Public Joint Stock Company National Joint Stock Company NAFTOGAZ OF UKRAINE

Transcription

1 Public Joint Stock Company National Joint Stock Company Separate Financial Statements as at and for the Year Ended 31 December 2017

2 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 Notes to the separate financial statements 1. THE ORGANISATION AND ITS OPERATIONS OPERATING ENVIRONMENT RESTATEMENT OF COMPARATIVE INFORMATION SEGMENT INFORMATION BALANCES AND TRANSACTIONS WITH RELATED PARTIES NON-CURRENT FINANCIAL INVESTMENTS NON-CURRENT ACCOUNTS RECEIVABLE AND OTHER NON-CURRENT ASSETS INVENTORIES TRADE ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE ON PREPAYMENTS MADE, SETTLEMENTS WITH THE STATE BUDGET, OTHER CURRENT ACCOUNTS RECEIVABLE AND OTHER CURRENT ASSETS CURRENT FINANCIAL INVESTMENTS AND CASH AND CASH EQUIVALENTS SHARE CAPITAL BORROWINGS NON-CURRENT AND CURRENT PROVISIONS ADVANCES RECEIVED AND OTHER CURRENT LIABILITIES COST OF SALES OTHER OPERATING INCOME ADMINISTRATIVE EXPENSES OTHER OPERATING EXPENSES OTHER EXPENSES FINANCE COSTS INCOME TAX CONTINGENCIES AND CONTRACTUAL COMMITMENTS AND OPERATING RISKS FINANCIAL RISK MANAGEMENT FAIR VALUE SUBSEQUENT EVENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS... 67

3 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 thousand of loss and UAH 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 thousand and UAH 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 thousand and share in other comprehensive loss of UAH thousand for the year ended 31 December 2017 and share in losses in the amount of UAH thousand and share in other comprehensive income in the amount of UAH thousand for the year ended 31 December 2016.

4 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 ) 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 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 Considering the above, we believe that the natural gas with the carrying amount of UAH 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 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 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. 2

5 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; 3

6 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 # 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 4

7 BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2017 CODES Date (year, month, day) Entity National Joint Stock Company Naftogaz of Ukraine and its branches EDRPOU Location Ukraine KOATUU Legal form of organisation: Public Joint Stock Company KOPFG 230 Type of economic activities Holding company KVED 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 ASSETS Line code 31 December December I. Non-current Assets Intangible assets: cost accumulated amortisation and impairment 1002 ( ) ( ) Construction in progress Property, plant and equipment: cost accumulated depreciation and impairment 1012 ( ) (93 796) Investment property Long-term biological assets Long-term financial investments: accounted under equity method other financial investment Long-term accounts receivable Deferred tax assets Other non-current assets including income tax prepaid 1090 (а) Total Section I IІ. Current Assets Inventories Current biological assets Trade accounts receivable Accounts receivable: prepayments made due from budget including income tax prepaid Other current accounts receivable Current financial investments Cash and cash equivalents Prepaid expense Other current assets including amount due under the Gas Transit Arbitration 1190 (а) Total Section IІ ІІІ. Non-current assets classified as held for sale and disposal groups Total Assets Notes 10, 23 The accompanying notes form an integral part of these separate financial statements. 5

8 BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) AS AT 31 DECEMBER 2017 (CONTINUED) EQUITY AND LIABILITIES Line code 31 December December I. Equity Share capital including: contributions to unregistered statutory capital Revaluation reserve Additional paid-in capital Legal reserve Retained earnings (accumulated deficit) 1420 ( ) ( ) Unpaid capital Withdrawn capital Total Section I II. Non-current Liabilities and Provisions Deferred tax liabilities Non-current bank borrowings Other non-current liabilities Non-current provisions Purpose financing Total Section II III. Current Liabilities and Provisions Current bank borrowings Accounts payable: current portion of long-term liabilities trade accounts payable due to budget including income tax payable social charges payable salary payable Advances received Current provisions Deferred income Other current liabilities including amount due under the Gas Sales Arbitration 1690 (а) Total Section ІІІ ІV. Liabilities related to non-current assets held for sale and disposal groups Total Equity and Liabilities Notes 15, 23 Original signed by: Director Konovets S.O. Acting Chief Accountant Guchek A.V. The accompanying notes form an integral part of these separate financial statements. 6

