March 2017
In millions of
Ukrainian hryvnias Revenue
Operating
profit/(loss) NOPLAT
Trade accounts receivable
gross
amount
provision for
impairment
carrying
amount
International transit 17,981 7,632 6,258 5,137 - 5,137
Domestic transmission 11,721 (1,602) (1,602) 16,721 (11,360) 5,361
including gas
balancing
operations 8,593 (4,188) (4,188) 13,907 (10,578) 3,329 Total 29,702 6,030 4,945 21,858 (11,360) 10,498
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
NAFTOGAZ OF UKRAINE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
22
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 discussed 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 three months ended 31 March 2018, about 32% of Group's revenue (2017: 34%) were earned
from transactions with the entities controlled, jointly controlled or influenced by the Government of
Ukraine. Outstanding trade accounts receivable related to these transactions as at 31 March 2018 and
31 December 2017 were about 40% and 45%, respectively, of the total trade accounts receivable
balance.
Outstanding accounts payable, advances and other current liabilities as at 31 March 2018 and
31 December 2017 were about 74% and 18%, respectively, of the total balance of these liabilities.
Provisions in respect of the entities controlled by the Government of Ukraine as at 31 March 2018 and
31 December 2017 were about 80% of the total provisions.
As at 31 March 2018 and 31 December 2017, about 97% 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 (2017: 65%). About 78% of finance
income in 2018 related to balances in these banks (2017: 52%) and about 78% of finance costs for the
three months ended 31 March 2018 (2017: 74%) related to borrowings from these banks.
Pledges. As at 31 March 2018 and 31 December 2017, borrowings from related parties (State-owned
banks) were secured by property, plant and equipment, inventories and proceeds from future sales.
Guarantees. Amount of guarantees, provided by the Government of Ukraine, as at 31 March 2018 and
31 December 2017 equalled to UAH 10,519 million and UAH 22,023 million, respectively (Note 12).
Transactions with the State are further disclosed in Note 11.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
23
5. PROPERTY, PLANT AND EQUIPMENT
Movements in the carrying amount of property, plant and equipment for the three months ended 31 March 2018 were as follows:
In millions of Ukrainian hryvnias
Pipelines
and related
equipment
Oil and gas
producing
properties
Machinery
and
equipment Buildings
Cushion
gas
Drilling and
exploration
equipment
Other
fixed
assets
Construc-
tion in
progress Total
Net book value at 31 December 2017 131,489 77,596 85,438 26,848 150,040 1,711 939 17,421 491,482
Cost or valuation 132,909 77,944 86,105 27,484 150,045 1,738 2,128 19,443 497,796
Accumulated depreciation and impairment (1,420) (348) (667) (636) (5) (27) (1,189) (2,022) (6,314)
Additions and transfers 647 876 704 66 - 151 271 2,178 4,893
Revaluation - - - - (16,881) - - - (16,881)
Disposals - (8) (3) (1) - (22) (37) (27) (98)
Depreciation charge (3,149) (2,112) (5,102) (682) - (158) (96) - (11,299)
Impairment - (3) (1) - - - - - (4)
Net book value at 31 March 2018 128,987 76,349 81,036 26,231 133,159 1,682 1,077 19,572 468,093
Cost or valuation 133,557 78,811 86,832 29,786 135,015 1,844 2,579 21,580 490,004
Accumulated depreciation and impairment (4,570) (2,462) (5,796) (3,555) (1,856) (162) (1,502) (2,008) (21,911)
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
24
5. PROPERTY, PLANT AND EQUIPMENT (Continued)
Movements in the carrying amount of property, plant and equipment for the three months ended 31 March 2017 were as follows:
In millions of Ukrainian hryvnias
Pipelines
and related
equipment
Oil and gas
producing
properties
Machinery
and
equipment Buildings
Cushion
gas
Drilling and
exploration
equipment
Other
fixed
assets
Construc-
tion in
progress Total
Net book value at 31 December 2016 191,074 52,342 106,818 34,411 153,566 952 1,002 11,496 551,661
Cost or valuation 199,270 59,300 116,533 39,194 155,422 1,447 2,724 13,117 587,007
Accumulated depreciation and impairment (8,196) (6,958) (9,715) (4,783) (1,856) (495) (1,722) (1,621) (35,346)
Additions and transfers 329 862 378 74 - 351 (65) 586 2,515
Revaluation - - - - 14,143 - - - 14,143
Disposals - - (4) (2) - (6) (1) (68) (81)
Depreciation charge (1,688) (1,432) (2,243) (550) - (102) (96) - (6,111)
Net book value at 31 March 2017 189,175 51,772 104,949 33,933 167,709 1,195 840 12,014 562,127
Cost or valuation 199,658 60,163 116,867 39,230 169,565 1,885 2,583 13,772 603,723
Accumulated depreciation and impairment (9,943) (8,391) (11,918) (5,297) (1,856) (690) (1,743) (1,758) (41,596)
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
NAFTOGAZ OF UKRAINE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
25
5. PROPERTY, PLANT AND EQUIPMENT (Continued)
During the three months ended 31 March 2018, the depreciation and depletion expenses of UAH 10,890
million (2017: UAH 5,593 million) were included in cost of sales, UAH 142 million (2017: UAH 148
million) in other operating expense and UAH 267 million (2017: UAH 370 million) were capitalised in
the cost of property, plant and equipment.
As at 31 March 2018 and 31 December 2017, the Group has pledged its property, plant and equipment
with carrying amount of UAH 17,226 million and UAH 2,682 million, respectively, to secure its
borrowings (Note 12).
