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Public Joint Stock Company

“National Joint Stock Company

“NAFTOGAZ OF UKRAINE”

Separate Financial Statements

as at and for the Year Ended

31 December 2017

PUBLIC JOINT STOCK COMPANY “NATIONAL JOINT STOCK COMPANY


TABLE OF CONTENTS

Page

INDEPENDENT AUDITOR’S REPORT 1-4

SEPARATE FINANCIAL STATEMENTS

Balance sheet (statement of financial position) 5-6

Statement of profit or loss (statement of comprehensive income) 7-8

Statement of cash flows 9-10

Statement of changes in equity 11-12

Notes to the separate financial statements

1. THE ORGANISATION AND ITS OPERATIONS ..................................................................... 13 2. OPERATING ENVIRONMENT .................................................................................................. 16 3. RESTATEMENT OF COMPARATIVE INFORMATION ......................................................... 22 4. SEGMENT INFORMATION ....................................................................................................... 22 5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES ......................................... 27 6. NON-CURRENT FINANCIAL INVESTMENTS ....................................................................... 30 7. NON-CURRENT ACCOUNTS RECEIVABLE AND OTHER NON-CURRENT ASSETS ..... 31 8. INVENTORIES ............................................................................................................................ 32 9. TRADE ACCOUNTS RECEIVABLE ......................................................................................... 32 10. ACCOUNTS RECEIVABLE ON PREPAYMENTS MADE, SETTLEMENTS WITH THE

STATE BUDGET, OTHER CURRENT ACCOUNTS RECEIVABLE AND OTHER

CURRENT ASSETS ..................................................................................................................... 34 11. CURRENT FINANCIAL INVESTMENTS AND CASH AND CASH EQUIVALENTS .......... 35 12. SHARE CAPITAL ........................................................................................................................ 35 13. BORROWINGS ............................................................................................................................ 36 14. NON-CURRENT AND CURRENT PROVISIONS .................................................................... 38 15. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES ......................................... 39 16. COST OF SALES ......................................................................................................................... 40 17. OTHER OPERATING INCOME ................................................................................................. 40 18. ADMINISTRATIVE EXPENSES ................................................................................................ 40 19. OTHER OPERATING EXPENSES ............................................................................................. 41 20. OTHER EXPENSES ..................................................................................................................... 41 21. FINANCE COSTS ........................................................................................................................ 41 22. INCOME TAX .............................................................................................................................. 41 23. CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS .. 43 24. FINANCIAL RISK MANAGEMENT ......................................................................................... 48 25. FAIR VALUE ............................................................................................................................... 52 26. SUBSEQUENT EVENTS ............................................................................................................ 54 27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES .................................................... 55 28. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS ................................................ 66 29. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS .................. 67

INDEPENDENT AUDITOR’S REPORT

To the shareholder of Public Joint Stock Company “National Joint Stock Company “Naftogaz of

Ukraine”:

Qualified Opinion

We have audited the separate financial statements of Public Joint Stock Company “National Joint Stock

Company “Naftogaz of Ukraine” (the “Company”), which comprise the separate balance sheet

(statement of financial position) as at 31 December 2017, and the separate statement of financial results

(statement of comprehensive income), the separate statement of changes in equity and the separate

statement of cash flows for the year then ended, and notes to the separate financial statements, including

a summary of significant accounting policies (the “separate financial statements”).

In our opinion, except for the possible effects of the matters described in the paragraphs 1 and 3 of the

Basis for Qualified Opinion section of our report, and except for the effect of the matter described in the

paragraph 2 of the Basis for Qualified Opinion section of our report, the accompanying separate

financial statements present fairly, in all material respects, the financial position of the Company as at

31 December 2017, and its financial performance and its cash flows for the year then ended in

accordance with International Financial Reporting Standards (“IFRSs”).

Basis for Qualified Opinion

1) Investments in subsidiaries and associates

As discussed in Note 27 to the separate financial statements, the Company’s investments are accounted

for using the equity method. We were unable to:

a) obtain sufficient and appropriate audit evidence regarding:

the Company’s share in the after tax financial results and other comprehensive income of the

PJSC “Ukrtatnafta” for the year ended 31 December 2017, since independent audit of the financial

statements under International Financial Reporting Standards of PJSC “Ukrtatnafta” as at

31 December 2017 and for the year then ended were not completed by the date of our audit opinion;

the Company’s share in the after tax financial results of the joint ventures of

PJSC “Ukrgasvydobyvannia” in the amounts of UAH 93 036 thousand of loss and UAH 51 994

thousand of profit for the years then ended 31 December 2017 and 2016, respectively, since we were

unable to obtain an access to the audited financial statements and financial information of joint

ventures, prepared in accordance with International Financial Reporting Standards;

recognition and measurement of prepayments made and trade accounts receivable of the subsidiary

PJSC “Ukrnafta” in the amount of UAH 2 969 887 thousand and UAH 2 552 094 thousand as at

31 December 2017 and 2016, respectively, and the after tax financial results of the joint operations

of PJSC “Ukrnafta” for the year ended 31 December 2016 and, as a result, the effect of these matters

on the Company’s share in the after tax financial result of PJSC “Ukrnafta”, including share in profit

in the amount of UAH 222 180 thousand and share in other comprehensive loss of UAH 17 936

thousand for the year ended 31 December 2017 and share in losses in the amount of UAH 4 341 118

thousand and share in other comprehensive income in the amount of UAH 944 795 thousand for the

year ended 31 December 2016.

2

b) determine the effect of the departure from the uniform accounting policy of the Company to use the

revaluation model for measurement of property, plant and equipment by PJSC “Ukrtatnafta” and the

joint operations of PJSC “Ukrgasvydobyvannya”, as required by IAS 28 “Investments in Associates and

Joint Ventures” as at 31 December 2017 and 2016 and for the years then ended.

As a result, we were unable to determine whether any adjustments were necessary to the carrying amounts

of investments in subsidiaries and associates and accumulated deficit as at 31 December 2017 and 2016

and the after income tax financial results and other comprehensive income of subsidiaries and associates

for the years ended 31 December 2017 and 2016.

2) Natural gas classification

As at 31 December 2017, the Company accounted for as inventories the natural gas stored in

underground gas storage facilities which, during the recent years, never decreased to the level of less

than about 4.7 billion cubic meters. As at 31 December 2016, the Company intended to sell those

volumes of gas to its subsidiary during 2017. The respective decision of shareholders taken in January

2017 provided for the acquisition by the Company’s subsidiary of a respective volume of natural gas,

with the inclusion of this transaction in the annual procurement plan and the financial plan. After the

Cabinet of Ministers of Ukraine did not approve the financial plan of the subsidiary in 2017 with the

said purchase, the Company was not able to sell this gas. As at 31 December 2017 the Company had no

intention to sell those volumes of natural gas during 2018. Considering the above, we believe that the

natural gas with the carrying amount of UAH 27 948 741 thousand as at 31 December 2017 should be

carried as non-current assets of the Company and, as at 31 December 2017, inventories should be

decreased and other non-current assets increased by UAH 27 948 741 thousand.

3) Matters related to prior periods that affect comparability of the current year and the

corresponding figures - investments in subsidiaries and associates

We were unable to obtain sufficient and appropriate audit evidence regarding certain purchases of capital

investments, inventories, and services made by the Company’s subsidiary, PJSC “Ukrtransgaz” during

2016 and, as a result, the effect of this matter on the Company’s share in the financial performance, after

tax, of PJSC “Ukrtransgaz” in the amount of UAH 6 136 270 thousand. Our audit opinion on the separate

financial statements for the year ended 31 December 2016 was modified accordingly. Our opinion on

the current period’s financial statements is also modified because of the possible effect of this matter on

the comparability of the current period’s figures and the corresponding figures.

We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our

responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit

of the Separate Financial Statements section of our report. We are independent of the Company in

accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for

Professional Accountants (the “IESBA Code”) together with the ethical requirements that are relevant

to our audit of the financial statements in Ukraine, and we have fulfilled our other ethical responsibilities

in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have

obtained is sufficient and appropriate to provide a basis for our qualified opinion.

Emphasis of Matters

Operating environment

We draw your attention to Note 2 to the separate financial statements, which describes that the impact

of the continuing economic crisis and political turmoil in Ukraine and their final resolution are

unpredictable and may adversely affect the Ukrainian economy and the operations of the Company. Our

opinion is not modified in respect of this matter.

3

Disputes with JSC “Gazprom”

We also draw your attention to Note 23 to the separate financial statements, which describes decisions

of the Arbitration Institute of the Stockholm Chamber of Commerce with regard to the claims between

the Company and JSC “Gazprom” and material uncertainty regarding final resolution of contentious

issues between the Company and JSC “Gazprom”. Our opinion is not modified in respect of this matter.

Responsibilities of Management and Those Charged with Governance for the Separate Financial

Statements

Management is responsible for the preparation and fair presentation of the separate financial statements

in accordance with IFRSs, and for such internal control as management determines is necessary to enable

the preparation of separate financial statements that are free from material misstatement, whether due to

fraud or error.

In preparing the separate financial statements, management is responsible for assessing the Company’s

ability to continue as a going concern, disclosing, as applicable, matters related to going concern and

using the going concern basis of accounting unless management either intends to liquidate the Company

or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting

process.

Auditor’s Responsibilities for the Audit of the Separate Financial Statements

Our objectives are to obtain reasonable assurance about whether the separate financial statements as

a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s

report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee

that an audit conducted in accordance with ISAs will always detect a material misstatement when it

exists. Misstatements can arise from fraud or error and are considered material if, individually or in the

aggregate, they could reasonably be expected to influence the economic decisions of users taken on the

basis of these separate financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain

professional scepticism throughout the audit. We also:

Identify and assess the risks of material misstatement of the separate financial statements, whether

due to fraud or error, design and perform audit procedures responsive to those risks, and obtain

audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not

detecting a material misstatement resulting from fraud is higher than for one resulting from error,

as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override

of internal control;

Obtain an understanding of internal control relevant to the audit in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of the Company’s internal control;

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting

estimates and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of accounting

and, based on the audit evidence obtained, whether a material uncertainty exists related to events

or conditions that may cast significant doubt on the Company’s ability to continue as a going

concern. If we conclude that a material uncertainty exists, we are required to draw attention in our

auditor’s report to the related disclosures in the separate financial statements or, if such disclosures

are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained

up to the date of our auditor’s report. However, future events or conditions may cause the Company

to cease to continue as a going concern;

4

Evaluate the overall presentation, structure, and contents of the separate financial statements,

including the disclosures, and whether the separate financial statements represent the underlying

transactions and events in a manner that achieves fair presentation;

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or

business activities within the Company to express an opinion on the separate financial statements.

We are responsible for the direction, supervision and performance of the group audit. We remain

solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned

scope and timing of the audit and significant audit findings, including any significant deficiencies in

internal control that we identify during our audit.

Original signed:

16 April 2018

Certified Auditor Sergey Kulyk

Auditor’s Certificate # 007492

Issued by the Audit Chamber of Ukraine on 21 December 2017

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

valid until 21 December 2022

PJSC “Deloitte & Touche Ukrainian Services Company”

48, 50a Zhylianska Str., Kyiv, 01033, Ukraine



BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2017

The accompanying notes form an integral part of these separate financial statements.

5

CODES Date (year, month, day) 2017 12 31

Entity National Joint Stock Company “Naftogaz of Ukraine” and its branches EDRPOU 20077720

Location Ukraine KOATUU 8039100000

Legal form of organisation: Public Joint Stock Company KOPFG 230

Type of economic activities Holding company KVED 70.10

Average number of employees 709

Address, phone 6 Bogdana Khmelnytskoho Str, Kyiv

Measuring unit: UAH thousands without decimals

Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards

International Financial Reporting Standards V

Balance Sheet (Statement of Financial Position)

as at 31 December 2017

Form №1

Код за ДКУД 1801001

ASSETS Line code 31 December

2017

31 December

2016 Notes

1 2 3 4 5

I. Non-current Assets

Intangible assets: 1000 122 125 143 080

cost 1001 258 570 250 499

accumulated amortisation and impairment 1002 (136 445) (107 419)

Construction in progress 1005 543 276 842 895

Property, plant and equipment: 1010 589 099 502 842

cost 1011 780 164 596 638

accumulated depreciation and impairment 1012 (191 065) (93 796)

Investment property 1015 - -

Long-term biological assets 1020 - -

Long-term financial investments:

accounted under equity method 1030 413 980 172 447 973 804 6

other financial investment 1035 103 257 103 257 6

Long-term accounts receivable 1040 5 017 854 4 780 607 7

Deferred tax assets 1045 725 546 2 630 000 22

Other non-current assets 1090 1 477 497 3 051 742 7

including income tax prepaid 1090 (а) - 1 317 274

Total Section I 1095 422 558 826 460 028 227

IІ. Current Assets

Inventories 1100 74 353 275 59 450 068 8

Current biological assets 1110 - -

Trade accounts receivable 1125 57 474 372 54 719 178 9

Accounts receivable:

prepayments made 1130 811 703 5 997 601 10

due from budget 1135 22 132 34 356 10

including income tax prepaid 1136 - -

Other current accounts receivable 1155 1 241 886 1 100 019 10

Current financial investments 1160 - 679 771 11

Cash and cash equivalents 1165 18 485 661 17 660 966 11

Prepaid expense 1170 389 628 1 134

Other current assets 1190 63 609 159 121 143 10

including amount due under the Gas Transit Arbitration 1190 (а) 57 125 342 -

10,

23

Total Section IІ 1195 216 387 816 139 764 236

ІІІ. Non-current assets classified as held for sale and disposal

groups 1200 - -

Total Assets 1300 638 946 642 599 792 463



BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2017

(CONTINUED)


6

EQUITY AND LIABILITIES Line code 31 December

2017

31 December

2016 Notes

1 2 3 4 5

I. Equity

Share capital 1400 190 150 481 190 150 481 12

including: contributions to unregistered statutory capital 1401 - 29 700 000 12

Revaluation reserve 1405 296 420 839 322 676 150

Additional paid-in capital 1410 2 660 010 2 690 237

Legal reserve 1415 2 750 674 1 424 224

Retained earnings (accumulated deficit) 1420 (60 478 029) (69 103 045)

Unpaid capital 1425 - -

Withdrawn capital 1430 - -

Total Section I 1495 431 503 975 447 838 047

II. Non-current Liabilities and Provisions

Deferred tax liabilities 1500 - -

Non-current bank borrowings 1510 14 117 317 22 971 585 13

Other non-current liabilities 1515 - -

Non-current provisions 1520 135 283 7 345 424 14

Purpose financing 1525 - -

Total Section II 1595 14 252 600 30 317 009

III. Current Liabilities and Provisions

Current bank borrowings 1600 25 484 601 25 512 030 13

Accounts payable:

current portion of long-term liabilities 1610 17 101 897 19 388 256 13

trade accounts payable 1615 47 694 343 53 432 850

due to budget 1620 8 794 699 3 666 216

including income tax payable 1621 6 798 494 -

social charges payable 1625 356 1 556

salary payable 1630 3 780 15 562

Advances received 1635 1 443 500 1 033 136 15

Current provisions 1660 31 622 849 14 022 759 14

Deferred income 1665 217 835 17 368

Other current liabilities 1690 60 826 207 4 547 674 15

including amount due under the Gas Sales Arbitration 1690 (а) 57 125 342 -

15,

23

Total Section ІІІ 1695 193 190 067 121 637 407

ІV. Liabilities related to non-current assets held for sale and

disposal groups 1700 - -

Total Equity and Liabilities 1900 638 946 642 599 792 463

Original signed by:

Director Konovets S.O.

Acting Chief Accountant Guchek A.V.