9 STATEMENT OF PROFIT OR LOSS (STATEMENT OF COMPREHENSIVE INCOME) FOR THE YEAR ENDED 31 DECEMBER 2017 CODES Date (year, month, day) Entity National Joint Stock Company Naftogaz of Ukraine and its branches EDRPOU Location Ukraine KOATUU Legal form of organisation: Public Joint Stock Company KOPFG 230 Type of economic activities Holding company KVED Average number of employees 709 Address, phone 6 Bogdana Khmelnytskoho Str, Kyiv 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 International Financial Reporting Standards V Statement of Profit or Loss (Statement of Comprehensive Income) for the Year Ended 31 December 2017 Form # 2 DKUD Code I. PROFIT OR LOSS STATEMENT Item Line code Notes Revenue Cost of sales 2050 ( ) ( ) 16 Gross: -- profit loss Other operating income including income recognised under the Gas Transit Arbitration 2120 (а) General administrative expense 2130 ( ) ( ) 18 Selling and distribution expense Other operating expense 2180 ( ) ( ) 19 including expense recognised under the Gas Sales Arbitration 2180 (а) ( ) - 23 Operating: -- profit loss Income on equity investments Other finance income Other income Finance costs 2250 ( ) ( ) 21 Loss on equity investments Other expense 2270 ( ) ( ) 20 Profit or loss before income tax: -- profit loss Income tax (expense) benefit 2300 ( ) Profit (loss) on discontinued operations after tax Net profit or loss: -- profit loss The accompanying notes form an integral part of these separate financial statements. 7

10 STATEMENT OF PROFIT OR LOSS (STATEMENT OF COMPREHENSIVE INCOME) FOR THE YEAR ENDED 31 DECEMBER 2017 (CONTINUED) II. COMPREHENSIVE INCOME Item Line code Notes Revaluation of the property, plant and equipment* 2400 (45 078) - Revaluation of the financial investments* Currency translation reserve** Share of movements in comprehensive income of subsidiaries, associates and joint ventures* 2415 ( ) Other comprehensive income* 2445 (92 848) Other comprehensive income before income tax 2450 ( ) Income tax related to items of other comprehensive income Other comprehensive income, after income tax 2460 ( ) Total comprehensive income (sum of lines 2350, 2355 and 2460) ІII. OPERATING EXPENSE BY ELEMENTS Item Line code Notes Materials Staff costs Social charges Depreciation and amortisation Other operating expense Total IV. EARNINGS PER SHARE Item Line code Notes Average annual number of ordinary shares Diluted average number of ordinary shares Net profit (loss) per 1 ordinary share ,84 139,52 Net profit (loss) per 1 ordinary share (diluted) ,84 139,52 Dividends per ordinary share ,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: Director Konovets S.O. Acting Chief Accountant Guchek A.V. The accompanying notes form an integral part of these separate financial statements. 8