6. OTHER NON-CURRENT ASSETS
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Accounts receivable on product sharing agreement 4,478 4,866
Intangible assets 2,379 2,318
Restructured accounts receivable of gas consumers 839 753
Other 3,074 3,194
Total 10,770 11,131
Intangible assets. As at 31 March 2018 and 31 December 2017, included in intangible assets are licenses
for exploration and extraction amounting to UAH 1,591 million and UAH 1,600 million, respectively.
Other. As at 31 March 2018 and 31 December 2017, included in other non-current assets are research
and development expenditures amounting to UAH 1,063 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 23).
7. INVENTORIES
The Group’s inventories were as follows:
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Natural gas 21,586 48,472
Crude oil and petroleum products 3,930 4,299
Spare parts 2,978 2,829
Oil for industrial and technological needs 1,930 1,954
Raw materials 1,479 1,500
Other 1,208 1,121
Total 33,111 60,175
As at 31 March 2018 and 31 December 2017, inventories with carrying amount of UAH 19,304 million
and UAH 38,208 million, respectively, were pledged as collateral for borrowings (Note 12).
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
26
8. TRADE ACCOUNTS RECEIVABLE
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Accounts receivable for gas sales and supply 78,559 65,548
Accounts receivable for gas balancing 26,729 20,033
Accounts receivable for crude oil 11,185 8,427
Accounts receivable for gas transportation services 9,469 9,360
Other accounts receivable 5,419 5,539
Less: provision for impairment (59,271) (49,919)
Total 72,091 58,988
Movements in provision for impairment of trade accounts receivable were as follows:
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Balance at 1 January 49,919 37,229
Effect of implementation of new standards (Note 23) 3,901 -
Provision for impairment recognised during the reporting period 11,748 7,496
Reversal of provision for impairment (6,296) (993)
Amounts written off as uncollectible (1) (4)
Balance at 31 March 59,271 43,728
Analysis of credit quality of trade accounts receivable is as follows:
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Neither past due nor impaired 27,054 27,333
Past due but not impaired:
Less than 30 days overdue 26,933 13,279
31 to 90 days overdue 12,236 6,854
91 to 180 days overdue 3,514 4,559
181 to 365 days overdue 1,805 6,738
Over 365 days overdue 549 225
Past due and individually impaired (gross):
Less than 30 days overdue 9,694 1,663
31 to 90 days overdue 3,046 732
91 to 180 days overdue 1,709 1,180
181 to 365 days overdue 7,209 13,053
Over 365 days overdue 37,613 33,291
Less: provision for impairment (59,271) (49,919)
Total 72,091 58,988
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
27
9. PREPAYMENTS MADE AND OTHER CURRENT ASSETS
The Group’s prepayments made and other current assets were as follows:
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Prepayments to suppliers for materials, works and services 10,775 10,834
Taxes prepaid, other than income tax 7,750 8,935
VAT recoverable 2,094 2,175
Receivables under assignation agreements in respect of natural gas sales 1,634 1,637
Promissory notes receivable 1,455 1,468
Prepayments for pipelines construction 1,333 1,348
Prepayments to suppliers for natural gas 58 649
Indebtedness under the Gas Transit Arbitration - 57,125
Other 8,719 5,385
Less: Provision for impairment (18,207) (18,309)
Total 15,611 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 as at this date (Note 14).
As at 31 March 2018, included in taxes prepaid, other than income tax are prepayments for subsoil
royalty amounting to UAH 637 million (31 December 2017: UAH 3,250 million).
Movements in the provision for impairment of prepayments made and other current assets were as follows:
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Balance at 1 January 18,309 18,963
Provision for impairment recognised during the reporting period 1 16
Reversal of provision for impairment (63) (273)
Amounts written off as uncollectible (60) (44)
Other movements 20 -
Balance at 31 March 18,207 18,662
Other movements in provision for impairment of prepayments made and other current assets relate to
reclassification of provision between current and non-current assets.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
28
10. CASH AND BANK BALANCES
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Cash in banks 30,526 22,895
Other 278 198
Total 30,804 23,093
11. SHARE CAPITAL
As at 31 March 2018 and 31 December 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 March 2018 and 31 December 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 4,156 million. Therefore the total amount of share capital of the Company as at
31 March 2018 and 31 December 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 financial statements prepared in accordance with International Financial Reporting Standards.
According to the Resolution of the Cabinet of Ministers of Ukraine #384-p dated 25 April 2018, 30%
of net profit of the Company for 2017 amounting to UAH 11,799 million should be paid to the State
Budget of Ukraine before 30 June 2018, and distribution of additional 45% of the net profit for 2017
amounting to UAH 17,699 million should be decided by the Cabinet of Ministers of Ukraine in August
2018.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
29
12. BORROWINGS
The Group’s borrowings were as follows:
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Non-current
Bank borrowings 12,776 14,927
Unamortised discount (180) (191)
Total non-current portion 12,596 14,736
Current
Bank borrowings 30,981 ¤ 43,993
Interest accrued 536 586
Total current portion 31,517 44,579
Total 44,113 59,315
The effective interest rates and currency denomination of borrowings were as follows:
In millions of Ukrainian
hryvnias
31 March 2018 31 December 2017
Balance % per annum Balance % per annum
UAH 18,344 19% 21,162 18%
USD 17,402 9% 26,706 7%
EUR 8,367 2% 11,447 2%
Total 44,113 59,315
Pledges
All the Group’s borrowings were secured as at 31 March 2018 and 31 December 2017.