STATEMENT OF PROFIT OR LOSS (STATEMENT OF COMPREHENSIVE INCOME) FOR THE

YEAR ENDED 31 DECEMBER 2017


7

CODES

Date (year, month, day) 2017 12 31







Measuring unit: UAH thousands without decimals (except Section ІV of the Statement of

Profit or Loss (Statement of Comprehensive Income) (Form # 2), stated in UAH with

kopecks) Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards


Statement of Profit or Loss (Statement of Comprehensive Income)

for the Year Ended 31 December 2017

Form # 2 DKUD Code 1801003

I. PROFIT OR LOSS STATEMENT

Item Line code 2017 2016 Notes 1 2 3 4 5

Revenue 2000 187 927 433 161 382 827 4

Cost of sales 2050 (146 639 564) (116 277 398) 16

Gross:

-- profit 2090 41 287 869 45 105 429

-- loss 2095 - -

Other operating income 2120 63 323 549 1 200 157 17

including income recognised under the Gas Transit

Arbitration 2120 (а) 57 125 342 - 23

General administrative expense 2130 (1 561 211) (1 400 788) 18

Selling and distribution expense 2150 - -

Other operating expense 2180 (46 532 479) (11 273 460) 19

including expense recognised under the Gas Sales

Arbitration 2180 (а) (44 528 046) - 23

Operating:

-- profit 2190 56 517 728 33 631 338

-- loss 2195 - -

Income on equity investments 2200 2 467 164 2 388 878

Other finance income 2220 1 089 072 1 005 647

Other income 2240 5 968 4 106

Finance costs 2250 (7 364 134) (8 181 637) 21

Loss on equity investments 2255 - -

Other expense 2270 (1 429 352) (4 949 343) 20

Profit or loss before income tax:

-- profit 2290 51 286 446 23 898 989

-- loss 2295 - -

Income tax (expense) benefit 2300 (11 956 294) 2 630 000 22

Profit (loss) on discontinued operations after tax 2305 - -

Net profit or loss:

-- profit 2350 39 330 152 26 528 989

-- loss 2355 - -



STATEMENT OF PROFIT OR LOSS (STATEMENT OF COMPREHENSIVE INCOME) FOR THE

YEAR ENDED 31 DECEMBER 2017 (CONTINUED)


8

II. COMPREHENSIVE INCOME


Revaluation of the property, plant and equipment* 2400 (45 078) -

Revaluation of the financial investments* 2405 - -

Currency translation reserve** 2410 301 972 1 054 050

Share of movements in comprehensive income of subsidiaries,

associates and joint ventures* 2415 (26 347 369) 5 487 833

Other comprehensive income* 2445 (92 848) 17 374

Other comprehensive income before income tax 2450 (26 183 323) 6 559 257

Income tax related to items of other comprehensive income 2455 16 713 - 22

Other comprehensive income, after income tax 2460 (26 166 610) 6 559 257

Total comprehensive income (sum of lines 2350, 2355 and

2460) 2465 13 163 542 33 088 246

ІII. OPERATING EXPENSE BY ELEMENTS


Materials 2500 108 752 499 82 181 190

Staff costs 2505 724 469 622 135

Social charges 2510 67 483 65 600

Depreciation and amortisation 2515 67 806 93 307

Other operating expense 2520 85 120 997 45 989 414

Total 2550 194 733 254 128 951 646

IV. EARNINGS PER SHARE


Average annual number of ordinary shares 2600 190 150 481 190 150 481

Diluted average number of ordinary shares 2605 190 150 481 190 150 481

Net profit (loss) per 1 ordinary share 2610 206,84 139,52

Net profit (loss) per 1 ordinary share (diluted) 2615 206,84 139,52

Dividends per ordinary share 2650 155,13 69,76

* items that cannot be reclassified subsequently to profit or loss

** items that can be reclassified subsequently to profit or loss

Original signed by:





STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017


9

CODES








Measuring unit: UAH thousands without decimals Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards


Statement of Cash Flows (indirect)



Item Code 2017

2016

(as restated, Note 3)

inflows outflows inflows outflows 1 2 3 4 5 6

І. Cash flows from operating activities

Profit before income tax 3500 51 286 446 - 23 898 989 -

Adjustments for:

depreciation and amortisation 3505 67 806 X 93 307 X

(decrease) increase in provisions 3510 - (5 929 470) 5 348 017 -

unrealised foreign exchange loss 3515 1 179 484 - 4 909 630 -

(gain) loss on non-operating activities and

other non-cash transactions 3520 - (11 331 248) 1 089 360 -

loss (gain) on equity investment 3521 - (2 467 164) - (2 388 878)

Finance costs 3540 6 275 062 - 7 175 990 -

Increase in current assets 3550 - (10 724 561) - (26 467 349)

Increase in current liabilities 3560 19 560 421 - 22 356 826 -

Cash flows from operating activities 3570 47 916 776 - 36 015 892 -

Income tax paid as advance on dividend

payment (Note 22) 3580 X (2 387 609) X -

Net cash flow from operating activities 3195 45 529 167 - 36 015 892 -

ІІ. Cash flows from investing activities

Proceeds from sale of:

financial investments 3200 13 033 X 110 581 X

non-current assets 3205 - X - X

Proceeds from:

interest received 3215 977 440 X 823 131 X

dividends received 3220 10 226 087 X 124 088 X

Proceeds from derivatives 3225 - X - X

Other inflows 3250 - X - X

Outflows from:

financial investments 3255 X (429 496) X (222 006)

non-current assets 3260 X (32 108) X (252 257)

Outflows from derivatives 3270 X - X -

Other outflows 3290 X - X -

Net cash flow from investing activities 3295 10 754 956 - 583 537 -



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


10

Item Code 2017

2016

(as restated, Note 3)

inflows outflows inflows outflows 1 2 3 4 5 6

ІІІ. Cash flows from financing activities

Proceeds from:

issue of shares 3300 - X - X

loans and borrowings received 3305 12 181 430 X 4 290 454 X

Other inflows 3340 - X - X

Outflows from:

redemption of own shares 3345 X - X -

loans and borrowings repaid 3350 X (47 553 315) X (23 216 196)

dividends paid 3355 X (13 264 495) X -

interest paid 3360 X (7 233 853) X (8 150 616)

Other outflows 3390 X (596 526) X (13 406)

Net cash flow from financing activities 3395 - (56 466 759) - (27 089 764)

Net increase in cash and cash equivalents 3400 - (182 636) 9 509 665 -

Cash and cash equivalents at the beginning of

the reporting period 3405 17 660 966 X 7 145 542 X

Effects of exchange rates changes on cash and

cash equivalents 3410 1 007 331 - 1 005 759 -

Cash and cash equivalents at the end of the

reporting period 3415 18 485 661 X 17 660 966 X

Original signed by:



Significant Non-Cash Transactions

In thousands of Ukrainian hryvnias Note 2017 2016

Payment for the natural gas acquired by a lending bank

to suppliers 13 21 850 305 13 636 276

Payment by subsidiaries of their portions of profit to the

state budget 12 - 1 021 364

Payment of dividends by mutual settlement - 264 078

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

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017


11

CODES




Measuring unit: UAH thousands without decimals Prepared under (mark “v” in the respective box): Ukrainian Accounting Standards


Statement of Changes in Equity



Item Line

code Share capital

Revaluation

reserve

Additional

paid-in

capital

Legal

reserve

Retained

earnings

(accumulated

deficit)

Unpaid

capital

Withdrawn

capital Total

1 2 3 4 5 6 7 8 9 10

Balance at 31 December 2016 4000 190 150 481 322 676 150 2 690 237 1 424 224 (69 103 045) - - 447 838 047

Net profit for the reporting period 4100 - - - - 39 330 152 - - 39 330 152

Other comprehensive income for the

reporting period 4110 - (26 254 973) 325 - 88 038 - - (26 166 610)

Profit distribution: Payments to owners (dividends) 4200 - - - - - - - -

Charge to the Legal reserve(Note 12) 4210 - - - 1 326 450 (1 326 450) - - -

Portion of net profit attributable to the State

Budget of Ukraine (Notes 12 and 14) 4215 - - - - (29 497 614) - - (29 497 614)

Contributions by the equity holders: Contributions to the share capital 4240 - - - - - - - -

Contributions to the share capital receivable

repaid 4245 - - - - - - - -

Capital withdrawals: Redemption of shares 4260 - - - - - - - -

Resale of treasury shares 4265 - - - - - - - -

Treasury shares cancelled 4270 - - - - - - - -

Capital withdrawn 4275 - - - - - - - -

Other changes in equity 4290 - (338) (30 552) - 30 890 - - -

Total changes in equity 4295 - (26 255 311) (30 227) 1 326 450 8 625 016 - - (16 334 072)



STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 (CONTINUED)


12

Statement of Changes in Equity



Item Line

code Share capital

Revaluation

reserve

Additional

paid-in

capital

Legal

reserve

Retained

earnings

(accumulated

deficit)

Unpaid

capital

Withdrawn

capital Total

1 2 3 4 5 6 7 8 9 10


Net profit for the reporting period 4100 - - - - 26 528 989 - - 26 528 989

Other comprehensive income for the

reporting period 4110

- 5 517 306 (3 373 573) - 4 415 524 - - 6 559 257

Profit distribution: Payments to owners (dividends) (Note 12) 4200 - - - - (1 021 364) - - (1 021 364)

Portion of net profit attributable to the State

Budget of Ukraine (Notes 12 and 14) 4215 - - - - (13 264 495) - - (13 264 495)

Contributions by the equity holders: Contributions to the share capital 4240 - - - - - - - -

Capital withdrawals: Redemption of shares 4260 - - - - - - - -

Other changes in equity 4290 - (6) (116) - 6 - - (116)

Total changes in equity 4295 - 5 517 300 (3 373 689) - 16 658 660 - - 18 802 271


Original signed by:





NOTES TO THE SEPARATE FINANCIAL STATEMENTS – 31 DECEMBER 2017

13

1. THE ORGANISATION AND ITS OPERATIONS

Public Joint Stock Company “National Joint Stock Company “Naftogaz of Ukraine” (“Naftogaz of

Ukraine” 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 is beneficially owned by the State of Ukraine. The Government of Ukraine, as

represented by the Cabinet of Ministers of Ukraine, controls the Company through participation in the

shareholders’ meetings and decisions making on behalf of the State of Ukraine as a single shareholder,

as well as through the appointment of the Chairman of the Executive Board and the Executive Board

members.

As at 31 December 2017 and at the date when these separate financial statements were authorised for

issue the Executive Board was as follows:

Position Name Commission of appointment

Head of the Executive

Board

Kobolyev Andriy

Volodymyrovych

Resolution of the Cabinet of Ministers of

Ukraine dated 25.03.14 №262-р;

Order dated 26.03.14 №48-К;

The 1st Deputy Head of

the Executive Board

Pereloma Sergiy

Vitaliyovych



Order dated 12.08.14 №195-К

Deputy Head of the

Executive Board

Konovets Sergiy

Oleksandrovych




Executive Board member Kolbushkin Yuriy

Petrovych


Ukraine dated 25.02.99 №268


Executive Board member

Chairman of Executive

Board at “Ukrgas-

vydobyvannia” PJSC

Prokhorenko Oleg

Vasiliyovych


Ukraine dated 24.05.17 №355-p

Executive Board member

Chief executive officer at

“Ukrtransnafta” PJSC

Havrylenko Mykola

Mykolayovych


Ukraine dated 24.05.17 №355-p




14

1. THE ORGANISATION AND ITS OPERATIONS (Continued)

As at 31 December 2017 and at the date when these separate financial statements were authorised for

issue the Supervisory Board was as follows:

Title

Name, the State

representative /independent

non-executive director Commission of appointment

Chairperson of the

Supervisory Board

Spottiswoode Clare Mary Joan,

independent non-executive

director

Resolution of the Cabinet of Ministers

of Ukraine dated 13.12.17 #892-p

Minutes of the Supervisory Board

Deputy chairperson of

the Supervisory

Board

Demchyshyn Volodymyr

Vasylyovych,

the State representative

Order of the Ministry of Economic

Development and Trade of Ukraine

dated 21.04.2016 №725

Supervisory Board

members

Lescoeur Bruno, Jean, Gaston,


director



Hochstein Amos,


director



Haysom Steven John,


director



Popyk Serhij Dmytrovych,




Kudrytskyi Volodymyr

Dmytrovych,






15


Attendance of the Supervisory board meetings in 2017 (both regular and extraordinary) was as follows:

Name Supervisory Board 1

Audit and Risks

Committee

Ethics and Unbundling

Committee

Nomination

and

Remuneration

Committee

Committee on

health, safety,

environment and

reserves 2

Kovaliv Yulia Ihorivna 8/11 4/5 2/3 2/3 1/1

Warwick Paul Cyril 21/21 9/9 7/7 8/8 2/2

Richards Marcus Trevor 19/21

(with partial presence

during meetings on

13-16 March 2017

and 3-6 April 2017)

7/9

7/7

8/8

2/2

Proctor Charles Richard Faraday 21/21 9/9 7/7 8/8 2/2

Demchyshyn Volodymyr Vasylyovych 21/22 9/9 7/7 7/8 2/2

Spottiswoode Clare Mary Joan 1/1 - - - -

Lescoeur Bruno, Jean, Gaston 1/1 - - - -

Hochstein Amos 1/1 - - - -

Haysom Steven John 1/1 - - - -

Popyk Sergii Dmytrovych 1/1 - - - -

Kudrytskyi Volodymyr Dmytrovych 1/1 - - - -

1 Total number of the Supervisory Board meetings includes one Supervisory board meeting as at 29 September 2017 which was not valid due to absence of quorum as well as one Supervisory

board meeting convened on 29 September 2017 and held via absentee voting. 2 Total number of the Committee on health, safety, environment and reserves meetings excludes the first Supervisory board meeting held on 13-16 February 2017 which resolved to establish the

Committee on occupational health, environmental and industrial safety.




16


Naftogaz of Ukraine and its subsidiaries is a vertically integrated oil and gas company engaged in full

cycle of operations in gas and oil field exploration and development, exploratory drilling and production,

gas and oil transportation and storage, supply of natural gas and liquefied petroleum gas (“LPG”) to

customers.

The Company holds stakes in various entities that form the national system of production, refinery,

supply, distribution, wholesale and retail trade, transportation, and storage of natural gas, gas

condensate, and oil.

The Company conducts its business and holds its production facilities mainly in Ukraine.

The Company is registered at 6 B. Khmelnytskogo Street, Kyiv, Ukraine.

These separate financial statements were authorised for issue by the Executive Board on 6 April 2018.

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 continued

in certain parts of Luhanska and Donetska 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% comparing to 12.4% in 2016. The Ukrainian economy

proceeded recovery from the economic and political crisis of previous years that resulted in real GDP

smooth growth of around 2.5% (2016: 2.4%) and stabilisation of national currency. From trading

perspective, the economy was demonstrating refocusing on the European Union (“EU”) market, which

was a result of the signed Association Agreement with the EU in January 2016 that established the Deep

and Comprehensive Free Trade Area (“DCFTA”). Under this agreement, Ukraine has committed to

harmonise its national trade-related rules, norms, and standards with those of the EU, progressively

reduce import customs duties for the goods originating from the EU member states, and abolish export

customs duties during a 10-year transitional period. Implementation of DCFTA began on

1 January 2017. As a result, the Russian Federation implemented a trade embargo or import duties on

key Ukrainian export products. In response, Ukraine implemented similar measures against Russian

products.

In terms of currency regulations, the National Bank of Ukraine (“NBU”) decreased the required share

of mandatory sale of foreign currency proceeds from 65% to 50% starting from April 2017, increased

settlement period for export-import transactions in foreign currency from 120 to 180 days from May

2017, and allowed companies to pay the 2013 (and earlier) dividends to non-resident entities with a limit

of USD 2 million per month from November 2017 (from June 2016, companies were allowed to pay

dividends for 2014–2016 to non-residents with a limit of USD 5 million per month).




17

2. OPERATING ENVIRONMENT (Continued)

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 from the entire 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 the 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, privatisation, as well as switch to market pricing principles in respect of

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 and the Company are undertaking significant 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. These measures introduce conceptual changes to the legal framework and functioning of the

natural gas market, to certain aspects of operations of the National Joint Stock Company “Naftogaz of

Ukraine” and also will have significant impact on the performance of the National Joint Stock Company

“Naftogaz of Ukraine” and its subsidiaries.

State regulation of gas market in Ukraine

Gas market reform in Ukraine started with adoption of the Law of Ukraine “On Natural Gas Market” №329-

VIII dated 9 April 2015 (“the Law on Gas Market”) that became effective on 1 October 2015. Starting from

this date, the wholesale and retail natural gas markets introduced the principle of free pricing and

freedom of choice regarding sources of the natural gas supplies, except for the cases when the Cabinet

of Ministers of Ukraine imposes specific obligations on the natural gas market participants.

