Public Joint Stock Company “National Joint Stock Company ...€¦ · Ukraine”, the “Parent”...

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


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



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


3



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


4



UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE

INCOME FOR THE THREE MONTHS ENDED 31 MARCH 2018


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


5

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

UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY


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


6


UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY


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


7



UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS



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)


8



UNAUDITED CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED 31 MARCH 2018 (CONTINUED)


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 -



NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS


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





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.





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.





12


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





13


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).





14


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.





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.





16


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.


NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED 31 MARCH 2018

17


Segment information for the reportable business segments of the Group for the three months ended 31 March 2018 is as follows:


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



18



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



19


Segment information for the reportable business segments of the Group for the three months ended 31 March 2017 is as follows:


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



20



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





21


Geographical concentration of sales


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


NAFTOGAZ OF UKRAINE



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.




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:


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


Accumulated depreciation and impairment (4,570) (2,462) (5,796) (3,555) (1,856) (162) (1,502) (2,008) (21,911)




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:


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



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




NAFTOGAZ OF UKRAINE



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:


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).





26

8. TRADE ACCOUNTS RECEIVABLE


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:


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:


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





27

9. PREPAYMENTS MADE AND OTHER CURRENT ASSETS

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


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:


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.





28

10. CASH AND BANK BALANCES


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.





29

12. BORROWINGS

The Group’s borrowings were as follows:


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).





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



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




32

13. PROVISIONS (Continued)

Movements in provisions for the three months ended 31 March 2017 were as follows:


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





33

14. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES

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


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


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.





34

16. OTHER OPERATING INCOME


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


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


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





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.





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.





37


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.





38


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





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:


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.





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.





41


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)





42


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.





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.





44


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.





45


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.





46


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.

Public Joint Stock Company “National Joint Stock Company ...€¦ · Ukraine”, the “Parent”...

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