The Group’s borrowings were secured by the following pledges:
31 March
2018 31 December
2017
Proceeds from future sales 34,595 43,393
Property, plant and equipment (Note 5) 17,226 2,682
Inventories (Note 7) 19,304 38,208
Total 71,125 84,283
Guarantees. As at 31 March 2018, the Group’s borrowings in the amount of UAH 10,519 million were
guaranteed by the State (31 December 2017: UAH 22,023 million).
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
30
12. BORROWINGS (Continued)
Reconciliation of financial liabilities from financing activities
In thousands of
Ukrainian
hryvnias 1 January
2018
Net cash
flows from
financing
activities Non-cash
transactions
Interest
expense
(Note 18) 31 March
2018
Bank borrowings 59,315 (20,771) 4,371 1,198 44,113
Total 59,315 (20,771) 4,371 1,198 44,113
In thousands of
Ukrainian
hryvnias 1 January
2017
Net cash
flows from
financing
activities Non-cash
transactions
Interest
expense
(Note 18) 31 March
2017
Bank borrowings 66,044 (12,856) (269) 1,810 54,729
Bonds 4,800 (120) - 120 4,800
Total 70,844 (12,976) (269) 1,930 59 529
Non-cash transactions relate to payment for the natural gas acquired by a lending bank and foreign
exchange differences.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY NAFTOGAZ OF UKRAINE
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
31
13. PROVISIONS
Movements in provisions for the three months ended 31 March 2018 were as follows:
In millions of Ukrainian hryvnias Provisions
for litigations
Employee
benefit
obligations
Decommissio-
ning provision
Provision for
fines and
penalties
Portion of net profit
attributable to the
State Budget of
Ukraine (Note 11)
Other
provisions Total
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
(Reversed)/charged for the reporting
period (161) 409 4
868 - 75 1,195
Unwinding of discount (Note 18) - 87 57 - - - 144
Used or paid during the reporting period (605) (597) - (1) - (100) (1,303)
Balance at 31 March 2018 4,995 5,567 2,358 15,000 29,498 1,176 58,594
Non-current - 3,984 2,159 - - - 6,143
Current 4,995 1,583 199 15,000 29,498 1,176 52,451
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY “NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
32
13. PROVISIONS (Continued)
Movements in provisions for the three months ended 31 March 2017 were as follows:
In millions of Ukrainian hryvnias
Provisions
for
litigations
Employee
benefit
obligations
Decommissio-
ning provision
Provision for
fines and
penalties
Portion of net profit
attributable to the
State Budget of
Ukraine
Other
provisions Total
Balance at 31 December 2016 11,844 4,510 1,771 11,154 13,264 989 43,532
Non-current 7,670 3,447 1,299 - - - 12,416
Current 4,174 1,063 472 11,154 13,264 989 31,116
Charge for the reporting period 2 357 9 902 - 108 1,378
Unwinding of discount (Note 18) - 82 33 - - - 115
Used or paid during the reporting period - (381) - (49) - (12) (442)
Balance at 31 March 2017 11,846 4,568 1,813 12,007 13,264 1,085 44,583
Non-current 7,670 3,514 1,335 - - 1 12,520
Current 4,176 1,054 478 12,007 13,264 1,084 32,063
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
33
14. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES
The Group’s advances received and other current liabilities were as follows:
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Advances from customers for natural gas 1,420 1,461
Advances for natural gas transportation 326 448
Advances for oil transportation 301 301
Advances received for geophysical surveys 230 237
Advances for petroleum products 179 149
Other advances received 153 85
Total advances received 2,609 2,681
VAT payable 11,523 4,138
Taxes payable other than income tax 10,124 10,347
Liabilities for purchase of property, plant and equipment 2,173 2,002
Wages, salaries and related social charges payable 662 348
Dividends payable to non-controlling shareholders of "Ukrnafta" PJSC 473 475
Recognised liabilities for litigations 44 47
Indebtedness according to the Gas Sales Arbitration (Note 9) - 57,125
Other current liabilities 1,622 1,445
Total other current liabilities 26,621 75,927
Total 29,230 78,608
As at 31 March 2018, taxes payable other than income tax included UAH 9,825 million of subsoil
royalty payable (31 December 2017: UAH 10,128 million).
15. COST OF SALES
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Cost of gas supplied 31,252 33,035
Depreciation, depletion and amortisation 11,951 5,858
Subsoil royalty and other taxes other than on income 11,041 8,407
Non-refundable VAT on gas transit via Ukraine in customs regime 3,184 3,598
Staff costs and related social charges 2,294 1,601
Cost of purchased oil and petroleum products 1,867 1,996
Repair and maintenance costs 220 286
Oil and gas transportation costs 94 80
Other 2,582 2,137
Total 64,485 56,998
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.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
34
16. OTHER OPERATING INCOME
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Fines and penalties received 1,068 83
Income from sale of inventories and other current assets 226 5
Other 135 162
Total 1,429 250
17. OTHER OPERATING EXPENSES
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Net movement in provision for trade accounts receivable, prepayments
made and other assets and direct write-offs 5,378 6,295
Non-refundable VAT recognised according to the Gas Transit
Arbitration (Note 19) 4,751 -
Staff costs and related social charges 1,309 1,162
Fines and penalties 1,012 53
Change in provisions for litigations and other provisions 786 1,017
Professional fees 206 275
Research, development and exploration costs 194 64
Depreciation and amortisation 150 158
Transportation costs 131 108
VAT liabilities written off 47 41
Other 638 457
Total 14,602 9,630
Inсluded in other operating expenses for the three months ended 31 March 2018 are non-refundable
VAT on compensation via Gas Transit Arbitration amounting to UAH 4,751 million (Note 19).