At the same time, the Resolution of the Cabinet of Ministers of Ukraine dated 1 October 2015 №758

imposed public service obligations on the Company during the period from 1 October 2015 to

31 March 2017 in respect of gas purchase of domestic production from “Ukrgasvydobyvannia” PJSC

and gas sales to gas supply companies for the needs of households, religious organisations, and district

heating companies for generating heat for households and religious organisations, and starting from

23 December 2016 – for the needs of budget financed entities and PJSC “Odessa Port Plant”.




18


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 (“PSO Resolution”). This

Resolution contains, amongst others, a series of differences from the previous one, in particular:

Both “Ukrgasvydobyvannia” PJSC and “Chornomornftogas” PJSC are obliged to sell gas to the

Company for the needs of households, religious organisations and heat generating entities under

heat production and distribution and water supply for households and religious organisations.

The Company is obliged to sell gas to district heating companies for all groups of customers, as

well as for producing electricity by these companies.

Starting from 1 April 2017 the Company will sell gas for the needs of households, religious

organisations and district heating companies 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 district heating companies 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 district heating companies for all customers, except for the needs of religious organisations and

households, and for electricity production by district heating companies 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 district heating companies. Concurrently with resolution on Company’s gas sales

price change for specified categories, gas purchase price from “Ukrgasvydobyvannia” PJSC and

“Chornomornftogas” PJSC should be revised.

Nevertheless, despite all preconditions for such price revision after recalculations performed by the

Ministry of Energy and Coal of Ukraine, final decision was not approved.

Other customers outside the PSO Resolution buy imported natural gas under the prices set discretionary

by the gas market participants, including the Company.




19


The following tariffs and prices were set:

31 December

2017

31 December

2016

Effective from 1 May 2016 single retail gas price for households

was set at UAH 4.94 per cubic meter, excluding VAT, and tariffs

for gas transmission and distribution. This price represented the

level of import parity and was effective up to 31 March 2017. At the

same time, in case preconditions for the price revision exist, retail

gas price should be recalculated.

Starting from 1 April 2017, retail gas price for households remains at

the same level. At the same time, Resolution of the Cabinet of

Ministers of Ukraine dated 22.03.17 №187 sets maximum level of

mark up on price of 2.5% from the retails price for gas suppliers.

UAH 6.96 per

cubic meter

From 1 May

2016 to

31 March

2017:

UAH 6.88 per

cubic meter

Natural gas prices for district heating companies generating heat

for household needs, excluding VAT and tariffs for gas

transmission and distribution.

UAH 4.94 per

cubic meter

From 1 May

2016 to

31 March

2017:

UAH 4.94 per

cubic meter

Gas selling prices for industrial customers and entities financed

from the State or municipal budgets, excluding VAT and tariffs

for gas transmission and distribution. These selling prices are set

discretionary by the Company depending on monthly consumption

levels and terms of payments.

From

UAH 7 516 to

UAH 8 265

per

1 000 cubic

meters

From

UAH 6 484 to

UAH 7 148 per

1 000 cubic

meters

General tariff for gas storage (storage, injection, and withdrawal),

excluding VAT, UAH per thousand cubic meters for one season of

storage.

UAH 112.0 UAH 112.0

Tariff for entry and exit points of Ukrainian gas transmission

network, excluding VAT, USD per thousand cubic meters USD 12.47 USD 12.47

Households settle their debts on natural gas consumed via special purpose accounts opened in banks

that were authorised by the Cabinet of Ministers of Ukraine for such purpose. According to the current

procedure, gas suppliers with public service obligations open special purpose bank accounts to receive

payments for natural gas consumed. Amounts accumulated on the special purpose bank accounts are

then allocated to current accounts of the transmission system operator according to the Code of Gas

transmission system, distribution system operators and gas supplier with public service obligations

according to ratios calculated by the gas suppliers with specific obligations and approved by the National

Commission for Regulation of Energy and Utilities (“NCREU”). Balances on the special purpose

accounts cannot be arrested or blocked.




20


District heating companies also open special purpose banks accounts for the settlement of debts for heat

supplied. Cash received by district heating companies on their special purpose bank accounts is then

allocated, among others, to current bank accounts of the gas supplier with public service obligations

according to ratios approved by the NCREU monthly. The special purpose bank accounts of district

heating companies 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 district heating companies and distribution and water supplying companies” №1730 was adopted.

The principles of district heating companies and distribution and water supplying companies payables

for gas settling are set in this Law. Among other, the Law assumes writing off penalties and fines implied

for overdue debts for gas supplied, and restructuring of payables to the Company on gas consumed. The

list of companies entitled for debt settling procedures should be approved by the central body of the

government executive authority responsible for pursuing the State policy in housing and utilities. This

list should be approved as a separate register of companies.

As at 31 December 2017 the Company has signed gas debts restructuring agreements according to this

Law in the amount of UAH 432 169 thousand. Fulfilment of gas debt restructuring agreements is

guaranteed by municipal executive government bodies representing particular territorial community as

set by a 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 separate financial statements.

Compensation for performing the public service obligations

In accordance with Para 7, Article 11 of the Law of Ukraine “On Natural Gas Market”, a gas market

player with public service obligations is eligible for compensation of economically justified

expenditures incurred by such player, less any income obtained in the course of fulfilling such

obligations plus adequate margin. The level of margin should be calculated following the relevant

resolution by the Cabinet of Ministers of Ukraine.

In July 2017, Kyiv county administrative court has supported the Company’s claim against the Cabinet

of Ministers of Ukraine, and has 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 has obliged the Cabinet of Ministers of Ukraine to make respective amendments

to the PSO Resolution. The court decision became effective in October 2017.

As at the date of these separate financial statements such resolution has not been adopted. Accordingly,

the Company did not receive any compensation as a gas market player with public service obligations

during 2016 and 2017.




21


Expected amount of compensation for performing special obligations for the whole period of PSO and

up to 31 December 2017 approximates to UAH 36.2 billion (unaudited), per the Company’s calculations.

This amount does not contain compensation attributable to other gas market players with public service

obligations, inter alia “Ukrgasvydobyvannia” PJSC and “Chornomornftogas” PJSC.

Gas transmission and storage unbundling process

As at 31 December 2016 and 2017 the Company executes control over transmission system operator

“Ukrtransgas” PJSC.

On 9 November 2016 the Cabinet of Ministers of Ukraine has approved incorporation of „Mahistralny

gasoprovody Ukrainy” PJSC with its Resolution №801. This decision was taken within the Company’s

Corporate Governance Restructuring Plan that assumes gas transmission and storage activities

unbundling. Unbundling was also approved by the Resolution of the Cabinet of Ministers of Ukraine

dated 01 July 2016 №496.

The Government has also approved the Corporate Governance Plan for „Mahistralny gasoprovody

Ukrainy” PJSC, taking into account requirements of the European Bank for Reconstruction and

Development and Energy community.

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, before 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” dated 2 September 2014 №1669.

Management of the Company continues to undertake all possible legal and diplomatic measures to

reimburse for losses and recover control of the Company’s assets in Crimea.




22

3. RESTATEMENT OF COMPARATIVE INFORMATION

The Company issued its separate financial statements as at and for the year ended 31 December 2016

on 31 March 2017.

Starting from 1 January 2017 the Company has changed its accounting policy in respect of presenting

cash flows for cash receipts and payments for items in which the turnover is quick, the amounts are

large, and the maturities are short. Such items are presented on a net basis in the statement of cash flows.

Management believes such presentation is more accurate and provides more relevant information for

the users of the financial statements.

When preparing the separate financial statements as at and for the year ended 31 December 2017 the

Company has performed reclassifications in respect of figures previously reported in the statement of

cash flows for the year ended 31 December 2016. The effect of such retrospective corrections was as

follows:

In thousands of Ukrainian hryvnias 2016, as

reported earlier

Effect of

reclassifications 2016, as restated

Loans and borrowings received 13 212 953 (8 922 499) 4 290 454

Loans and borrowings repaid (32 138 695) 8 922 499 (23 216 196)

4. SEGMENT INFORMATION

The Executive Board is the Company’s chief operating decision maker. Management has determined

operating segments used for disclosure by the Company based on reports reviewed by the Executive

Board for assessing their financial performance. Management assesses the performance of operating

segments based on a measure of net profit or loss before income tax. Reportable segments defined by

the Board in accordance with the type of activities are as follows:

Gas transit. Gas transmission pipelines in Ukraine are operated by “Ukrtransgaz” PJSC, which is

the Company’s fully owned subsidiary. The Company is mainly engaged in transit of natural gas

from the Russian Federation through the territory of Ukraine under the contract with

“Gazprom” PJSC.

Wholesale gas trading. “Ukrgasvydobyvannia” PJSC and “Chornomornftogas” PJSC sell all gas

produced to the end users via the Company, as they perform public service obligations under the

PSO Resolution (Note 2). The Company also imports significant volumes of natural gas for resale

to different groups of customers. This segment covers sales of natural gas to different groups of

customers within Ukraine.

Other. Revenues of this segment include revenues from sales of materials and services by auxiliary

divisions of the Company, mainly supporting services. The segment also includes results of joint

operations under the concession agreement for exploration and development with the Arab

Republic of Egypt and Egyptian General Petroleum Corporation.




23

4. SEGMENT INFORMATION (Continued)

Segment information for reportable business segments of the Company for the year ended

31 December 2017 is as follows:

In thousands of Ukrainian hryvnias Gas transit

Wholesale

gas trading Other Total

Sales to external customers 73 940 136 113 528 769 458 528 187 927 433

Sales to other segments - - - -

Total revenue 73 940 136 113 528 769 458 528 187 927 433

Result from operating activities 36 408 002 1 208 181 604 683 38 220 866

Result from non-operating activities 45 587 (8 587 389) 9 346 (8 532 456)

Segment result 36 453 589 (7 379 208) 614 029 29 688 410

Income on equity investments 2 467 164

Net movement in provisions (Note 14) 5 954 244

Income recognised under the Gas Transit

Arbitration (Note 17) 57 125 342

Expense recognised under the Gas Sales

Arbitration (Note 19) (44 528 046)

Unallocated income, net 579 332

Profit before income tax 51 286 446

Material non-cash items included in

segment results:

Unrealised foreign exchange differences 45 587 (1 453 784) 228 760 (1 179 437) Depreciation of property, plant, and

equipment and amortisation of intangible

assets (Note 18) (17 631) (43 072) (7 103) (67 806) Net movement in provision for impairment of

trade and other receivables, prepayments

made, and other current assets (Note 19) - (1 539 946) 31 933 (1 508 013) Adjustment of inventories to net realisable

value (Note 8) - (1 190 955) - (1 190 955)

Segment assets 6 721 703 132 660 751 9 078 607 148 461 061

Non-current financial investments (Note 6) 414 083 429

Indebtedness under the Gas Transit

Arbitration (Note 10) 57 125 342

Deferred tax assets (Note 22) 725 546

Cash and cash equivalents (Note 11) 18 485 661

Unallocated assets 65 603

Total assets 638 946 642




24


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

2016 is as follows:

In thousands of Ukrainian hryvnias Gas transit

Wholesales

gas trading Other Total

Sales to external customers 61 393 874 99 590 812 398 141 161 382 827

Sales to other segments - - - -

Total revenue 61 393 874 99 590 812 398 141 161 382 827

Result from operating activities 28 702 775 10 115 776 115 235 38 933 786

Result from non-operating activities 17 798 (13 012 453) (67 006) (13 061 661)

Segment result 28 720 573 (2 896 677) 48 229 25 872 125

Income on equity investments 2 388 878

Accrual of provisions for litigations (Note 14) (5 259 136)

Unallocated income, net 897 122

Profit before income tax 23 898 989

Material non-cash items included in

segment results:

Unrealised foreign exchange differences 17 798 (4 658 401) (240 539) (4 881 142) Depreciation of property, plant, and

equipment and amortisation of intangible

assets (Note 18 and 19) (34 728) (56 334) (2 245) (93 307) Net movement in provision for impairment of

trade and other receivables, prepayments

made, and other current assets (Note 19) - (4 606 822) 60 640 (4 546 182) Adjustment of inventories to net realisable

value (Note 8) - (1 541 524) - (1 541 524)

Reversal of impairment of natural gas - 245 132 - 245 132 Segment assets 6 493 539 113 949 371 8 376 200 128 819 110 Non-current financial investments (Note 6) 448 077 061

Deferred tax assets (Note 22) 2 630 000

Income tax prepaid (Note 7) 1 317 274

Cash and cash equivalents (Note 11) 17 660 966

Unallocated assets 1 288 052

Total assets 599 792 463

External customers concentration exceeded 10% of total revenues

During the years ended 31 December 2017 and 2016, the external customers with concentration of

revenue exceeding 10% of total revenues were Gazprom and “Ukrtransgaz” PJSC.

Revenue from sales to “Gazprom” OJSC is attributable to the segment of gas transit for these periods

and amounted to UAH 73 937 144 thousand and 59 986 448 thousand, respectively.

Revenue from sales to “Ukrtransgaz” PJSC is attributable to the segment of wholesale gas trading for

these periods and amounted to UAH 24 542 275 thousand and UAH 16 307 679 thousand, respectively.



25


Revenues, gross profit/(loss), profit/(loss) before tax and receivables of the wholesale gas trading segment by main groups of customers are as follows:

31 December 2017

In thousands of Ukrainian hryvnias Revenue

Gross (loss)

profit

(Loss) / profit

before income

tax

Accounts receivable

gross

provision for

impairment

carrying

amount

District heating companies for the needs of

households 22 770 150 (1 825 785)

(4 796 216) 13 698 477 (3 802 650) 9 895 827

Regional gas distribution companies for resale

to households and religious organisations 55 552 665 467 772

(6 068 210) 29 922 927 (1 205 641) 28 717 286

District heating companies for the needs of other

entities 6 352 051 769 790

203 530 3 390 514 (26 747) 3 363 767

Odessa Port Plant - - - 1 374 772 (1 374 772) -

Total public service obligation performance

(Note 2) 84 674 866 (588 223)

(10 660 896) 48 386 690 (6 409 810) 41 976 880


to other customers 201 606 46 265

(8 239) 105 658 (105 658) -

Industrial and other customers 28 083 254 5 173 583 2 874 356 14 865 561 (6 366 167) 8 499 394


customers 569 043 148 453

270 201 6 339 928 (6 339 928) -

„Gas Ukraiiny” SE for the needs of other

customers - -

145 3703 11 695 647 (11 695 647) -

Total performance of gas trading at non-

regulated prices for the needs of other

customers 28 853 903 5 368 301

3 281 688 33 006 794 (24 507 400) 8 499 394

Total 113 528 769 4 780 078 (7 379 208) 81 393 484 (30 917 210) 50 476 274

3 Reversal of provision for doubtful debts at partial accounts receivable settlement by „Gas Ukraiiny” SE



26


31 December 2016

In thousands of Ukrainian hryvnias Revenue

Gross profit

(Loss) / profit

before income

tax

Accounts receivable

gross

provision for

impairment

carrying

amount


households 18 870 996 348 814

(2 802 220) 14 144 679 (3 083 175) 11 061 504


to households and religious organisations 50 075 658 12 597 879

3 862 150 21 617 203 (147 046) 21 470 157


budget other entities 2 254 559 443 875

77 083 1 496 510 - 1 496 510

Odessa Port Plant 1 145 644 229 897 (1 331 359) 1 374 772 (1 374 772) -

Total public service obligation performance

(Note 2) 72 346 857 13 620 465

(194 346) 38 633 164 (4 604 993) 34 028 171


to other customers 551 254 63 372

(34 693) 252 436 (159 138) 93 298

Industrial and other customers 21 931 803 2 964 732 (2 495 021) 19 722 748 (6 521 900) 13 200 848


customers 4 760 898 765 208

(372 735) 7 244 514 (6 464 265) 780 249

„Gas Ukraiiny” SE for the needs of other

customers - -

200 1184 11 841 017 (11 841 017) -

Total performance of gas trading at non-

regulated prices for the needs of other

customers 27 243 955 3 793 312

(2 702 331) 39 060 715 (24 986 320) 14 074 395

Total 99 590 812 17 413 777 (2 896 677) 77 693 879 (29 591 313) 48 102 566

4 Reversal of provision for doubtful debts at partial accounts receivable settlement by „Gas Ukraiiny” SE




27

5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES

Parties are generally considered to be related if one party has the ability to control the other party, is

under common control, or can exercise significant influence or joint control over the other party in

making financial and operating decisions. In considering each possible related party relationship,

attention is directed to the substance of the relationship, and not merely the legal form.