11 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 CODES Date (year, month, day) Entity National Joint Stock Company Naftogaz of Ukraine and its branches EDRPOU Location Ukraine KOATUU Legal form of organisation: Public Joint Stock Company KOPFG 230 Type of economic activities Holding company KVED 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 Statement of Cash Flows (indirect) for the Year Ended 31 December 2017 Form # 3 DKUD Code Item Code (as restated, Note 3) inflows outflows inflows outflows І. Cash flows from operating activities Profit before income tax Adjustments for: depreciation and amortisation X X (decrease) increase in provisions ( ) unrealised foreign exchange loss (gain) loss on non-operating activities and other non-cash transactions ( ) loss (gain) on equity investment ( ) - ( ) Finance costs Increase in current assets ( ) - ( ) Increase in current liabilities Cash flows from operating activities Income tax paid as advance on dividend payment (Note 22) 3580 X ( ) X - Net cash flow from operating activities ІІ. Cash flows from investing activities Proceeds from sale of: financial investments X X non-current assets X - X Proceeds from: interest received X X dividends received X X Proceeds from derivatives X - X Other inflows X - X Outflows from: financial investments 3255 X ( ) X ( ) non-current assets 3260 X (32 108) X ( ) Outflows from derivatives 3270 X - X - Other outflows 3290 X - X - Net cash flow from investing activities The accompanying notes form an integral part of these separate financial statements. 9

12 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 (CONTINUED) Item Code (as restated, Note 3) inflows outflows inflows outflows ІІІ. Cash flows from financing activities Proceeds from: issue of shares X - X loans and borrowings received X X Other inflows X - X Outflows from: redemption of own shares 3345 X - X - loans and borrowings repaid 3350 X ( ) X ( ) dividends paid 3355 X ( ) X - interest paid 3360 X ( ) X ( ) Other outflows 3390 X ( ) X (13 406) Net cash flow from financing activities ( ) - ( ) Net increase in cash and cash equivalents ( ) Cash and cash equivalents at the beginning of the reporting period X X Effects of exchange rates changes on cash and cash equivalents Cash and cash equivalents at the end of the reporting period X X Original signed by: Director Konovets S.O. Acting Chief Accountant Guchek A.V. Significant Non-Cash Transactions In thousands of Ukrainian hryvnias Note Payment for the natural gas acquired by a lending bank to suppliers Payment by subsidiaries of their portions of profit to the state budget Payment of dividends by mutual settlement The accompanying notes form an integral part of these separate financial statements. 10

13 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 CODES Date (year, month, day) Entity National Joint Stock Company Naftogaz of Ukraine and its branches EDRPOU Location Ukraine KOATUU Measuring unit: UAH thousands without decimals Prepared under (mark v in the respective box): Ukrainian Accounting Standards International Financial Reporting Standards Item Line code Share capital Statement of Changes in Equity for the Year Ended 31 December 2017 Revaluation reserve Additional paid-in capital Legal reserve The accompanying notes form an integral part of these separate financial statements. 11 Form # 4 DKUD Code Retained earnings (accumulated deficit) Unpaid capital Withdrawn capital Balance at 31 December ( ) Net profit for the reporting period Other comprehensive income for the reporting period ( ) ( ) Profit distribution: Payments to owners (dividends) Charge to the Legal reserve(note 12) ( ) Portion of net profit attributable to the State Budget of Ukraine (Notes 12 and 14) ( ) - - ( ) Contributions by the equity holders: Contributions to the share capital Contributions to the share capital receivable repaid Capital withdrawals: Redemption of shares Resale of treasury shares Treasury shares cancelled Capital withdrawn Other changes in equity (338) (30 552) Total changes in equity ( ) (30 227) ( ) Balance at 31 December ( ) V Total

14 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 (CONTINUED) Item Line code Share capital Statement of Changes in Equity for the Year Ended 31 December 2016 Revaluation reserve Additional paid-in capital Legal reserve Form # 4 DKUD Code Retained earnings (accumulated deficit) Unpaid capital Withdrawn capital Balance at 31 December ( ) Net profit for the reporting period Other comprehensive income for the 4110 reporting period ( ) Profit distribution: Payments to owners (dividends) (Note 12) ( ) - - ( ) Portion of net profit attributable to the State Budget of Ukraine (Notes 12 and 14) ( ) - - ( ) Contributions by the equity holders: Contributions to the share capital Capital withdrawals: Redemption of shares Other changes in equity (6) (116) (116) Total changes in equity ( ) Balance at 31 December ( ) Total Original signed by: Director Konovets S.O. Acting Chief Accountant Guchek A.V. The accompanying notes form an integral part of these separate financial statements. 12