18. FINANCE COSTS
In millions of Ukrainian hryvnias
Three months
ended
31 March 2018
Three months
ended
31 March 2017
Interest expense on bank borrowings 1,198 1,930
Unwinding of discount on employee benefit obligations (Note 13) 87 82
Unwinding of discount of decommissioning provision (Note 13) 57 33
Other 115 91
Total 1,457 2,136
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
35
19. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS
Tax legislation. Ukraine’s tax environment is characterised by complexity in tax administering,
arbitrary interpretation by tax authorities of tax laws and regulations that, inter alia, can increase fiscal
pressure on tax payers. Inconsistent application, interpretation, and enforcement of tax laws can lead to
litigation which, as a consequence, may result in the imposition of additional taxes, penalties, and
interest, and these amounts could be material. Facing current economic and political issues, the
Government has implemented certain reforms in the tax system of Ukraine by adopting the Law of
Ukraine “On Amending the Tax Code of Ukraine and Certain Laws of Ukraine” which is effective from
1 January 2015, except for certain provisions which will take effect at a later date.
Management believes that the Group has been in compliance with all requirements of the effective tax
legislation. In the ordinary course of business the Group is engaged in transactions that may be
interpreted differently by the Group and tax authorities. Where the risk of outflow of financial resources
associated with this is deemed to be probable and the amount is measured with sufficient reliability, the
Group provides for those liabilities. Where management of the Group estimates the risk of financial
resources outflow as possible, the Group makes a disclosure of these contingent liabilities.
During 2015 “Ukrnafta” PJSC was engaged in transactions for petroleum products and crude oil sales, and
made prepayments in respect of future supply of petroleum products. In 2017 National Anti-corruption
Bureau of Ukraine initiated a claim in the court to declare such transactions invalid. The Group’s
management believes that there is likelihood that certain transactions performed by “Ukrnafta” PJSC can be
challenged or declared invalid in future, leading to additional tax obligations. The Group’s management
cannot estimate impact of such potential obligations to the condensed consolidated interim financial
statements reliably, and does not recognise any provision in this respect as at 31 March 2018.
The Group conducts transactions with its subsidiaries. It is possible with evolution of the interpretation
of tax law in Ukraine and changes in the approach of tax authorities under the Tax Code, that such
transactions could be challenged in the future. The impact of any such challenge cannot be estimated,
however, management believes that it should not be significant.
The Group exports refinery products and transportation services, performs intercompany transactions
and is involved in transactions with related parties, which may potentially be in the scope of the new
Ukrainian transfer pricing (“TP”) regulations. The report on controlled transactions for the year ended
31 December 2017 shall be prepared by the Group’s companies by 1 October 2018.
Management believes that the Group is in compliance with TP requirements. As the practice of
implementation of the new transfer pricing rules has not yet developed and wording of some clauses of
the rules may be subject to various interpretations, the impact of challenge of the Group’s companies
transfer pricing positions by the tax authorities cannot be reliably estimated.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
36
19. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS (Continued)
Arbitral Tribunal requests.
On 28 February 2018 the Tribunal rendered the Final Award in respect of the Gas Transit Arbitration,
and supported Naftogaz’s position in respect of Gazprom failure to deliver minimum contractual volume
of gas transit (underdeliveries) during 2009-2017. As a result, the Tribunal awarded USD 4,674 million
to be paid in favour of Naftogaz by Gazprom as a compensation of losses in this respect. Further, the
Tribunal performed a set-off in respect of amounts owing between the parties pursuant to the Gas Sales
Arbitration and Gas Transit Arbitration, supporting a respective Naftogaz request. Consequently, a
single amount of USD 2,560 million payable by Gazprom in favour of Naftogaz was ordered by the
Tribunal. This amount also bears a late payment interest. There was no settlement of this amount
performed by the date of these condensed consolidated interim financial statements. Taking that
Gazprom has appealed the final award in the Gas Transit Arbitration, and the fact that the amount was
not settled by the date of these condensed consolidated interim financial statements, management
follows a prudent approach and does not recognise the amount owed by Gazprom after the set-off, as
decided by the Tribunal, as receivable as at 31 March 2018.
Additionally, according to the Final Award of the Tribunal in the Gas Sales Arbitration, Naftogaz is
obliged to resume purchases of gas from Gazprom according to the current Gas Sales Contract.
Following the Final Award in this case, in February 2018 Naftogaz made a prepayment of USD 128
million for gas deliveries to be made in March 2018. However, Gazprom returned this payment and
refused to make gas supplies in March 2018, and decreased pressure level in transmission gas lines at
their side of the gas transmission system by 20%. As a result, the Company had to cover deficit in gas
volumes from more expensive sources of supply at the Western border of Ukraine. Such actions from
Gazprom currently prevent Naftogaz from fulfilling the Final Award requirements in respect of
offtaking minimum gas transit contract volumes in 2018.
As stated above, after both Final Awards were rendered, Gazprom representatives officially declared a
refusal to resume deliveries to Ukraine as ordered by the Tribunal in the Gas Sales Arbitration.
Additionally, Gazprom refused to confirm its intention to settle outstanding amount as decided by the
Tribunal in the Gas Transit Arbitration. Instead, on 20 April 2018 Gazprom filed a Request for
Arbitration to The Arbitration Institute of the Stockholm Chamber of Commerce requesting revision or,
alternatively, setting aside of the Gas Transit and Gas Sales Contracts because of alleged imbalance
between the parties’ obligations under the Contracts following Final Awards in both Transit and Sales
Arbitration.