As discussed in Note 1, the Company is controlled by the Government of Ukraine and, therefore, all

state-controlled entities or entities under significant influence of the state are considered as related

parties under common control with the Company.

Transactions with related parties may be performed on terms that would not necessarily be available to

unrelated parties.

Transactions with state-controlled entities. The Company performs significant transactions with the

entities controlled, jointly controlled or significantly influenced by the Government of Ukraine. These

entities include State Savings Bank of Ukraine, Ukreximbank, Ukrgazbank, district heating companies

and part of regional gas distribution companies.

For the year ended 31 December 2017, about 36% of the Company’s revenue (2016: 41%) were earned

from transactions with the entities controlled, jointly controlled or influenced by the Government of

Ukraine. Outstanding trade accounts receivable related to these transactions as at 31 December 2017

and 2016 are about 52% та 49%, respectively, of the total trade accounts receivable balance. Revenues

from gas sales to “Ukrtransgaz” PJSC in 2017 was 22% of total revenues in the wholesale gas trading

segment (2016: 16%).

For the year ended 31 December 2017, about 49% of the Company’s expenses (2016: 54%) occurred

from transactions with the entities controlled, jointly controlled or influenced by the Government of

Ukraine. Outstanding trade accounts payable related to these transactions as 31 December 2017 and

2016 are about 43% and 73%, respectively, of the total accounts payable balance. Purchase of gas from

the Company’s subsidiary “Ukrgasvydobuvannya” PSJC during 2017 amounted to 57% of total gas

purchases (2016: 54%).

Provision for litigations and other provisions with the entities controlled, jointly controlled or influenced

by the Government of Ukraine as at 31 December 2017 and 2016 are about 4% і 32%, respectively, of

the total provisions.




28

5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Continued)

As at 31 December 2017 and 2016, about 99% of cash and bank balances were placed in the banks

controlled, jointly controlled or influenced by the Government of Ukraine. About 91% of finance income

in 2017 relate to balances in these banks (2016: 91%).

As at 31 December 2017, about 66% of all borrowings were provided by the banks controlled, jointly

controlled or influenced by the Government of Ukraine (31 December 2016: 54%). About 78% of

finance costs in 2017 relate to borrowings obtained from these banks (2016: 69%).

In December 2017 the Company has completed redemption of bonds amounting to

UAH 4 800 000 thousand that were issued in 2013 guaranteed by the State.

In 2017 the Company has concluded additional agreements with two state-owned banks in respect of

decreasing interest rates and changes to the borrowings repayment schedules prolonging their maturities,

and converting one loan to a revolving credit line.

Pledges. As at 31 December 2017 and 2016, borrowings from related parties (state-owned banks) were

secured by inventories and proceeds from future sales.

Guarantees. Amount of guarantees, provided by the Government of Ukraine, as at 31 December 2017

and 2016 equalled to UAH 20 981 549 thousand and UAH 28 524 443 thousand, respectively (Note 13).

Key management remuneration. During 2017 key management personnel consisted on average of

6 Executive Board members and 9 directors (2016: 4 Executive Board members and 6 directors).

Compensation to the key management personnel included into administrative expense consists of salary

and additional current bonuses and comprises UAH 179 521 thousand in 2017 (2016:

UAH 86 587 thousand).

Conditions and amounts of the Chairman and members of the Executive Board remuneration meet

requirements of the Resolution of the Cabinet of Ministers of Ukraine dated 19 May 1999 №859 (as

amended). According to this Resolution, the following types of remuneration could be generally set for

the heads and members of executive boards of public joint stock companies created as a result of

corporatisation of the state entities:

basic salary,

quarterly and annual performance bonuses,

bonus for effective management of the state property,

extra payments for scientific degree and academic rank.




29

5. BALANCES AND TRANSACTIONS WITH RELATED PARTIES (Continued)

According to this Resolution, basic salary of the chief executive officer is defined with the reference to

the average annual number of employees in full employment equivalent, total assets or revenue

according to the most recent annual financial statements, and is linked to the minimal basic salary of the

essential position of an entity. Currently effective contracts with the Chairman and members of the

Executive Board of the Company do not assume extra payments for scientific degree and academic rank.

According to the Company’s Charter, decisions on quarterly and annual performance bonus payments

and bonus for effective management of the state property for the Chairman and members of the

Executive Board stay within competence of the Supervisory Board. As at the date of these financial

statements there was no such decision taken, and thus, such bonuses were not accrued or paid.

During 2017 the Company also incurred UAH 25 547 thousand of expenses on operations of the

Supervisory board (2016: UAH 20 070 thousand). This amount includes UAH 20 253 thousand in

service fees accrued (2016: UAH 15 302 thousand), and UAH 5 294 thousand in compensation of

expenses incurred by the Board members during performance of their duties (2016:

UAH 4 768 thousand), as well as directors and officers liability insurance procured and paid by the

Company to insure the liability of these officers after their appointment.

Fixed service fees of the independent non-executive directors – Supervisory Board members is set in

the individual contracts. Additionally to the fixed fees the Supervisory Board members are compensated

for certain justifiable expenses incurred by the Supervisory Board members during performance of their

duties (travel expenses, hotels, communication etc.). Compensations are made for justified and properly

documented expenses, net of taxes and based on original documents confirming such payments as

prescribed by the Ukrainian legislation and provisions of the individual contracts.




30

6. NON-CURRENT FINANCIAL INVESTMENTS

The Company’s non-current financial investments were as follows:

In thousands of Ukrainian hryvnias 31 December

2017

31 December

2016

Investment in subsidiaries 413 207 938 447 116 458

Investment in associates 772 234 857 346

Other investments 103 257 103 257

Total 414 083 429 448 077 061

Investment in subsidiaries were as follows:

31 December 2017 31 December 2016

Name of investee/principal

activities

Country of

incorporation

and place of

business

Ownership

interest, %

Carrying

amount

Ownership

interest, %

Carrying

amount

Production of gas, oil, and refinery products

“Ukrgazvydobuvannia” PJSC Ukraine 100.00% 114 527 062 100.00% 69 351 826

“Ukrnafta” PJSC

Ukraine

50.0%+1

share 2 710 655

50.0%+1

share 2 506 411

“Zakordonnaftogaz” SE Ukraine 100.00% 1 019 862 100.00% 1 045 936

Oil and gas transmission and transportation

“Ukrtansgaz” PJSC Ukraine 100.00% 276 465 888 100.00% 353 806 314

“Ukrtransnafta” PJSC Ukraine 100.00% 16 604 047 100.00% 18 488 955

“Ukrspetstransgaz” PJSC Ukraine 100.00% 150 922 100.00% 184 260

Wholesale and retail trade of oil, gas, and refinery products

“Ukravtogaz” SE Ukraine 100.00% 1 231 615 100.00% 1 305 295

Other investments in

subsidiaries miscellanious

49.00%-

100.00% 497 887

49.00%-

100.00% 427 461

Total 413 207 938 447 116 458

Investments in associates were as follows:


Name of investee/principal

activities

Country of

incorporation

and place of

business

Ownership

interest, %

Carrying

amount

Ownership

interest, %

Carrying

amount

Production of gas, oil, and refinery products

“Ukrtatnafta” PJSC Ukraine 43.05% - 43.05% -

Other

“Gaztransit” PrJSC Ukraine 40.22% 772 234 40.22% 857 346

Total 772 234 857 346




31

7. NON-CURRENT ACCOUNTS RECEIVABLE AND OTHER NON-CURRENT ASSETS

The Company’s non-current accounts receivable and other non-current assets were as follows:

In thousands of Ukrainian hryvnias 31 грудня

2017 року

31 грудня

2016 року

Accounts receivable on product sharing agreement 4 865 530 4 203 539

Restructured accounts receivable of gas consumers 363 894 577 068

Income tax prepaid - 1 317 274

Other non-current assets 1 477 497 1 734 468

Less: provision for impairment (211 570) -

Total 6 495 351 7 832 349

Accounts receivable on product sharing agreement. The Company entered into a concession

agreement for hydrocarbon exploration and development with the Arab Republic of Egypt and Egyptian

General Petroleum Corporation (“EGPC”) on 13 December 2006. Under the terms and conditions of the

concession agreement, the Company has the right to recover all exploration and development costs

incurred in connection with the concession agreement in equal parts during five years starting from the

date of the first delivery of oil or gas (Note 27). As at 31 December 2017 and 2016, included in other

non-current assets were research and development expenditures in the amount of

UAH 1 170 709 thousand and UAH 1 442 883 thousand, respectively, incurred by the Company in

connection with the concession agreement for hydrocarbon exploration and development, but not yet

included for recovery under the agreement terms and conditions.

In 2017 the Company engaged independent consultants to evaluate exploration and evaluation assets

and hydrocarbon exploration and development assets in the Arab Republic of Egypt. The Company

plans to make a decision in respect of viability of its future activities within the Concession Agreement

per results of such evaluation, including, but not limited to potential exit from this project.

Restructured accounts receivable of gas consumers. In 2011, the Law of Ukraine №3319-VI “On

Certain Matters of Indebtedness for Natural Gas and Electricity Consumed” was adopted. According to

this Law, accounts receivable due from the entities supplying natural gas at the regulated tariff that were

originated in 2010 were restructured for the period from 1 to 20 years and stated at amortised cost using

the effective interest rate method which, at the restructuring date, varied from 14% to 15%.

Commercial courts can make an award to restructure or postpone execution of the court decision, in case

of circumstances making this execution impossible or in case of motion of the debtor to postpone

execution. After the court decides on restructuring, accounts receivable are accounted at amortised cost

using the effective interest rate method that equals to average deposit interest rate for the month prior

the month when such decision was taken. Effective interest rates vary from 14% to 19%.

Movements in provision for impairment of non-current accounts receivable were as follows:

In thousands of Ukrainian hryvnias 2017 2016

Balance as at 1 January - -

Reversal of provision (9 815) -

Other changes (reclassification of provision between current and non-

current accounts receivable) (Note 9) 221 385 -

Balance as at 31 December 211 570 -




32

8. INVENTORIES

The Company’s inventories were as follows:


2017

31 December

2016

Natural gas 74 292 971 59 388 456

Other inventories 60 304 61 612

Total 74 353 275 59 450 068

Management estimates the necessity of write-down of inventories to their net realisable value taking

into consideration the aging of inventories and indications of economic, technical, and physical

obsolescence. In 2017, the natural gas adjustment to its net realisable value amounted to

UAH 1 190 955 thousand (2016: UAH 1 541 524 thousand) and was included in cost of sales.

As at 31 December 2017, included in the inventories balance is natural gas with the carrying value of

UAH 6 327 thousand that was arrested according to the court decision in Slovak Republic.

As at 31 December 2017, inventories with the carrying value of UAH 37 061 723 thousand

(31 December 2016: UAH 42 545 343 thousand) were pledged as a collateral for borrowings (Note 13).

9. TRADE ACCOUNTS RECEIVABLE

The Company’s trade accounts receivable as follows:


2017

31 December

2016

Trade accounts receivable 89 015 736 84 943 402

Less: provision for impairment (31 541 364) (30 224 224)

Total 57 474 372 54 719 178

Out of the total carrying value of trade accounts receivable as at 31 December 2017, accounts receivable

for natural gas sales amounted to UAH 50 476 274 thousand (31 December 2016:

UAH 48 102 566 thousand) (Note 4).




33

9. TRADE ACCOUNTS RECEIVABLE (Continued)

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


Balance as at 1 January 30 224 224 25 615 914

Provision for impairment recognised during the year 3 300 257 6 228 186

Reversal of provision (1 761 732) (1 617 905)

Other changes (reclassification of provision between current and non-

current accounts receivable) (Note 7) (221 385) -

Amounts written off during the year as uncollectible - (1 971)

Balance as at 31 December 31 541 364 30 224 224

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


2017

31 December

2016

Neither past due nor impaired 28 697 818 29 300 394

Past due but not impaired:

Less than 30 days overdue 11 547 125 14 517 849

31 to 90 days overdue 5 454 580 6 117 217

91 to 180 days overdue 3 124 306 1 675 640

181 to 365 days overdue 8 297 962 2 199 228

Over 365 days overdue 352 581 908 850

Past due and individually impaired (gross):

Less than 30 days overdue - 993 505

31 to 90 days overdue 295 658 381 267

91 to 180 days overdue 480 368 142 955

181 to 365 days overdue 1 811 319 1 634 575

Over 365 days overdue 28 954 019 27 071 922

Less: Provision for impairment (31 541 364) (30 224 224)

Total 57 474 372 54 719 178




34

10. ACCOUNTS RECEIVABLE ON PREPAYMENTS MADE, SETTLEMENTS WITH THE

STATE BUDGET, OTHER CURRENT ACCOUNTS RECEIVABLE AND OTHER

CURRENT ASSETS

The Company’s accounts receivable on prepayments made, settlements with the state budget, other

current accounts receivable and other current assets were as follows:


2017

31 December

2016

Indebtedness under the Gas Transit Arbitration 57 125 342 -

Refundable financial aid to subsidiaries 12 079 067 12 079 067

Balance at the electronic account for VAT 2 969 330 112 132

Prepayments to suppliers for materials, works, and services 2 529 958 7 723 658

VAT advance in respect of customs registration of imported natural gas 1 980 547 -

Receivables under assignment agreements in respect of natural gas sales 1 569 405 1 619 287

Cash collateral for participation in the State procurement procedures 1 489 567 -

Promissory notes receivable 1 413 229 1 416 416

Other 2 623 006 2 459 963

Less: provision for impairment (18 094 571) (18 157 404)

Total 65 684 880 7 253 119

On 28 February 2018 the Arbitral Tribunal rendered the Final Award in the Gas Transit Arbitration

(Note 23), where, amongst other, it supported Naftogaz’s claim 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. As further described in Note 23, the Company has received a legal right to set-off the

amounts owing between the parties pursuant to the Gas Sales Arbitration and Gas Transit Arbitration,

supporting a respective Naftogaz request. Amount of such set-off as at 31 December 2017 amounts to

UAH 57 125 342 thousand, and is recognised in other current assets.

Net amount receivable from Gazprom after the set-off amounts to UAH 71 861 428 thousand (equivalent to

USD 2 560 million at the exchange rate as at 31 December 2017, Note 23). As at the date when these separate

financial statements were authorised for issue, this amount was not settled, and the Company does not

recognise it as an asset as at 31 December 2017 (Note 23).

As at 31 December 2017 and 2016, included to the provision for impairment UAH 12 022 196 thousand

of provision for refundable financial aid to “Chornomornaftogaz” PJSC.

Movements in provision for impairment for prepayments made and other current assets were as follows:


Balance as at 1 January 18 157 404 18 222 454

Provision for impairment recognised during the year 26 998 57 199

Reversal of provision (47 695) (121 298)

Amounts written off during the year as uncollectible (42 136) (951)

Balance as at 31 December 18 094 571 18 157 404




35

11. CURRENT FINANCIAL INVESTMENTS AND CASH AND CASH EQUIVALENTS

Current financial investments and cash and cash equivalents were as follows:


2017

31 December

2016

Cash in banks 18 485 661 17 660 966

Restricted cash - 679 771

Total 18 485 661 18 340 737

Current financial investments. As at 31 December 2016 current financial investments included

restricted cash amounting to UAH 679 771 thousand. In 2017 this amount was transferred by the agent

bank to settle balance due by the Company to its contractor, as prescribed by the court decision.

12. SHARE CAPITAL

As at 31 December 2017 and 2016, registered, issued, and fully paid share capital of the Company was

UAH 190 150 481 thousand and UAH 160 450 481 thousand, respectively, comprising 190 150 481

ordinary shares and 160 450 481 ordinary shares, respectively, at a par value of UAH 1 000 per share.

As at 31 December 2017 and 2016, the Company’s additional capital has been adjusted for the effect of

hyperinflation in accordance with the requirements of IAS 29 “Financial Reporting in Hyperinflationary

Economies” by UAH 4 156 259 thousand.