15 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 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 The 1 st Deputy Head of the Executive Board Deputy Head of the Executive Board Executive Board member Executive Board member Chairman of Executive Board at Ukrgasvydobyvannia PJSC Executive Board member Chief executive officer at Ukrtransnafta PJSC Kobolyev Andriy Volodymyrovych Pereloma Sergiy Vitaliyovych Konovets Sergiy Oleksandrovych Kolbushkin Yuriy Petrovych Prokhorenko Oleg Vasiliyovych Havrylenko Mykola Mykolayovych Resolution of the Cabinet of Ministers of Ukraine dated р; Order dated К; Resolution of the Cabinet of Ministers of Ukraine dated р; Order dated К Resolution of the Cabinet of Ministers of Ukraine dated р; Order dated К Resolution of the Cabinet of Ministers of Ukraine dated Order dated К Resolution of the Cabinet of Ministers of Ukraine dated p Resolution of the Cabinet of Ministers of Ukraine dated p 13

16 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 Chairperson of the Supervisory Board Deputy chairperson of the Supervisory Board Supervisory Board members Name, the State representative /independent non-executive director Spottiswoode Clare Mary Joan, independent non-executive director Demchyshyn Volodymyr Vasylyovych, the State representative Lescoeur Bruno, Jean, Gaston, independent non-executive director Hochstein Amos, independent non-executive director Haysom Steven John, independent non-executive director Popyk Serhij Dmytrovych, the State representative Kudrytskyi Volodymyr Dmytrovych, the State representative Commission of appointment Resolution of the Cabinet of Ministers of Ukraine dated #892-p Minutes of the Supervisory Board Order of the Ministry of Economic Development and Trade of Ukraine dated Resolution of the Cabinet of Ministers of Ukraine dated #892-p Resolution of the Cabinet of Ministers of Ukraine dated #892-p Resolution of the Cabinet of Ministers of Ukraine dated #892-p Resolution of the Cabinet of Ministers of Ukraine dated #892-p Resolution of the Cabinet of Ministers of Ukraine dated #892-p 14

17 1. THE ORGANISATION AND ITS OPERATIONS (Continued) 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 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/ Lescoeur Bruno, Jean, Gaston 1/ Hochstein Amos 1/ Haysom Steven John 1/ Popyk Sergii Dmytrovych 1/ Kudrytskyi Volodymyr Dmytrovych 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 February 2017 which resolved to establish the Committee on occupational health, environmental and industrial safety. 15

18 1. THE ORGANISATION AND ITS OPERATIONS (Continued) 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 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 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 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 to non-residents with a limit of USD 5 million per month). 16

19 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 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 The NBU expects that Ukraine will receive another USD 3.5 billion from the IMF in 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 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 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. 17

20 2. OPERATING ENVIRONMENT (Continued) 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 for 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. 18

21 2. OPERATING ENVIRONMENT (Continued) The following tariffs and prices were set: 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 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 sets maximum level of mark up on price of 2.5% from the retails price for gas suppliers. Natural gas prices for district heating companies generating heat for household needs, excluding VAT and tariffs for gas transmission and distribution. 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. General tariff for gas storage (storage, injection, and withdrawal), excluding VAT, UAH per thousand cubic meters for one season of storage. Tariff for entry and exit points of Ukrainian gas transmission network, excluding VAT, USD per thousand cubic meters 31 December 2017 UAH 6.96 per cubic meter UAH 4.94 per cubic meter From UAH to UAH per cubic meters 31 December 2016 From 1 May 2016 to 31 March 2017: UAH 6.88 per cubic meter From 1 May 2016 to 31 March 2017: UAH 4.94 per cubic meter From UAH to UAH per cubic meters UAH UAH USD USD 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. 19

22 2. OPERATING ENVIRONMENT (Continued) 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 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 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

23 2. OPERATING ENVIRONMENT (Continued) 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 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 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. 21