Despite the fact that the Tribunal has rejected Naftogaz claim on reimbursement of VAT payable on
compensation of losses for underdeliveries after 1 January 2016, Naftogaz treats the amount awarded as
a contractual service price adjustments that is subject to VAT under the Tax Code of Ukraine. As a
result, Naftogaz has recognised respective VAT liabilities amounting to UAH 4,751 million in March
2018, payable by 30 April 2018.
Net amount receivable from Gazprom after the set-off amounts to UAH 68,375 million (equivalent to
USD 2,576 million at the exchange rate as at 31 March 2018) including interest. As at the date when these
condensed consolidated interim financial statements were authorised for issue, this amount was not settled,
and the Company does not recognise it as an asset as at 31 March 2018.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
37
19. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS (Continued)
Claim to the Russian Federation regarding assets in Crimea. In October 2016, Naftogaz and its
subsidiaries initiated Arbitration proceeding against the Russian Federation about reimbursement of
losses caused by unlawful occupation of Group’s assets in Crimea by the Russian Federation. This
arbitration proceeding was initiated under Agreement between the Cabinet of Ministers of Ukraine and
the Government of the Russian Federation on mutual encouragement and protection of investments.
On 15 September 2017, Naftogaz and its subsidiaries have submitted the Statement of Claim to the
Tribunal under the auspices of Permanent Court of Arbitration in the Hague. The amount of claim will
be estimated following the Tribunals’ Partial Final Award, which is expected in the early 2019.
Legal proceedings. In the normal course of business, the Group is subject to claims. Where the risk of
outflow of financial resources associated with such claims is assumed as probable, a respective liability
is recognised as a component of provision for litigations (Note 13). Where management estimates the
risk of outflow of financial resources associated with such claims as possible, or amount of outflow
cannot be measured reliably, no provision is recognised, and respective amount is disclosed in the
consolidated financial statements. Management believes that it has provided for all material losses in
these condensed consolidated interim financial statements.
Joint operations with Misen Enterprises AB, and “Karpatygaz” LLC. As a part of determining the
validity of the joint arrangement, in July 2016, the Group initiated legal proceedings in the Stockholm
Arbitration on termination or recognition as invalid of this agreement. Oral hearings under the case were
held in November 2017 and January 2018. Management expects that, by June 2018, the Arbitration will
pass a preliminary decision on all conceptual issues within the said proceedings. Also, in accordance
with the Ukrainian legislation, within the criminal proceedings, an issue on the validity of entering into
this joint arrangement is being investigated.
Irrespectively of the decision adopted by the Arbitration, it is expected that the joint arrangement
between the Group, Misen Enterprises AB, and “Karpatygaz” LLC will be terminated, and the assets
of the joint arrangement will be transferred into ownership of the Group. Consideration to Misen
Enterprises AB and “Karpatygaz” LLC for the transfer of their interests in the assets of the joint
arrangement to the Group may reach up to USD 363 million, depending on the decision adopted by the
Arbitration, but the Management believes that the consideration will not exceed the carrying amount of
the assets.
Dispute with the non-controlling shareholders of “Ukrnafta” PJSC in respect of the validity and
fulfilment of shareholders agreement. In January 2010 Naftogaz and the non-controlling shareholders
of “Ukrnafta” PJSC (“Ukrnafta”) signed a shareholders agreement that included, among other, setting
the procedure of electing the Chairman of the Board, appointment of the Executive Board and the
Supervisory board members. Under the shareholders agreement the Chairman of the Board is to be
elected from among the candidates nominated by the non-controlling shareholders, 6 of 11 Ukrnafta
Supervisory board members, including Chairman, are to be nominated by Naftogaz, and remaining 5
members by the non-controlling shareholders.
Under the shareholders agreement, any dispute arising in connection with it is to be resolved exclusively
by the London Court of International Arbitration and the shareholder agreement is governed by the
English law.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
38
19. CONTINGENCIES, COMMITMENTS AND OPERATING RISKS (Continued)
In April 2018 the London Court of International Arbitration came to the conclusion that the key
provisions of the Joint agreements between Naftogaz and the companies of non-controlling shareholders
on corporate management of Ukrnafta are such that cannot be enforced because they contradict the
imperative norms of the corporate legislation of Ukraine.
Uncertainty as to the ability of “Ukrnafta” PJSC to continue as a going concern. Following accumulated
debts to the State Budget of UAH 28,003 million as at 31 March 2018 (31 December 2017:
UAH 26,920 million), limited ability to collect accounts receivable and recover prepayments made to
suppliers with gross amount of UAH 25,356 million as at 31 March 2018 (31 December 2017:
UAH 22,525 million), Ukrnafta had insufficient funds to satisfy its working capital needs and settle its tax
payments as they fall due. Consequently, as at 31 March 2018 and 31 December 2017 Ukrnafta had a
negative working capital.
If Ukrnafta fails to restructure or otherwise ensure settlement of overdue accounts receivable,
prepayments made, extend production licenses and perform other measures to minimise amount of net
current liabilities, this could lead to insufficient funds to settle accumulated tax liabilities in the short
run, and this will lead to additional measures to ensure the going concern assumption, including
negotiations in respect of export operations or partial sale of assets.
Despite the material uncertainties described above, and taking into account management actions in
improving its liquidity, production and sales activities, management of the Group believes that
application of the going concern assumption in respect of Ukrnafta is appropriate for the purpose of
these condensed consolidated interim financial statements.