Contributions to unregistered statutory capital

In 2015, according to resolutions of the Cabinet of Ministers of Ukraine adopted during 2014-2015

years, the Government issued UAH 29 700 000 thousand of the State treasury bonds in exchange to the

new share issue of the Company. As at 31 December 2016 the Company has registered the Temporary

share placement certificate. In April 2017 the Company obtained the Permanent share placement report.

Profit share payable to the state budget

For the year ended 31 December 2016, the Company’s subsidiaries paid the profit share to the state

budget in the amount of UAH 1 021 364 thousand.

Profit distribution

Profit available for distribution to the shareholders for each reporting period is determined by reference

to the separate financial statements 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 exceeding retained earnings as calculated in the financial

statements prepared in accordance with International Financial Reporting Standards.




36

12. SHARE CAPITAL (Continued)

According to the Resolution of the Cabinet of Ministers of Ukraine dated 26.04.17 № 282-р share of

the Company’s net profit for 2016 amounting to UAH 13 264 495 thousand was distributed as dividends,

and UAH 1 326 450 thousand forwarded to the Legal reserve. The Company paid this amount together

with respective advance payment of income tax in June 2017.

At the date when these financial statements were authorised for issue, basic allowance for profit

distribution per results of 2017 was set at 75% of net profit. The Company has accrued respective

provision in respect of the portion of net profit attributable to the State Budget of Ukraine in current

provisions (Note 14). According to the Ukrainian legislation, the Company has to make a decision in

respect of profit distribution up to 30 April, and make payment to the State Budget of Ukraine up to 30

June of the year following the reporting year.

13. BORROWINGS

The Company’s borrowings were as follows:


2017

31 December

2016

Non-current

Bank borrowings 14 117 317 22 971 585

Total non-current portion 14 117 317 22 971 585

Current

Bank borrowings 25 009 792 24 889 042

Current portion of long-term borrowings and bonds 17 101 897 19 388 256

Interest accrued 474 809 622 988

Total current portion 42 586 498 44 900 286

Total 56 703 815 67 871 871

In 2017 the Company has concluded additional agreements with two state-owned banks in respect of

decreasing interest rates and changes to the borrowings repayment schedules prolonging their maturities

to 2018-2020, and converting one loan to a revolving credit line. The Company analysed the impact of

such changes to the financial obligations and concluded that they lead to no material changes in their

value.

In December 2017 the Company has completed redemption of bonds amounting to

UAH 4 800 000 thousand that were guaranteed by the State. The Company has fulfilled all its

obligations during the bonds circulation period.




37

13. BORROWINGS (Continued)

The effective interest rates and currency denomination of borrowings were as follows:

In thousands of Ukrainian hryvnias


Carrying

amount % per annum

Carrying

amount % per annum

US dollars 25 559 046 6.4 41 746 656 7.7

UAH 20 551 422 17.6 26 125 215 18.9

Euro 10 593 347 1.9 - -

Total 56 703 815 67 871 871

Pledges

As at 31 December 2017 and 2016 the Company’s borrowings were secured by the following assets:


2017

31 December

2016

Proceeds from future sales 34 574 649 136 966 120

Inventories (Note 8) 37 061 723 42 545 343

Guarantees. As at 31 December 2017, the Company’s borrowings were guaranteed by the State in the

amount of UAH 20 981 549 thousand (31 December 2016: UAH 28 524 443 thousand).

Reconciliation of liabilities arising from financing activities

In thousands of

Ukrainian hryvnias 1 January

2017

Cash flows

from

financing

activities

Non-cash

transactions

Interest

expense

(Note 21)

31 December

2017

Bank borrowings 63 071 871 (37 327 066) 24 352 888 6 606 122 56 703 815

Bonds 4 800 000 (5 278 672) - 478 672 -

Total 67 871 871 (42 605 738) 24 352 888 7 084 794 56 703 815

Non-cash transactions relate to payment for the natural gas acquired by a lending bank to suppliers and

foreign exchange differences on borrowings attracted in foreign currencies.



38

14. NON-CURRENT AND CURRENT PROVISIONS

Movements in provisions were as follows:

In thousands of Ukrainian hryvnias Provision for

litigations

Employee benefit

obligation

Portion of net profit

attributable to the

State Budget of

Ukraine (Note 12)

Other provisions Total

Balance as at 1 January 2016 2 672 215 99 489 - - 2 771 704

Non-current 2 672 215 82 626 - - 2 754 841

Current - 16 863 - - 16 863

Charge for the year 5 259 136 143 040 13 264 495 - 18 666 671

Unwinding of discount (Note 21) - 10 198 - - 10 198

Used or paid during the year (165) (41 898) - - (42 063)

Remeasurements - (38 327) - - (38 327)

Balance as at 31 December 2016 7 931 186 172 502 13 264 495 - 21 368 183

Non-current 7 300 148 45 276 - - 7 345 424

Current 631 038 127 226 13 264 495 - 14 022 759

Charge for the year 125 614 120 555 29 497 614 1 220 290 30 964 073

Unwinding of discount (Note 21) - 5 762 - - 5 762

Used or paid during the year - (108 091) (13 264 495) - (13 372 586)

Provisions reversed during the year (7 300 148) - - - (7 300 148)

Remeasurements - 92 848 - - 92 848

Balance as at 31 December 2017 756 652 283 576 29 497 614 1 220 290 31 758 132

Non-current - 135 283 - - 135 283

Current 756 652 148 293 29 497 614 1 220 290 31 622 849




39

14. NON-CURRENT AND CURRENT PROVISIONS (Continued)

Provision for litigation

The Company is involved in a number of litigation both as a plaintiff and as a defendant. Provision for

litigation represents management assessment of probable outflow of the Company’s resources arising

from a negative (adverse) outcome of court and arbitration procedures.

In 2017 provision for litigations amounting to UAH 7 300 148 thousand was reversed after the court

decision was received in favour of the Company.

Employee benefit obligations

The Company has certain obligations to its employees prescribed by the provisions of collective

agreements. Those benefits include lump sum benefits payable upon retirement and post-retirement

benefit programs. Those employee benefits plans are not funded, and there are no plan assets.

Current provisions for employee benefits consist of provision for performance bonuses per results of

2017 and provision for unused vacations (Note 18).

Other provisions

Other provisions include a current provision for gas storage services.

15. ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES

Advances received and other current liabilities of the Company were as follows:


2017

31 December

2016

Indebtedness under the Gas Sales Arbitration 57 125 342 -

Contributions to the subsidiaries’ statutory capitals payable 3 035 075 3 349 588

Advances received for natural gas 1 185 856 776 957

Advances received on geophysical surveys 236 706 239 716

Accounts payable per court decisions 43 746 481 718

Other advances received and current liabilities 642 982 732 831

Total 62 269 707 5 580 810

On 22 December 2017 the Company received the Final Award of the Arbitral Tribunal in the Gas Sales

Arbitration (Note 23). As at 31 December 2017 the Company recognised its obligations in respect of

this award in other current liabilities. In February 2018 the Company received a legal right to set-off the

amounts owing between the parties pursuant to the Gas Sales Arbitration and Gas Transit Arbitration

(Notes 23 та 26).




40

16. COST OF SALES

Cost of sales for the years ended 31 December was as follows:


Cost of natural gas sold 108 748 691 82 177 035

Gas transmission costs 22 133 710 20 692 744

Non-refundable VAT on gas transit via Ukraine in customs regime 14 788 027 11 997 848

Others 969 136 1 409 771

Total 146 639 564 116 277 398

17. OTHER OPERATING INCOME

Other operating income for the years ended 31 December was as follows:


Income recognised under the Gas Transit Arbitration 57 125 342 -

Net movement in provision for litigations 5 954 244 -

Penalties and fines received 177 750 838 085

Income from transfer of geological surveys to the State

information geological fund 3 010 22 380

Write off of accounts payable 96 13 872

Reversal of provision for impairment of natural gas - 245 132

Other 63 107 80 688

Total 63 323 549 1 200 157

The Arbitral Tribunal decisions dated 22 December 2017 and 28 February 2018 had an effect on the

Company’s separate financial statements as at 31 December 2017 (Note 23). As a result, the Company

recognised income and expense amounting to UAH 57 125 342 thousand and UAH 44 528 046

thousand, respectively (Note 19).

18. ADMINISTRATIVE EXPENSES


Staff costs and related social charges 671 397 544 695

Legal and audit fees 454 531 390 864

Accrual of employee related provisions (Note 14) 120 555 143 040

Depreciation and amortisation 67 806 92 506

Other 246 922 229 683

Total 1 561 211 1 400 788




41

19. OTHER OPERATING EXPENSES

Other operating expense for the years ended 31 December was as follows:


Expense recognised under the Gas Sales Arbitration (Note 23) 44 528 046 -

Net movement in provision for impairment of trade accounts receivable,

non-current accounts receivable, prepayments made, other current

assets, and direct write-offs (Notes 7, 9 and 10) 1 508 013 4 546 182

Fines and penalties 310 832 129 386

Net operating foreign exchange loss 103 179 1 150 336

Research, development, and exploration costs 45 302 -

Professional fees 21 047 48 555

Write off of VAT receivable 190 77 109

Change in provision for litigations - 5 259 136

Depreciation and amortisation - 801

Other 15 870 61 955

Total 46 532 479 11 273 460

20. OTHER EXPENSES

In 2017, other expenses included net non-operating foreign exchange loss in the amount of

UAH 1 291 851 thousand (2016: net losses in the amount of UAH 4 890 400 thousand).

21. FINANCE COSTS


Interest expenses on bank borrowings and bonds 7 084 794 8 083 575

Bank commissions and fees 268 981 23 451

Unwinding of discount on employee benefit obligations (Note 14) 5 762 10 198

Loss on initial recognition of financial assets at amortised cost - 59 865

Other 4 597 4 548

Total 7 364 134 8 181 637

22. INCOME TAX

The components of income tax expense/(benefit) for the years ended 31 December were as follows:


Current income tax 10 035 127 -

Deferred income tax 1 921 167 (2 630 000)

Income tax expense/(benefit) 11 956 294 (2 630 000)

The Company is subject to taxation in Ukraine. In 2017 and 2016, the Ukrainian corporate income tax

was levied on taxable profit, less allowable income and expenses that are not deductible for tax purposes

at the rate of 18%. According to the Tax Code of Ukraine, dividend payment has certain income tax

implications for the Company. As a result, during 2017 the Company has performed an advance payment

on income tax of UAH 2 387 609 thousand, representing 18% of dividend payment.




42

22. INCOME TAX (Continued)

Reconciliation between the expected and actual tax charges is provided below:


Profit before income tax 51 286 446 23 898 989

Income tax expense at the statutory rate of 18% 9 231 560 4 301 818

Tax effect of items that are non-deductible or non-taxable for taxation

purposes:

- Permanent differences, net (63 993) (55 540)

- Change in unrecognised deferred tax asset 2 788 727 (6 876 278)

Income tax expense/(benefit) 11 956 294 (2 630 000)

Net deferred tax asset as at 31 December 2017 was as follows:


2016

Recognised in

profit or loss

Recognised in

other

comprehensive

income

31 December

2017

Provisions - 363 488 16 713 380 201

Inventories - 263 682 - 263 682

Trade accounts payable and

deferred income - 56 638 - 56 638

Property, plant and equipment - 25 025 - 25 025

Tax losses carried forward 2 630 000 (2 630 000) - -

Net deferred tax asset 2 630 000 (1 921 167) 16 713 725 546

As at 31 December 2017 and 2016, unrecognised deductible temporary differences were:

У тисячах гривень 31 December

2017

31 December

2016

Provisions 45 529 008 8 977 422

Inventories 9 326 698 11 057 125

Tax losses carried forward - 19 328 233

Total 54 855 706 39 362 780

Unrecognised deductible temporary differences as at 31 December 2016 were subsequently adjusted as

in 2017 the Company has submitted amended corporate income tax return in relation to prior periods.

These adjustments did not have an impact to the current income tax expense in 2016.

The Company has recognised deferred tax assets based on assumption that the future taxable profits will

be available to realise respective temporary differences in future periods.




43

23. CONTINGENCIES AND CONTRACTUAL 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 taxpayers. 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. Management believes that the Company has been in

compliance with all requirements of the effective tax legislation.

In the course of regular business activities, the Company enters into transactions, which can be treated by tax

authorities contrary to the way they are interpreted by the Company. In the event a probability of outflow of

financial resources related to such transactions is high, and its amount can be reliably measured, the Company

accrues a provision for such obligations. When the Company’s management estimates the probability of

outflow of financial resources as likely, the Company discloses contingent liabilities.

As at 31 December 2017, the Company’s management estimated a potential impact of such

transactions in the total amount of UAH 87 288 thousand (31 December 2016:

UAH 88 624 thousand). Additionally, the Company is involved in litigation with the tax authorities

in respect of its VAT obligations on total amount of UAH 60 426 thousand.

Arbitral Tribunal requests

Gas Sales Arbitration

The Gas Sales Arbitration was initiated by both Naftogaz and Gazprom on 16 June 2014 under the

auspices of the Arbitration Institute of the Stockholm Chamber of Commerce. In its Request for

Arbitration, Gazprom claimed payment of unpaid invoices for gas delivered under the Gas Sales

Contract from November 2013 to May 2014, while Naftogaz claimed a retroactive revision of the price

under the Gas Sales Contract, and compensation for previous overpayments under the prices applied

before the revision.

In addition, Gazprom has later added a claim for payment of gas which Gazprom did not deliver, but

which Naftogaz allegedly nevertheless was obliged to pay for under the Contract (the “take or pay”

claim).

On 31 May 2017 The Arbitral Tribunal rendered a separate award in the Gas Sales Arbitration. The

separate award is final and legally binding, and sets all legal and factual issues required to resolve the

parties’ claims except for certain elements and/or values of a numeric or quantifiable nature that had to

be defined before the Final Award. The Tribunal in its award of 31 May 2017: (a) totally rejected

Gazprom’s “take or pay” monetary claim; (b) declared “take or pay” claim invalid from the date of the

Contract; (c) decided that Naftogaz is entitled to a market-reflective reduction of the sales price and to

gas market indexation of the price formula, with retrospective effect from April 2014; (d) has declared

invalid provisions in the Gas Sales Contract in respect of a destination clause, illegally prohibiting sales

of the gas outside of Ukraine.




44


(Continued)

The Tribunal has obliged the parties to determine the elements of gas price formula to be used for gas

supplies starting from 27 April 2014 through negotiations. Such negotiations took place during June-

August 2017, but the parties failed to reach agreement on remaining issues, and thus, the Tribunal had

to decide on such issues on its own. After additional oral hearings in October 2017, all remaining issues

and any resulting monetary claims were left for the final award.

On 7 November 2017 Gazprom has challenged the separate award on Gas Sales Arbitration in the Court

of Appeal of Svea (Stockholm).

On 22 December 2017 the Arbitral Tribunal rendered the Final Award in the Gas Sales Arbitration,

stating the following:

Contract price for natural gas shall be calculated with 100% reference to the European hub price

under the revised price formula.

Gazprom “take or pay” claim was fully rejected.

Annual contract quantity (“ACQ”) of gas that Naftogaz is obliged to purchase during 2018-2019

was set at the level of 5.0 billion cubic metres. This Final Award also contains a quarterly

distribution of gas deliveries in 2018.

The contractual annual volume of gas on “take or pay” terms (“MAQ”) was set as 80% of ACQ.

It is not responsibility of Naftogaz to pay for gas volumes delivered to occupied territories of the

Donetsk and Luhansk regions to the parties other than Naftogaz.

As a result, as set in the Final Award, and taking the obligation to pay for gas consumed but not

paid for in 2014, Naftogaz was ordered to pay to Gazprom USD 2 019 million and late payment

interest in amount equal to 0.03% on any amount overdue for each day of delay in payment after

22 December 2017 until the payment has been made. Later, on 17 January 2018, the Arbitral

Tribunal has amended this amount, and has set a net payable from Naftogaz to Gazprom at the level

of USD 2 030 million plus respective late payment interest after 22 December 2017.

During January-February 2018 Naftogaz and Gazprom had a number of negotiations to agree the gas

supply process in 2018. Following the Final Award in this case, in February 2018 Naftogaz has made a

prepayment for gas deliveries to be made in March 2018. However, Gazprom has returned this payment

and refused to make gas supplies in March 2018. Such actions from Gazprom currently prevent Naftogaz

from fulfilling the Final Award requirements in respect of offtaking MAQ volumes in 2018, and could

result in a new claim from Naftogaz in respect of compensation for losses against Gazprom. The

Company considers Gazprom’s refusal to supply gas as a contractual violation and non-compliance with

the Tribunal’s Final Award.