20. FINANCIAL RISK MANAGEMENT
The Group’s activities expose it to a variety of financial risks: market risk (including currency risk and
interest rate risk), concentration risk (Note 3), credit risk and liquidity risk. According to its risk
management policy the Group identifies, assessed and develops actions to minimise the potential
adverse effects on the Group’s financial performance for those risks.
These condensed consolidated interim financial statements do not include a complete set of financial
risk management information and disclosures required in the annual financial statements and should be
read in conjunction with the Group’s annual consolidated financial statements as at 31 December 2017.
There have been no changes in the risk management function and risk management policies since
31 December 2017.
Major categories of financial instruments:
In millions of Ukrainian hryvnias Note 31 March
2018 31 December
2017
Other non-current assets 6 5,803 6,118
Trade accounts receivable 8 72,091 58,988
Prepayments made and other current assets 9 4,812 1,531
Сash and bank balances 10 30,804 23,093
Restricted cash 1,343 1,591
Total financial assets 114,853 91,321
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
39
20. FINANCIAL RISK MANAGEMENT (Continued)
In millions of Ukrainian hryvnias Note 31 March
2018 31 December
2017
Borrowings 12 (44,113) (59,315)
Trade accounts payable (4,584) (8,137)
Advances received and other current liabilities 14 (4,179) (3,381)
Total financial liabilities (52,876) (70,833)
Credit risk. The maximum exposure to credit risk as at 31 March 2018 is UAH 117,933 million
(31 December 2017: UAH 91,321 million).
Liquidity risk. There were no significant changes in the contractual undiscounted cash outflows for
financial liabilities.
Gearing ratio. The gearing ratio at the end of the reporting period was as following:
In millions of Ukrainian hryvnias 31 March
2018 31 December
2017
Total borrowings (Note 12) 44,113 59,315
Less: cash and cash equivalents (Note 10) (30,804) (23,093)
Total Net Debt 13,309 36,222
Total Equity 430,684 440,519
Gearing ratio 0.03 0.08
21. FAIR VALUE
There were no changes in valuation techniques during the period. There were no transfers between Level
2 and Level 3 during the period. During the three months ended 31 March 2018 there were no significant
changes in the business and economic environment that affect the fair value of the Group’s financial
assets and liabilities.
22. SUBSEQUENT EVENTS
Dispute with the non-controlling shareholders of “Ukrnafta” PJSC in respect of the validity and fulfilment of shareholders agreement. In April 2018 the London Court of International Arbitration came
to the conclusion that the key provisions of the Joint agreements between Naftogaz and the companies of
non-controlling shareholders on corporate management of Ukrnafta are such that cannot be enforced
because they contradict the imperative norms of the corporate legislation of Ukraine (Note 19).
Prolongation of the PSO Resolution. The Cabinet of Ministers of Ukraine with its Resolution #415
dated 30 May 2018 prolonged the period of performing public service obligations by the Company
(Note 2) up to 1 August 2018.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
40
22. SUBSEQUENT EVENTS (Continued)
Distribution of net profit. According to the Resolution of the Cabinet of Ministers of Ukraine #384-p
dated 25 April 2018, 30% of net profit of the Company for 2017 amounting to UAH 11,799 million
should be paid to the State Budget of Ukraine before 30 June 2018, and distribution of additional 45%
of the net profit for 2017 amounting to UAH 17,699 million should be decided by the Cabinet of
Ministers of Ukraine in August 2018.
Loans repayment. During April-May 2018 the Group repaid UAH 6,147 million of bank borrowings.
23. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
These condensed consolidated interim financial statements for the three months ended 31 March 2018
have been prepared in accordance with IAS 34 Interim Financial Reporting. They do not include all
disclosures and information required for complete set of the annual consolidated financial statements,
and should be read in conjunction with the latest annual consolidated financial statements as at and for
the year ended 31 December 2017, which have been prepared in accordance with IFRS.
As at 31 March, the exchange rates used for translating foreign currency balances were:
In Ukrainian hryvnias 31 March
2018 31 December
2017
USD 1.00 26.54 28.07
EUR 1.00 32.70 33.50
Exchange restrictions in Ukraine are limited to compulsory receipt of foreign receivables within
180 days of sales and to the compulsory conversion of 50% of proceeds in foreign currency to Ukrainian
hryvnia. Foreign currency can be easily converted at a rate close to the National Bank of Ukraine rate.
At present, UAH is not freely convertible outside Ukraine.
The accounting policies applied during the three months ended 31 March 2018 are consistent with those
described in the Group’s consolidated financial statements referred above except the changes related to
adoption of new standards IFRS 9 “Financial Instruments” and IFRS 15 “Revenue from Contracts with
Customers” as described below.
With effect from 1 January 2018, the Group has implemented IFRS 9 “Financial Instruments” and
IFRS 15 “Revenue from Contracts with Customers”. At the same date, the Group changed its policy for
recognition of revenue as well as classification and measurement of financial instruments.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
41
23. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
IFRS 9 Financial Instruments
Classification and measurement of financial assets. All recognised financial assets that are within the
scope of IFRS 9 are required to be subsequently measured at amortised cost or fair value. Specifically,
debt investments that are held within a business model whose objective is to collect the contractual cash
flows, and that have contractual cash flows that are solely payments of principal and interest on the
principal outstanding are measured at amortised cost. Debt instruments that are held within a business
model whose objective is achieved both by collecting contractual cash flows and selling financial assets,
and that have contractual terms that give rise on specified dates to cash flows that are solely payments
of principal and interest on the principal amount outstanding, are generally measured at FVTOCI. All
other debt investments and equity investments are measured at FVTPL at the end of subsequent
accounting periods.
Classification and measurement of financial liabilities. With regard to the measurement of financial
liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in
the fair value of a financial liability that is attributable to changes in the credit risk of that liability is
presented in other comprehensive income, unless the recognition of such changes in other comprehensive
income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable
to a financial liability's credit risk are not subsequently reclassified to profit or loss.
Impairment. The Group apply the simplified approach to recognise lifetime expected credit losses for
its trade and other receivables, as permitted by IFRS 9. In relation to the cash and cash equivalents, the
management of the Group considers that they have low credit risk given their strong external credit
rating and hence expect to recognise 12-month expected credit losses for these items. The Group account
for expected credit losses and changes in those expected credit losses at each reporting date to reflect
changes in credit risk since initial recognition.
IFRS 9 has been implemented retrospectively without restating comparative information. The Group
equity was adjusted upon adoption of the new standard as described below.
Reconciliation of statement of financial position balances from IAS 39 to IFRS 9 at 1 January 2018.
Financial assets
IAS 39 carrying
amount
31 December 2017
Reclassi-
fications
Remeasu-
rements
IFRS 9 carrying
amount
1 January 2018
Retained earnings
effect on
1 January 2018
FVTPL - - - - -
FVTOCI - - - - -
Amortised cost 91,321 - (3,901) 87,420 (3,901)
Total 91,321 - (3,901) 87,420 (3,901)
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
42
23. BASIS OF PREPARATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
IFRS 15 Revenue from Contracts with Customers
Revenue recognition. The Group recognises revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the Group expects to be entitled in
exchange for those goods or services. The Group uses the Standard 5-step approach to revenue
recognition:
Identify the contract with the customer;
Identify the performance obligations in the contract;
Determine the transaction price;
Allocate the transaction price to the performance obligations in the contracts;
Recognise revenue when (or as) the entity satisfies a performance obligation.
The Group recognises revenue when or as a performance obligation is satisfied, i.e. when ‘control’ of
the goods or services underlying the particular performance obligation is transferred to the customer.
The Group’s management is currently completing to estimate the effect of IFRS 15 on its accounting
for balancing services. Except for this issue the application of IFRS 15 will not have a significant impact
on the financial position and/or financial performance of the Group.
24. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
In the application of the Group’s accounting policies, management is required to make judgements,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant. Actual results may differ from these
estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognised in the period in which the estimate is revised if the revision affects only that
period, or in the period of the revision and future periods if the revision affects both current and future
periods.
Critical judgements in applying accounting policies. The following are the critical judgements, apart
from those involving estimations, that the Group management has made in the process of applying the
Group’s accounting policies and that have the most significant effect on the amounts recognised in the
condensed consolidated interim financial statements.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
43
24. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
Investment in “Ukrnafta” PJSC. The Group holds 50% + 1 share of voting rights in “Ukrnafta” PJSC.
The rest is owned by limited number of investors. In March 2015, according to changes in the Law of
Ukraine “On Joint-Stock Companies”, quorum of the General meetings of shareholders was lowered
from 60%+1 share down to 50%+1 share. Following those changes and changes in the Supervisory
Board of “Ukrnafta” PJSC in July 2015, the Company has regained control over “Ukrnafta” PJSC
starting from 22 July 2015. Accordingly, the investment in “Ukrnafta” PJSC is accounted for as
investment in subsidiary starting from that date. The Company considers this change as a business
combination and applied acquisition method of accounting, respectively.
Revenue recognition. In accordance with the Code of the gas transmission system, starting from 1
October 2015 the Group, as transmission system operator, is responsible for regulating an imbalance of
the system which is calculated as the difference between the volumes of natural gas entering through
the entry points and the volumes of natural gas exiting through the exit points, on the basis of actual data
received through the allocation procedure, in the context of transmission service customers.
The Group provides balancing services and recognises revenue from these operations in accordance with
the Code of the gas transmission system and terms of individual contracts with transmission services
customers, considering that:
the Code of the gas transmission system provides that balancing service is provided by the
transmission system operator based on the data on a monthly imbalance and does not require
transmission service customers to confirm the provision of services ;
the price of balancing services is determined by the Group on the basis of data on unadjusted
negative balance of the customer and base price of gas. The base price for gas consists of price of
natural gas procurement, transmission and storage costs, and other costs, related to balancing
services that can be reliably measured.
Key sources of estimation uncertainty. The following are the key assumptions concerning the future,
and other key sources of estimation uncertainty at the end of the reporting period, that have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next
financial year.
Employee benefit obligations. The Group assesses post-employment and other employee benefit
obligations using the projected unit credit method based on actuarial assumptions which represent
management’s best estimates of the variables that will determine the ultimate cost of providing post-
employment and other employee benefits. The present value of the pension obligations depends on a
number of factors that are determined on an actuarial basis using a number of assumptions. The major
assumptions used in determining the net cost (income) for pensions include the discount rate and
expected salary increases. Any changes in these assumptions will impact the carrying amount of pension
obligations. Since there are no long-term, high quality corporate or government bonds issued in
Ukrainian hryvnias, significant judgement is needed in assessing an appropriate discount rate.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
44
24. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
Deferred tax asset recognition. The deferred tax asset, recognised in the consolidated statement of
financial position, represents income taxes recoverable through future deductions from taxable profits.
Deferred tax assets are recorded to the extent that realisation of the related tax benefit is probable. In
determining future taxable profits and the amount of tax benefits that are probable in the future,
management makes judgements and applies estimation based on historic taxable profits and expectations
of future taxable income that are believed to be reasonable under the circumstances.