45


(Continued)

Gas Transit Arbitration

Naftogaz initiated the Gas Transit Arbitration on 13 October 2014 under the auspices of the Arbitration

Institute of the Stockholm Chamber of Commerce. In its Statement of Claim, Naftogaz claimed a

revision of the transit tariff with retroactive effect, compensation for underpayments as a result of tariff

revision, compensation for underdeliveries, amendments to the Gas Transit Contract authorising

Naftogaz to assign its rights and obligations under the Contract to “Ukrtransgas” PJSC or any other

entity designated as transmission system operator, and certain other adjustments to the Contract.

As at 31 December 2017, Naftogaz’s maximum monetary claim stood at more than USD 12.5 billion

including interest (up to USD 10.6 billion excluding interest). Gazprom has submitted a counterclaim

in amount of approximately USD 7.0 million including interest (up to USD 5.3 million excluding

interest), but has reserved the right to make additional counterclaims after receiving the award in the

Gas Sales Arbitration.

Both the Gas Sales Arbitration and the Gas Transit Arbitration were initiated by Naftogaz following

unsuccessful efforts to reach agreement with Gazprom in negotiations. The monetary claims in both

Arbitrations have been updated on a continuous basis until the awards, inter alia in respect of interest

calculations.

On 28 February 2018 the Arbitral Tribunal rendered the Final Award in the Gas Transit Arbitration,

stating the following:

Naftogaz’s claim for minimum contractual volume of gas transit (underdeliveries) during 2009-

2017 was decided in favour of Naftogaz. As a result, the Tribunal awarded USD 4 674 million to

be paid in favour of Naftogaz by Gazprom for its failure to deliver minimum gas transit contract

volumes. This amount represents compensation of losses in this respect, plus interest up to

28 February 2018.

Naftogaz also claimed compensation of VAT that arises on damages awarded to Naftogaz for

underdeliveries, taking effect since 1 January 2016. However, the Tribunal has rejected such claim

from Naftogaz.

Naftogaz’s claim for underpayments were not supported, as Naftogaz in its request for transit tariff

revision in 2009 did not follow the contractual requirements. At the same time, transit tariff was

retrospectively revised in relations to the adjustment to the transit tariff as a result of the gas price

made by the Tribunal in the Gas Sales Arbitration.

The Tribunal rejected Naftogaz claim in respect of the possibility to assign its rights and obligations

under the Contract to “Ukrtransgas” PJSC or any other entity designated as transmission system

operator.

The Tribunal has also rejected Naftogaz claim in respect of adjustments to the Gas Transit Contract

according to the EU competition and energy law, stating that it is not the role of the Tribunal to

implement reforms in Ukraine but should be decided by the Ukrainian government.




46


(Continued)

Further, the Tribunal has 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 separate financial statements. Taking numerous public statements

by Gazprom to appeal the final award in the Gas Transit Arbitration, and the fact that the amount was

not settled by the date of these separate 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 December 2017.

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, Gazprom has officially suggested to amend both

contracts or to terminate them, and thus to reverse the awards of the Tribunal. Gazprom actions violate

and neglect the awards rendered by the Tribunal that are final and binding for Gazprom. Naftogaz finds

this position unacceptable and has rejected Gazprom’s proposals to make amendments to the contracts.

At the date of these separate financial statements Naftogaz is waiting for Gazprom’s answer to

Naftogaz’s request in respect of the tariff revision for gas transit from the Russian Federation to the EU

after the contract expiry in 2019.

Despite the fact that the Tribunal has rejected Naftogaz claim on VAT compensation of losses for

underdeliveries after 1 January 2016, Naftogaz treats the amount awarded as a contractual price of

services 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.

Claim to the Russian Federation regarding assets in Crimea. In October 2016, Naftogaz and its

subsidiaries –“Chornomornftogaz” PJSC, “Ukrtransgaz” PJSC, “Likvo” SE, “Ukrgasvydobyvannia”

PJSC, “Ukrtransnafta” PJSC and “Gas Ukraiiny” SE – initiated Arbitration proceeding against the

Russian Federation about reimbursement of losses caused by unlawful occupation of their 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 named above submitted the Statement of Claim to

the Tribunal under the auspices of Permanent Court of Arbitration in Hague. Total damage caused by

unlawful expropriation of Crimea is estimated at over USD 5.0 billion. The tribunal’s final award is

expected by the end 2018.




47


(Continued)

Claim to the Cabinet of Ministers of Ukraine in respect of compensation for performing the public

service obligations. In May 2017, the Company initiated a claim against the Cabinet of Ministers of

Ukraine in respect of its failure to identify formula and sources of financing the compensation for

performing public service obligations when approving the PSO Resolution (Note 2).

Legal proceedings. From time to time and in the normal course of business, claims against the Company

arise. 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 litigation. 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 the respective amount

is disclosed in the separate financial statements. Management believes that it has provided for all

material losses in these separate financial statements.

The Company and certain suppliers are in the process of claims settlement on return and/or pay for the

natural gas consumed in prior years. Management estimated the liabilities under such claims in the

amount of UAH 3 757 157 thousand as at 31 December 2017 and UAH 4 678 264 thousand as at

31 December 2016. Management cannot reliably estimate the amount of potential losses on these

obligations, if any.

Possible transfer of the Company’s equity interest in subsidiaries to the state. In 1998, upon creation

of the Company, the Government of Ukraine contributed certain shares of joint stock companies to the

share capital of the Company. These joint stock companies included “Long-Distance Pipeline

“Druzhba” JSC and “Prydniprovskyi Long-Distance Pipeline” JSC that were reorganised in 2001 into

“Ukrtransnafta” JSC, “Ukrspetstransgaz” JSC, “Chornomornaftogaz” JSC, “Ukrnafta” JSC, and fifty

four regional gas distribution entities. The Government of Ukraine may transfer ownership or control

over all or part of the Company’s equity interest in those joint stock companies and/or other state-owned

oil and gas transportation and storage facilities to other companies or government agencies, and those

actions could have a material adverse effect on the Company’s operations.

State property not subject to privatisation. In 1998, the Company entered into an agreement “On the

Use of State Owned Property not Subject to Privatization” (the “Agreement”) with the State Property

Fund of Ukraine, and received oil and gas transportation system into its operational control. The

Agreement was signed for one year, and its term is prolonged automatically for one year, unless

terminated by a notice from either party, and is binding on the legal successor of each party. Historically,

the Agreement was prolonged automatically, as neither party initiated its termination. As the state

property not subject to privatisation forms an essential part of the Company’s business, the future

operations and financial performance of the Company depend on the prolongation of the Agreement.

The Company’s management believes that the Company will continue to operate with this property in

the foreseeable future.




48


(Continued)

Pursuant to the Agreement, the Company is required, inter alia, to handle oil and gas transportation and

distribution pipelines owned by the state of Ukraine, keep the state property in adequate operational

condition, and transfer 50% share of profits received from using those assets to the state. The amount

of such a transfer could be reduced by the amount of capital investments of those assets. The Agreement

does not provide a mechanism for such calculations and, historically, there were no payments from the

Company to the state in respect of using such assets. The Company believes that had the mechanism for

calculating the state share in profits from using the assets been determined by the state, the capital

investments performed by the Company would be greater, and no payment in favour of the state would

occur. Accordingly, no liability for such payment was recognised in these separate financial statements.

24. FINANCIAL RISK MANAGEMENT

The Company’s activities expose it to a variety of financial risks: market risk (including currency risk

and interest rate risk), concentration risk, credit risk, and liquidity risk. The Company reviews and

agrees risk management policies to minimise the potential adverse effects on the Company’s financial

performance for those risks.

Major categories of financial instruments were as follows:

In thousands of Ukrainian hryvnias Note

31 December

2017

31 December

2016

Accounts receivable for products, goods, works, services 9 57 474 372 54 719 178

Other current accounts receivable 10 264 160 189 287

Other current assets 10 1 489 567 -

Current financial investments 11 - 679 771

Cash and cash equivalents 11 18 485 661 17 660 966

Non-current financial investments accounted for under the

equity method 6 413 980 172 447 973 804

Other non-current financial investments 6 103 257 103 257

Non-current accounts receivable and other non-current assets 7 459 112 821 750

Total financial assets 492 256 301 522 148 013

In thousands of Ukrainian hryvnias Note

31 December

2017

31 December

2016

Borrowings 13 (56 703 815) (67 871 871)

Trade accounts payable (43 940 911) (49 679 418)

Other current liabilities 15 (3 657 119) (4 065 959)

Total financial liabilities (104 301 845) (121 617 248)

Market risk. The Company is exposed to market risks. Market risks arise from open positions in

(a) foreign currencies, (b) interest bearing assets and liabilities, and (c) equity investments, all of which

are exposed to general and specific market movements.

Currency risk. The Company operates within Ukraine and its exposure to foreign currency risk is

determined mainly by purchase of natural gas from foreign suppliers, which are denominated in USD

and EUR. The Company also receives borrowings in foreign currencies. The Company does not hedge

its foreign currency positions.




49

24. FINANCIAL RISK MANAGEMENT (Continued)

The Company’s exposure to foreign currency risk is as follows, based on the carrying amounts of

respective foreign currency denominated assets and liabilities:

In thousands of

Ukrainian hryvnias


USD EUR Other USD EUR Other

Trade accounts

receivable 6 989 190 - - 6 616 570 - -

Other current

accounts receivable 3 112 - - - - -

Other current assets 538 857 950 710 - - - -

Current financial

investments - - - 679 771 - -

Cash and cash

equivalents 16 805 531 1 199 940 48 721 15 579 615 438 797 66 661

Non-current accounts

receivable and

other non-current

assets - 306 788 - - 244 682 -

Borrowings (25 559 046) (10 593 347) - (41 746 656) - -

Trade accounts

payable (3 377) (3 549 325) (3 776) (13 240 277) (265 328) (3 776)

Other current

liabilities (136 526) (67 492) - (87 293) (7) -

Net (short) long

currency position (1 362 259) (11 752 726) 44 945 (32 198 270) 418 144 62 885

The following table presents sensitivities of profit or loss before tax and equity, to reasonably possible

changes in exchange rates applied at the reporting dates, with all other variables held constant.

The exposure was calculated only for monetary balances denominated in foreign currencies, other than

the functional currency of the Company. Since the most significant impact on the Company’s operations

is fluctuations in USD/EUR exchange rates against UAH, the risk exposure was calculated only for the

balances denominated in those currencies.


31 December 2017

Impact on

profit or loss

before income

tax

Impact on

equity before

income tax

USD strengthening by 20% (272 452) (272 452)

USD weakening by 10% 136 226 136 226

EUR strengthening by 20% (2 350 545) (2 350 545)

EUR weakening by 10% 1 175 273 1 175 273




50



31 December 2016

Impact on

profit or loss

before income

tax

Impact on

equity before

income tax

USD strengthening by 20% (6 439 654) (6 439 654)

USD weakening by 10% 3 219 827 3 219 827

EUR strengthening by 20% 83 629 83 629

EUR weakening by 10% (41 814) (41 814)

Interest rate risk. The Company normally has no significant interest bearing assets, and its income and

operating cash flows are substantially independent of changes in market interest rates. The Company’s

interest rate risk exposure arises from borrowings at variable interest rates. Borrowings at fixed rates

expose the Company to fair value interest rate risk.

The Company attracts borrowings at both fixed and floating interest rates. As at 31 December 2017

almost 34% of the Company’s borrowings were provided to the Company at floating rates

(31 December 2016: 12%). The risk of increase in market interest rates is monitored by the Treasury

department of the Company. The key objective of managing interest rate risk is to get financing at

a minimum costs, and match the liquidity needs with the proceeds from borrowings.

The borrowing activities are reviewed during annual budgeting process. Long-term investing activities

and associated funding are considered separately and are subject to approval of the Government of

Ukraine.

The maturity dates of financial instruments are further disclosed in this Note.

Re-pricing for fixed rate financial instruments occurs at their maturity. Re-pricing for floating rate

financial instruments occurs continually.

If floating interest rates on USD and EUR denominated borrowings had been 100 basis points higher as

at 31 December 2017 with all other variables remaining constant, net profit for 2017 would have been

UAH 149 450 thousand lower (2016: UAH 40 099 thousand lower).

Concentration risk. During the years ended 31 December 2017 and 2016, the external customers

revenues from whom exceeded 10% of total revenues were “Gazprom” PJSC and “Ukrtransgaz” PJSC.

Revenue from sales to “Gazprom” PJSC is attributable to the segment of gas transit for these periods

and amounted to UAH 73 937 144 thousand and UAH 59 986 448 thousand, respectively.

Revenue from sales to “Ukrtransgaz” PJSC is attributable to the segment of gas trading for these periods

and amounted to UAH 24 542 275 thousand and UAH 16 307 679 thousand, respectively.




51


Credit risk. The Company takes on exposure to credit risk, which is the risk that one party to a financial

instrument will cause a financial loss for the other party by failing to discharge an obligation. Exposure

to credit risk arises as a result of the Company’s sales of products on credit terms and other transactions

with counterparties giving rise to financial assets. The Company’s policies are that the customers that

wish to pay on credit terms are subject to the solvency review. Significant outstanding balances are also

reviewed on an ongoing basis. At the same time, the Company must follow the state regulations as a

guaranteed supplier of natural gas to the households and state-owned entities irrespective whether they

are settling their obligation or not.

The Company establishes a provision for impairment that represents its estimate of incurred losses in

respect of trade accounts receivable. The main components of this provision are a specific loss

component that relates to individually significant exposures.

The Company does not hold any collateral as a security for its credit risks related to financial assets.

Liquidity risk. Prudent liquidity management implies maintaining sufficient cash and the availability

of funding to meet the existing obligations as they fall due. The Company’s objective is to maintain a

balance between the continuity of funding and flexibility through the use of credit terms provided by

suppliers and banks. Prepayments are commonly used to manage both liquidity and credit risks. The

Company analyses ageing of its assets and maturity of its liabilities and plans liquidity depending on

their expected repayment.

The following table analyses the Company’s financial liabilities into relevant maturity groupings based

on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in

the table are undiscounted cash flows of principal and interest payments. The maturity analysis of

financial liabilities as at 31 December was as follows:

31 December 2017 In thousands of

Ukrainian hryvnias Up to 6

months

6-12

months 1-2 years 2-5 years

Over

5 years Total

Borrowings 24 631 600 22 124 853 6 015 292 10 937 442 - 63 709 187

Trade accounts

payable 43 940 911 - - - - 43 940 911

Other current

liabilities 3 657 119 - - - - 3 657 119

Total 72 229 630 22 124 853 6 015 292 10 937 442 - 111 307 217




52


31 December 2016 In thousands of

Ukrainian hryvnias Up to 6

months

6-12

months 1-2 years 2-5 years

Over

5 years Total

Borrowings 31 276 618 19 293 101 15 976 033 12 122 577 - 78 668 329

Trade accounts

payable 49 679 418 - - - - 49 679 418

Other current

liabilities 4 029 706 - - - - 4 029 706

Total 84 985 742 19 293 101 15 976 033 12 122 577 - 132 377 453

Gearing ratio. Consistent with others in the industry, the Company monitors capital on the basis of a

gearing ratio. This ratio is calculated as net liabilities divided by total capital under management. Net

debt is calculated as total borrowings (current and long-term as shown in the separate statement of

financial position), less cash and cash equivalents. Total capital under management equals equity as

shown in the statement of financial position.

The gearing ratio at the end of the reporting period was as follows:


2017

31 December

2016

Borrowings (Note 13) 56 703 815 67 871 871

Less: Cash and cash equivalents (Note 11) (18 485 661) (17 660 966)

Total net debt 38 218 154 50 210 905

Total equity 431 503 975 447 838 047

Gearing ratio 0.09 0.11

25. FAIR VALUE

IFRS define fair value as the price that would be received to sell an asset or paid to transfer a liability in

an orderly transaction between market participants at the measurement date.