Tax legislation. Ukrainian tax, currency and customs legislation continues to evolve. Conflicting
regulations are subject to varying interpretations. Management believes its interpretations are
appropriate and sustainable, but no guarantee can be provided against a challenge from the tax
authorities (Note 19).
Decommissioning costs. The decommissioning provision represents the present value of the
decommissioning costs relating to oil and gas properties, which are expected to be incurred in the future
(Note 13). These provisions were recognised, based on Group’s internal estimates.
Main estimates include future market prices for the necessary decommissioning costs, and are based on
market conditions and factors. Additional uncertainties relate to the timing of the decommissioning
costs, which depends on depletion of the fields, future oil and gas prices and as a result – expected point
of time, when there are no further economic benefits in the production.
Changes in these estimates can lead to the material changes in the provisions recognised in the
consolidated statement of financial position.
Depreciation of the gas transit assets and depletion of the oil and gas assets. Oil and gas assets are
depleted using a unit-of-production method. The cost of the wells is amortised based on the proved
volumes of available reserves, estimated in accordance with the standards of the Hydrocarbons Resource
Management System prepared by the Oil and Gas Reserves Committee of Society of Petroleum
Engineers. The estimation of hydrocarbons reserves is carried out in general on the field. Respectively,
all wells of the field are depreciated based on the total volume of extracted from the field specific type
of hydrocarbons for the period and the balances of reserves of such hydrocarbons at the beginning of
the period. Changes in estimates regarding the volumes of total proved reserves either downward or
upward, can result in the change of depreciation and depletion expenses.
The following events occurred during the first quarter of 2017 that provide higher probability of the
assumption of no transit flows through Ukraine from 1 January 2020, including but not limited to:
ratifying the Intergovernmental agreement in respect of “TurkStream” gas pipeline project by the State
Duma of the Russian Federation; obtaining permissions for partial commissioning of gas pipelines
within “Nord Stream-2” project. As a result, the Group has revised useful lives of its transit assets
planned for decommissioning after 31 December 2019.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
45
24. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
Estimation of oil and gas reserves. Reserves are the quantities of oil and gas which are anticipated to be
commercially recovered from known accumulations from a given date forward under defined
conditions. Proved and probable reserves used in depletion rate calculation are determined using
estimates of known oil and gas reservoirs, recovery factors, operating conditions, future oil and gas
prices and government regulations. Latest assessment of gas reserves was performed as at 30 June 2017,
and latest assessment of oil reserves was performed as at 30 June 2016. Reserves estimates involve some
degree of uncertainty, and their estimates are revised as additional geologic and engineering data
becomes available or as economic conditions change. Accordingly, depletion rates and discounted cash
flows for revaluation and impairment of property, plant and equipment may be also revised.
Revaluation and impairment of property, plant and equipment. Management performs assessment
whether carrying amounts of property, plant and equipment accounted under the revaluation model,
differ materially from their fair values. Such assessment is performed on an annual basis, and involves
analysis of prices, price indices, changes in technology, foreign exchange rates and other relevant
factors. In case such assessment identifies that carrying amounts of items of property, plant and
equipment differ materially from their fair values, management engages independent appraisers to
perform property, plant and equipment revaluation.
Latest revaluation of property, plant and equipment was made by the independent appraisers as at
31 December 2017.
Management also reviews carrying amounts of property, plant and equipment to determine whether
there are any indicators that these assets are impaired. The last revision was made during independent
valuation of the fair value of property, plant, and equipment performed as at 31 December 2017.
In making the assessment for general impairment, assets that do not generate independent cash flows
are allocated to an appropriate cash-generating unit. Indicators of a potential impairment include analysis
of market conditions, asset utilisation and the ability to utilise the asset for alternative purposes. If an
indication of impairment exists, the Group estimates the recoverable value (greater of fair value less cost
to sell and value in use) and compares it to the carrying value, and records impairment to the extent the
carrying value is greater than the recoverable amount. Management did not identify any general
indicators of impairment as at 31 December 2017.
Revaluation of cushion gas. The replacement cost of cushion gas in underground storage facilities is
determined as the sum of market value of the gas pumped in to underground storage facilities, cost of
gas transportation from point of sale to the underground storage facilities, and cost of its pumping in
into the underground storage facilities (provided no economic impairment is identified based on the use
of income approach). Besides, in the event economic impairment is identified under income approach
for the assets of underground storage facilities, the value of cushion gas, after economic impairment,
will be not lower than its liquidation cost, which is equal to the market price of gas that is possible to
pump in into the underground storage facilities, less cost of gas withdrawal and its transportation to a
point of sale.
PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY
“NAFTOGAZ OF UKRAINE”
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED 31 MARCH 2018
46
24. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued)
Cushion gas is designed for maintaining pressure in underground storage facilities of the Group and
protecting them from flooding. Cushion gas, based on the engineering analysis, is considered to be the
gas that may be fully pumped out and, as at the date of closing the storage facilities, be available for sale
or other use. Cushion gas is revalued when evidence exists that the carrying amounts as at the reporting
date significantly differ from its fair value.
Inventory valuation. Inventory are stated at lower of cost or net realisable value. In assessing the net
realisable value of its inventories, management bases its estimates on various assumptions including
current market prices. At each reporting date, the Group evaluates its inventories for excess quantities
and obsolescence and, if necessary, records an allowance to reduce inventories for obsolete and slow-
moving goods. This allowance requires assumptions related to future inventories use. These assumptions
are based on inventories ageing and forecasted demand. Any changes in the estimates may impact the
amount of the allowances for inventory that may be required.