The estimated fair values have been determined by the Company using available market information,

where it exists, and appropriate valuation methodologies. However, judgment is required to interpret

market data to determine the estimated fair value. Management has used all available market information

in estimating the fair value. The estimates presented herein are not necessarily indicative of the amounts

the Company could realise in a market exchange from the sale of its full holdings of a particular

instrument or pay in the transfer of liabilities.




53

25. FAIR VALUE (Continued)

Fair value of the Company’s financial assets and financial liabilities that are not measured at fair

value on a recurring basis (but fair value disclosure is required)

Except as detailed in the following table, management considers that the carrying amounts of financial

assets and financial liabilities recognised in the separate financial statements approximate their fair

values:



Carrying

amounts Fair value

Carrying

amounts Fair value

Restructured accounts receivable of

gas consumers net of provision

(Note 7) 152 324 149 410 577 068 582 692

Borrowings (Note 13) 56 703 815 57 197 807 67 871 871 68 047 850

The following table provides information about how the fair value of financial assets and liabilities is

determined (in particular, the valuation techniques and inputs used):

Financial assets/liabilities Fair value

hierarchy

Valuation techniques and key inputs

Restructured accounts

receivable of gas

consumers net of

provision

2 Discounted cash flows.

Future cash flows are estimated based on the inputs that

are observable, either directly or indirectly, and the

estimates use one or more observable quoted prices for

orderly transactions in the markets that are not considered

active. The fair value of restructured accounts receivable

was estimated using interest rates for UAH denominated

deposits of 11.5% per annum (31 December 2016: 10.9%).

Borrowings 2 Discounted cash flows.

Future cash flows are estimated based on the inputs that

are observable, either directly or indirectly, and the

estimates use one or more observable quoted prices for

orderly transactions in the markets that are not considered

active. The fair value of borrowings was estimated using a

range of interest rates for UAH denominated borrowings,

15.0%-19.7% per annum (31 December 2016: 15.7%-

21.1%% per annum), USD denominated borrowings,

4.9%-5.9% per annum (31 December 2016: 6.6%-9.1%

per annum) and EUR denominated borrowings 6.6%-9.1%

per annum).




54

26. SUBSEQUENT EVENTS

Refusal of “Gazprom” PJSC from fulfilling the Final Award requirements rendered by the

Arbitration Institute of the Stockholm Chamber of Commerce. On 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 (Note 23). 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 has made a prepayment of USD 127 624 thousand for gas deliveries to be made in

March 2018.

However, Gazprom has returned this payment and refused to make gas supplies in March 2018, and has

decreased pressure level in transmission gas lines at their side of the gas transmission system by 20% at

1 March 2018. As a result, the Company had to cover deficit in gas volumes from more expensive

sources of supply at the Western border of Ukraine.

As described in Note 23, such actions from Gazprom currently prevent Naftogaz from fulfilling the

Final Award requirements in respect of offtaking MAQ volumes in 2018.

Recognition of the Arbitral Tribunal Final Awards. The Company has received a legal right to set-off

the amounts owing between the parties pursuant to the Gas Sales Arbitration and Gas Transit Arbitration

in February 2018, and further accounts for the amounts recognised as at 31 December 2017 in current

assets and current liabilities on a net basis in its statement of financial position (Notes 10, 15 and 23).

Claim against “Ukrtransgaz” PJSC in respect of debt settlement. In February 2018 the Company has

initiated a claim against “Ukrtransgaz” PJSC in respect of settling its debts of UAH 5 187 400 thousand

under the gas sales agreement for gas supply for technological needs during January-April 2017. Court

hearings are planned for April 2018.

Prolongation of the PSO Resolution. The Cabinet of Ministers of Ukraine with its Resolution dated

28 March 2018 №228 has prolonged the period of performing public service obligations by the

Company (Note 2) up to 1 June 2018.

Loans repayment. Subsequent to the balance sheet date and up to the date of these separate financial

statements the Company repaid UAH 22 981 982 thousand of bank borrowings. This amount includes

redemption of financing facility from the EBRD concluded in October 2015 that was completed by the

Company on 22 January 2018.




55

27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Statement of compliance. These financial statements represent the Company’s separate financial

statements prepared in accordance with International Financial Reporting Standards (“IFRS”) in respect

of preparation and presentation of separate financial statements of entities as it is required by law. Thus,

these separate financial statements differ from the consolidated financial statements also prepared by

the Company which incorporate the financial statements of the Company and its subsidiaries and present

them as a single entity by consolidating similar items of assets and liabilities, income and expense, and

cash flows of the Company with similar items of its subsidiaries. In these separate financial statements,

investments in subsidiaries are accounted for using equity method.

Basis of preparation. The separate financial statements have been prepared on the historical cost basis,

except for certain property, plant and equipment that are measured at revalued amounts, as explained in

the accounting policies below. Historical cost is generally based on the fair value of the consideration

given in exchange for goods and services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date regardless of whether that price is

directly observable or estimated using another valuation technique.

These policies have been consistently applied to all periods presented, unless otherwise indicated.

Functional and presentation currency. Items included in the separate financial statements of the

Company are measured using the currency of the primary economic environment in which the Company

operates (the “functional currency”). The separate financial statements are presented in Ukrainian

Hryvnias (“UAH”), which is the Company’s functional currency. All amounts presented in the separate

financial statements are presented in UAH rounded to the nearest thousand, unless otherwise indicated.

Transactions denominated in currencies other than the relevant functional currency are translated into

the functional currency using the exchange rate prevailing at the date of the transaction. Foreign

exchange gains and losses arising from settlement of such transactions and from translation of monetary

assets and liabilities denominated in foreign currency at the end of year are recognised in the statement

of profit or loss. Translation at year-end does not apply to non-monetary items, including equity

investments. The effects of exchange rate changes on the fair value of equity securities are recorded as

part of the fair value gain or loss.

As at 31 December, the exchange rates used for translating foreign currency balances were as follows:

In Ukrainian hryvnias 2017 2016

USD 1.00 28.07 27.19

EUR 1.00 33.50 28.42




56

27. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Foreign exchange restrictions in Ukraine are limited to compulsory receipt of foreign currency

denominated receivables within 180 days of sales and to compulsory conversion of 50% of proceeds in

foreign currency to UAH. At present, UAH is not freely convertible outside Ukraine.

Investments in subsidiaries and associates. Investments in subsidiaries and associates comprise:

subsidiaries and associates with the ownership interest of 50% and more, over which the Company

has a significant influence in managing their business activities;

associates are entities over which the Company has a significant influence but not control.

The above investments are accounted for by the Company using equity method of accounting, with the

Company’s respective interest in net gains or losses of subsidiaries and associates recorded in the

statement of profit or loss and the Company’s respective interest in other comprehensive income of such

entities recorded in comprehensive income.

Interest in joint operations. A joint operation is a joint arrangement whereby the parties that have joint

control of the arrangement have rights to the assets and obligations for the liabilities relating to the

arrangement. Joint control is the contractually agreed sharing of control of an arrangement which exists

only when decisions about the relevant activities require unanimous consent of the parties sharing

control.

When the Company undertakes its activities under joint operations, the Company as a joint operator

recognises in relation to its interest in a joint operation:

its assets, including its share of any assets held jointly;

its liabilities, including its share of any liabilities incurred jointly;

its revenue from the sale of its share of the output arising from the joint operation;

its share of the revenue from the sale of the output by the joint operation; and

its expenses, including its share of any expenses incurred jointly.

The Company accounts for assets and liabilities, income and expense relating to its interest in a joint

operation in accordance with IFRSs applicable to particular assets, liabilities, income, and expense.

When the Company’s entity transacts with a joint operation in which the Company’s entity is a joint

operator (such as a sale or contribution of assets), the Company is considered to be conducting the

transaction with the other parties to the joint operation, and gains and losses resulting from the

transactions are recognised in the Company’s separate financial statements only to the extent of other

parties’ interests in the joint operation.

Concession agreement (product sharing agreement). The Company entered into a concession

agreement for hydrocarbon exploration and development (the “Concession Agreement”) with the Arab

Republic of Egypt and Egyptian General Petroleum Corporation (“EGPC”) on 13 December 2006.




57


The Concession Agreement includes the following terms and conditions:

Subject to the procedure under the Concession Agreement, the Company shall recover on a quarterly

basis all exploration and development costs to the extent and out of 25% of all petroleum produced

and accumulated from all production areas and not used in petroleum operations (“Cost Recovery”).

Petroleum products under the Concession Agreement include crude oil or gas and LPG.

The remaining 75% of the petroleum produced is shared by the Company and EGPC depending on

the volume of production and the product type (crude oil or gas and LPG). The Company’s share

varies from 15% to 19%.

EGPC shall become the owner of all the Company’s assets acquired and owned within the

Concession Agreement, which assets were charged to Cost Recovery by the Company in connection

with the operations carried out by the Company: the land shall become the property of EGPC as

soon as it is purchased; title to fixed and movable assets shall be transferred automatically and

gradually from the Company to EGPC as they become subject to Cost Recovery.

The development period under the Concession Agreement is limited to maximum 25 years from the date

of commercial oil discovery or from the date of first gas deliveries started in 2010.

Accounting for all exploration and evaluation and other costs and income related to the product sharing

agreement is similar to accounting for a normal production process, as described in this Note.

Segment reporting. Operating segments are reported in a manner consistent with the internal reporting

provided to the Company’s Chief operating decision maker. Segments whose revenue, results, or assets

are ten percent or more of all the segments are reported separately. Segments falling below this threshold

can be reported separately at management’s decision.

Property, plant, and equipment. The Company uses the revaluation model to measure property, plant,

and equipment. Fair value was based on valuations by external independent appraisers. The frequence

of revaluations depends on the movements in the fair values of the assets being revalued. The last

independent valuation of the fair value of the Company’s property, plant, and equipment was performed

as at 31 December 2015.

Subsequent additions to property, plant, and equipment are recorded at cost. Cost includes expenditure

directly attributable to acquisition of the items. The cost of self-constructed assets includes the cost of

materials, direct labor, and an appropriate portion of production overheads. Сost of acquired and self-

constructed qualifying assets includes borrowing costs.

Any increase in the carrying amounts resulting from revaluations are credited to other reserves in equity

through other comprehensive income. Decreases that offset previsouly recognised increases of the same

asset are charged against other reserves in equity through other comprehensive income; all other

decreases are charged to the statement of profit or loss.




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To the extent that an impairment loss on the same revalued asset was previously recognised in the

statement of profit or loss, a reversal of that impairment loss is also recognised in the statement of profit

or loss.

Expenditure incurred to replace a component of an item of property, plant, and equipment that is

accounted for separately is capitalised with the carrying amount of the replaced component being written

off. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as

appropriate, only when it is probable that future economic benefits associated with the item will flow to

the Company and the cost of the item can be measured reliably. The carrying amount of the replaced

part is derecognised. All other repairs and maintenance are charged to the statement of profit or loss

during the financial period in which they are incurred. Property, plant, and equipment are derecognised

upon disposal or when no future economic benefits are expected from the continued use of the asset.

Gains and losses on disposal determined by comparing proceeds with carrying amount of property, plant,

and equipment are recognised in the statement of profit or loss. When revalued assets are sold, the

amounts included in other reserves are transferred to retained earnings.

Construction in progress includes also prepayments for property, plant and equipment.

Exploration expense. Exploration expenses comprise the costs associated with unproved reserves.

These include geological and geophysical costs for the identification and investigation of areas with

possible oil and gas reserves and administrative, legal, and consulting costs in connection with

exploration.

Research and development expenses. Research and development (R&D) expenses include all direct

and indirect materials, personnel and external services, costs incurred in connection with the focused

search for new development techniques and significant improvements in products services and

processes, and in connection with research activities. Expenditure related to research activities is shown

as R&D expenses in the period in which it is incurred. Development costs are capitalised if the

recognition criteria according to IAS 38 “Intangible Assets” are fulfilled.

Depreciation. Depreciation is charged to the statement of profit or loss on a straight-line basis to allocate

costs of individual assets to their residual values over their estimated useful lives. Depreciation

commences on the date of acquisition or, in respect of self-constructed assets, from the time an asset is

completed and ready for use. Other property, plant, and equipment are depreciated on a straight line

basis over their expected useful lives. The typical useful lives of the Company’s other property, plant,

and equipment are as follows:

Useful lives, years

Machinery and equipment 5-12

Buildings 20-40

Other fixed assets 3-6

Construction in progress is not depreciated.




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Intangible assets. Intangible assets have definite useful lives and primarily include capitalised computer

software. Acquired computer software is capitalised on the basis of the costs incurred to acquire and

bring them to use. Intangible assets are carried at cost, less accumulated amortisation and impairment

losses, if any. If impaired, the carrying amount of intangible assets is written down to the higher of value

in use and fair value, less costs to sell.

Leases. Leases in which a significant portion of the risks and rewards of ownership are retained by a

lessor are classified as operating leases. Payments made under operating leases (net of any incentives

received from the lessor) are charged to the statement of profit or loss on a straight-line basis over the

period of the lease. Finance leases are capitalised at the lease commencement at the lower of the fair

value of the leased property and the present value of the minimum lease payments.

Impairment of non-financial assets. Assets are reviewed for impairment whenever events and changes

in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is

recognised for the amount by which the assets carrying amount exceeds its recoverable amount.

The recoverable amount is the higher of fair value, less cost to sell, and value in use. For purposes of

assessing impairment, assets are grouped to the lowest levels for which there are separately identifiable

cash flows (cash generating units). Non-financial assets that have suffered impairment are reviewed for

possible reversal of the impairment at each reporting date.

Classification of financial assets. The Company classifies its financial assets into the following

measurement categories: (a) loans and receivables, and (b) available-for-sale financial assets.

Loans and receivables include financial receivables created by the Company by providing cash, goods,

or services directly to a debtor, other than those receivables which are created with the intention to be

sold immediately or in the short term, or which are quoted in an active market. Loans and receivables

comprise primarily loans and trade and other accounts receivable, including purchased loans and

promissory notes. All other financial assets are included in the available-for-sale category.

Initial recognition of financial instruments. Financial assets and financial liabilities are initially

measured at fair value.

The Company’s principal financial instruments comprise available-for-sale investments, borrowings,

cash and cash equivalents, and short-term deposits. The Company has various other financial

instruments, such as accounts receivable and payables from trade debtors and trade creditors, which

arise directly from its operations.




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All purchases and sales of financial instruments that require delivery within the time frame established

by regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which

is the date that the Company commits to deliver a financial instrument. All other purchases and sales

are recognised on the settlement date with the change in value between the commitment date and

settlement date not recognised for assets carried at cost or amortised cost, and recognised in equity for

assets classified as available-for-sale.

Subsequent measurement of financial instruments. Subsequent to initial recognition, the Company’s

financial liabilities, loans, and receivables are measured at amortised cost. Amortised cost is calculated

using the effective interest rate method and, for financial assets, is determined net of any impairment

losses. Premiums and discounts, including initial transaction costs, are included in the carrying amount

of the related instrument and amortised based on the effective interest rate of the instrument.

The carrying values of financial assets and liabilities with a maturity of less than one year, less any

estimated credit adjustments, are assumed to be their fair values. The fair value of financial liabilities

is estimated by discounting the future contractual cash flows at the current market interest rate available

to the Company for similar financial instruments.

Gains and losses arising from a change in the fair value of available-for-sale assets are recognised

directly in other comprehensive income. In assessing the fair value of financial instruments, the

Company uses a variety of methods and makes assumptions based on market conditions existing at the

reporting date.

When available-for-sale assets are sold or otherwise disposed of, recognised in other comprehensive

income the cumulative gain or loss is included in the determination of net profit. When a decrease in

fair value of available-for-sale assets has been recognised in equity and there is objective evidence that

the assets are impaired, the loss recognised in other comprehensive income is transferred and included

in the determination of net profit, even though the assets have not been derecognised.

Interest income on available-for-sale debt securities is calculated using the effective interest method and

recognised in the statement of profit or loss. Dividends on available-for-sale equity instruments are

recognised in the statement of profit or loss when the Company’s right to receive payment is established

and the inflow of economic benefits is probable. Impairment losses are recognised in the statement of

profit or loss when incurred as a result of one or more events that occurred after the initial recognition

of available-for-sale investments. A significant or prolonged decline in the fair value of an instrument

below its cost is an indicator that it is impaired. The cumulative impairment loss measured as the

difference between the acquisition cost and the current fair value, less any impairment loss on that asset

previously recognised in the statement of profit or loss, is removed from equity and recognised in the

statement of profit or loss.




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Impairment losses on equity instruments are not reversed through the statement of profit or loss. If, in

a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the

increase can be objectively related to an event occurring after the impairment loss was recognised in the

statement of profit or loss, the impairment loss is reversed through current period’s statement of profit

or loss.

A provision for impairment of loans and accounts receivable is established when there is objective

evidence that the Company will not be able to collect all amounts due according to the original terms.

Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or

financial reorganisation, and default or delinquency in payments are considered to be indicators that the

trade receivable is impaired.

The amount of the provision is the difference between the asset’s carrying amount and the present value

of estimated future cash flows. The carrying amount of the asset is reduced through the utilisation of an

allowance account, and the amount of the loss is recognised in the statement of profit or loss. When

receivable is uncollectible, it is written off against the allowance account for receivables. Subsequent

recoveries of amounts previously written off are credited in the statement of profit or loss.

Derecognition of financial instruments. The Company derecognises financial assets when (i) the assets

are redeemed or the rights to cash flows from the assets have otherwise expired, or (ii) the Company has

transferred substantially all the risks and rewards of ownership of the assets, or (iii) the Company has neither

transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control

is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated

third party without needing to impose additional restrictions on the sale.

Income tax. Income tax have been provided for in the separate financial statements in accordance with

the Ukrainian legislation enacted or substantively enacted by the reporting date. The income tax charge

comprises current tax and deferred tax and is recognised in the statement of profit or loss unless it relates

to transactions that are recognised, in the same or a different period, in other comprehensive income.

Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of

taxable profits or losses for the current and prior periods. Taxes other than income tax are recorded

within operating expenses.

Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and

temporary differences arising between the tax bases of assets and liabilities and their carrying amounts

for financial reporting purposes.




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In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary

differences on initial recognition of an asset or a liability in a transaction other than a business

combination, if the transaction, when initially recorded, affects neither accounting nor taxable profit.

Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and

subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured

at tax rates enacted or substantively enacted at the reporting date which are expected to apply to the

period when the temporary differences will reverse or the tax loss carry forwards will be utilised.

Deferred tax assets and liabilities are netted only within the individual companies of the Company.

Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only

to the extent that it is probable that future taxable profit will be available against which the deductions

can be utilised.

Inventories. Inventories are recorded at the lower of cost and net realisable value. The cost of

inventories includes expenditures incurred in acquiring the inventories, production or conversion costs,

and other costs incurred in bringing them to their existing location and condition.

The cost of inventory is determined using the following methods: weighted average cost for natural gas

and “first-in, first-out” basis for other inventories. Net realisable value is the estimated selling price in

the ordinary course of business, less the cost of completion and selling expenses.

Trade accounts receivable. Trade accounts receivable are recognised initially at fair value and

subsequently measured at amortised cost using the effective interest rate method, less allowance for

impairment.

Prepayments made and other current assets. Prepayments are carried at cost, less allowance for

impairment. A prepayment is classified as non-current when the goods or services relating to the

prepayment are expected to be obtained after one year or when the prepayment relates to an asset which

will itself be classified as non-current upon initial recognition.

Other prepayments are charged to the statement of profit or loss when the goods or services relating to

the prepayments are received. If there is an indication that the assets, goods, or services relating to a

prepayment will not be received, the carrying value of the prepayment is written down accordingly and

a corresponding impairment loss is recognised in the statement of profit or loss.

Promissory notes. Some purchases may be settled by promissory notes or bills of exchange which are

negotiable debt instruments. Purchases settled by promissory notes are recognised based on

management’s estimate of the fair value to be given up in such settlements. The fair value is determined

with reference to observable market information.




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Cash and cash equivalents. Cash and cash equivalents include cash on hand, deposits held at call with

banks, and other short-term highly liquid investments with original maturities of three months or less.

Cash and cash equivalents are carried at amortised cost using the effective interest rate method.

Restricted balances are excluded from cash and cash equivalents for the purposes of the statement of

cash flows. Balances restricted from being exchanged or used to settle a liability for at least twelve

months after the reporting date are included in other non-current assets.

Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the

issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

Dividends and mandatory budget contribution of profit share. Dividends and mandatory budget

contribution of profit share are recognised as a liability and deducted from equity at the reporting date

only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed

before the reporting date or proposed or declared after the reporting date but before the separate financial

statements are authorised for issue.

Value added tax („VAT”). In Ukraine, VAT is levied at two rates: 20% on sales and imports of goods

within the country works and services and 0% on the export of goods and provision of works or services

to be used outside Ukraine. A taxpayer’s VAT liability incurs on the earlier of the date of shipping goods

to a customer or the date of receiving payment from the customer. A VAT credit is the amount that a

taxpayer is entitled to offset against its VAT liability in a reporting period. Rights to VAT credit arise

when a VAT invoice registered in the Unified register of VAT invoices, and can be issued on the earlier

of the date of payment to the supplier or the date goods are received. VAT liabilities and credit are

registered in the electronic system separately for each tax payer and in accordance with the rules set out

by the Cabinet of Ministers of Ukraine.

Borrowings. Borrowings include bank borrowings and bonds.

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are

subsequently stated at amortised cost using the effective interest rate method. Bank overdrafts are

included into borrowings line item in the statement of financial position.

Trade accounts payable. Trade accounts payable are recognised and initially measured under the policy

for financial instruments mentioned above. Subsequently, instruments with a fixed maturity are re-

measured at amortised cost using the effective interest rate method. Amortised cost is calculated by

taking into account any transaction costs and any discount or premium on settlement.




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Advances received. Advances received are carried at the amounts originally received. Amounts of

advances received are expected to be realised through the revenue received from ordinary activities of

the Company.

Provisions. Provisions are recognised when the Company has a present obligation (legal or

constructive) as a result of a past event, and it is probable that an outflow of resources embodying

economic enefits will be required to settle the obligation, and a reliable estimate can be made of the

amount of the obligation.

Where the Company expects some of all the provision to be reimbursed, for example, under an insurance

contract, the reimbursement is recognised as a separate asset but only when the reimbursement is

virtually certain.

The expense on any provision is presented in the statement of profit or loss, net of any reimbursement.

If the effect of time value of money is material, provisions are discounted using a current pre-tax rate

that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase

in provision due to the passage of time is recognised as a finance cost.

Other liabilities. Other financial liabilities are recognised initially at fair value, net of transaction costs

incurred, and are subsequently stated at amortised cost using the effective interest rate method. Other

non-financial liabilities are measured at cost.

Contingent assets and liabilities. A contingent asset is not recognised in the separate financial

statements but disclosed when an inflow of economic benefits is probable.

Contingent liabilities are not recognised in the separate financial statements unless it is probable that an

outflow of economic resources will be required to settle the obligation and it can be reasonably

estimated. Contingent liabilities are disclosed unless the possibility of an outflow of resources

embodying economic benefits is remote.

Revenue recognition. Revenues from sales of goods are recognised at the point of transfer of risks and

rewards associated with ownership of goods. If the goods are transported to a specified location, revenue

is recognised when the goods are transferred to a customer at the destination point. Revenues are

measured at the fair value of the consideration received or receivable, and are shown net of value added

tax and discounts.

Revenue from sale and resale of natural gas is recognised at the point of transfer of risks and rewards

associated with ownership of these goods. Revenues are measured at the fair value of the consideration

received or receivable, and are shown net of value added tax and discounts.

Recognition of expenses. Expenses are recorded on an accrual basis. The cost of goods sold comprises

the purchase price, transportation costs, commissions relating to supply agreements, and other related

expenses.




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Finance income and costs. Finance income and costs comprise interest expense on borrowings, losses

on early repayment of loans, interest income on funds invested, income or loss on origination of financial

instruments, unwinding of interest of the pension obligation and provisions, and foreign exchange gains

and losses.

Borrowing costs that relate to assets that take a substantial period of time to construct are capitalised as

part of the cost of the asset. All other interest and other costs incurred in connection with borrowings

are expensed using the effective interest rate method.

Interest income is recognised as it accrues, taking into account the effective yield on the asset.

Employee benefits: Defined Contributions Plan. The Company makes statutory unified social

contributions to the State Pension Fund of Ukraine in respect of its employees. The contributions are

calculated as a percentage of current gross salary, and are expensed when incurred. Discretionary

pensions and other post-employment benefits are included in labour costs in the statement of profit or

loss.

During 2017 the Company has recognised expenses in respect of contribution to the State Pension Fund

of Ukraine amounting to UAH 49 783 thousand (2016: UAH 45 493 thousand).

Employee benefits: Defined Benefit Plan. The Company provides lump sum benefits, payments on

reaching certain age, and other benefits as prescribed by a collective agreement. The liability recognised

in the statement of financial position in respect of the defined benefit pension plan is the present value

of the defined benefit obligation at the reporting date. The defined benefit obligation is calculated

annually using the projected unit credit method.

The present value of the defined benefit obligation is determined by discounting the estimated future

cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency

in which the benefits will be paid, and that have terms to maturity approximating the terms of the related

pension liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are

charged or credited to other comprehensive income in the period in which they arise. Past service costs

are recognised immediately in the statement of profit or loss.




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28. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

In applying the Company’s accounting policies, management is required to make judgments, 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 judgments in applying accounting policies. The following are the critical judgments, apart

from those involving estimations, that the Company’s management has made in the process of applying

the Company’s accounting policies and that have the most significant effect on the amounts recognised

in the separate financial statements.

Revaluation of property, plant, and equipment. As described in Note 27, the Company applies the

revaluation model to its property, plant, and equipment. At each reporting date, the Company carries

out a review of the carrying value of those assets in order to determine whether it is materially different

from the fair value. Based on the results of the review, management concluded that carrying amounts of

property, plant and equipment as at 31 December 2017 did not differ materially from their fair values.

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.

Restructuring of trade accounts receivable for gas under the Law “On measures to settle the debts

for the natural gas consumed by district heating companies and distribution and water supplying

companies” №1730 (Note 2). The Company reclassifies trade accounts receivable under the

restructuring agreements for gas as non-current after three months from the date of agreement, if the

debtor has made all payments in due terms as described in the repayment schedule. Such accounts

receivable are then accounted for at amortised cost, and reverses respective provision for doubtful debts.

Such receivables are accounted for as current trade accounts receivable for products, goods and services

until that time.




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28. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued)

Impairment of trade and other accounts receivable. Management estimates the likelihood of the

collection of trade and other accounts receivable based on an analysis of individual accounts. Factors

taken into consideration include an aging analysis of trade and other receivables with reference to the

payment history, credit terms allowed to customers, and available market information regarding the

counterparty’s ability to pay. Should actual collections be less than management’s estimates, the

Company would be required to record an additional impairment expense.

Deferred tax asset recognition. 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 judgments 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 tax authorities

(Note 23).

29. ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS

Adoption of new and revised International Financial Reporting Standards. The following standards

have been adopted by the Company for the first time for the financial year beginning on or after

1 January 2017:

Amendments to IAS 12 “Income Taxes” – Recognition of deferred tax assets for unrealised losses;

Amendments to IAS 7 “Statement of Cash Flows” – Disclosure initiative;

Annual Improvements to IFRSs 2014-2016 Cycle – amendments to IFRS 12.

The adoption of amendments to standards did not have any effect on the financial position or

performance reported in the separate financial statements and had not resulted in any changes to the

Company’s accounting policies and the amounts reported for the current or prior years.




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(Continued)

Standards and Interpretations in issue, but not yet effective. At the date of authorisation of these

consolidated financial statements, the following Standards and Interpretations, as well as amendments

to Standards were in issue but not yet effective:

Standards/Interpretations

Effective for annual

accounting period

beginning on or after

IFRS 15 “Revenue from Contracts with Customers” including amendments to

IFRS 15: Effective date of IFRS 15

Clarifications to IFRS 15 “Revenue from Contracts with Customers”

1 January 2018

1 January 2018

IFRS 9 “Financial Instruments” 1 January 2018

Amendments to IFRS 2 “Share-based Payment” – Classification and

Measurement of Share-based Payment Transactions 1 January 2018

IFRIC 22 “Foreign Currency Transactions and Advance Consideration” 1 January 2018

Amendments to IFRS 4 “Applying IFRS 9 “Financial Instruments” with IFRS 4

„Insurance Contracts“

1 January 2018

Amendments to IAS 40 “Investment Property”: Transfers of Investment Property 1 January 2018

Annual Improvements to IFRSs 2014-2016 Cycle 1 January 2018

IFRIC 23 “Uncertainty over Income Tax Treatments” 1 January 2019

IFRS 16 “Leases” 1 January 2019

Amendments to IFRSs – Annual Improvements

to IFRSs 2015 –2017 Cycle

1 January 2019

Amendments to IFRS 9 “Financial Instruments”: Prepayment Features

with Negative Compensation

1 January 2019

Amendments to IAS 28 “Investments in Associates and Joint Ventures”: Long-

term Interests in Associates and Joint Ventures

1 January 2019

Amendments to IAS 19 “Employee Benefits”: Plan Amendment, Curtailment or

Settlement

1 January 2019

IFRS 17 “Insurance Contracts” 1 January 2021

Amendment to IFRS 10 “Consolidated Financial Statements” and IAS 28

“Investments in Associates and Joint Ventures” – Sale or contribution of assets

between an investor and its associate or joint venture

Effective date to be

determined

IFRS 9 Financial Instruments

IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement

of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the

classification and measurement of financial liabilities and for derecognition, and in November 2013 to

include the new requirements for general hedge accounting. Another revised version of IFRS 9 was

issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited

amendments to the classification and measurement requirements by introducing a ‘fair value through

other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments.




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(Continued)

The key requirements of IFRS 9 are:

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 generally measured at amortised cost at the

end of subsequent accounting periods. 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 their fair value at the

end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable

election to present subsequent changes in the fair value of an equity investment (that is not held for

trading nor contingent consideration recognised by an acquirer in a business combination) in other

comprehensive income, with only dividend income generally recognised in profit or loss;

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. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated

as fair value through profit or loss is presented in profit or loss;

Impairment. In relation to the impairment of financial assets, IFRS 9 requires an expected credit

loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss

model requires an entity to 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. In other words,

it is no longer necessary for a credit event to have occurred before credit losses are recognised;

Hedge accounting. The new general hedge accounting requirements retain the three types of hedge

accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been

introduced to the types of transactions eligible for hedge accounting, specifically broadening the

types of instruments that qualify for hedging instruments and the types of risk components of non-

financial items that are eligible for hedge accounting. In addition, the effectiveness test has been

overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment

of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an

entity’s risk management activities have also been introduced.

Based on an analysis of the Company’s financial assets and financial liabilities as at 31 December 2017

based on the facts and circumstances that exist at that date, the management of the Company has assessed

the impact of IFRS 9 to the financial statements as follows:

Classification and measurement

All financial assets and financial liabilities will continue to be measured on the same basis as is currently

adopted under IAS 39. Based on its assessment, the Company believe that the new classification

requirements will not have a material impact on its accounting for financial assets and financial

liabilities.




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(Continued)

Impairment

The Company expects to 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 Company considers that they have low credit risk given that 99% of the Company’s

cash and cash equivalents are placed in the state-owned banks.

Currently management is finalising its calculation of the impact from the lifetime expected credit losses

according to IFRS 9.

The Company does not apply hedge accounting under IAS 39 and does not intend to apply it under

IFRS 9.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising

from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance

including IAS 18 Revenue, IAS 11 “Construction Contracts” and the related Interpretations when it

becomes effective.

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of

promised goods or services to customers in an amount that reflects the consideration to which the entity

expects to be entitled in exchange for those goods or services.

Specifically, the Standard introduces a 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.

Under IFRS 15, an entity 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. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios.

Furthermore, extensive disclosures are required by IFRS 15.

In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance

obligations, principal versus agent considerations, as well as licensing application guidance.

The standard permits either a full retrospective or a modified retrospective approach for the adoption.

Based on five-step model defined by IFRS 15 the Company performs a review to understand how IFRS

15 applies to the Company’s business. Apart from providing more extensive disclosures on the

Company’s revenue transactions, the management does not anticipate that the application of IFRS 15

will have a significant impact on the financial position and/or financial performance of the Company.

public joint stock company “national joint stock company “naftogaz … eng naftogaz stand alone...

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