INTERIM FINANCIAL REPORT. for the period ending on 30 June 2018

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3 INTERIM FINANCIAL REPORT

4 Interim financial report for the period ending on 30 June 2018 TABLE OF CONTENTS Interim statement of profit or loss and other comprehensive income... 1 Interim statement of financial position... 2 Interim statement of changes in equity... 4 Interim statement of cash flows 5 Notes to financial statement Review Report 0

5 Interim financial report for the period ending on 30 June 2018 Interim statement of profit or loss and other comprehensive income For the period ending on 30 June In BGN 000s Notes Operating income Other income Total income Technological costs 7 (35 122) (35 486) Cost of materials 8 (2 870) (3 100) Hired services costs 9 (3 163) (3 342) Amortization costs 13,14 (45 512) (45 252) Wages and salaries of employees 10 (34 048) (30 981) Other costs from activities 11 (14 145) (11 810) Cost of natural gas, used for balancing and goods sold (6 949) (3 974) Changes in inventories of finished goods and work in progress Operating profit Financial income Financial expenses 12 (17) (6 913) Net financial income/(cost) (6 001) Profit before taxes Tax expenses (5 237) (3 856) Profit for the period Total comprehensive income for the period The notes on pages 7 up to 41 are an integral part of this financial statement. Date: Executive Director Vladimir Malinov Chief Accountant Svetlana Koeva Certified according to the Auditor s Report of Grant Thornton Ltd Audit Company Mariy Apostolov Manager Registered auditor in charge of the review 1

6 Interim financial report for the period ending on 30 June 2018 Interim statement of financial position In BGN 000s Notes 30 June December 2017 Assets Property, plant and equipment Intangible assets Investments in jointly controlled undertakings Long-term receivables Long-term receivables from related parties Total non-current assets Inventories Trade and other receivables Receivables from related parties Receivables in connection with income taxes Prepayments for current assets Cash and cash equivalents Total current assets Total assets The notes on pages 7 up to 41 are an integral part of this financial statement. Date: Executive Director Vladimir Malinov Chief Accountant Svetlana Koeva Certified according to Review Report of Grant Thornton Ltd Audit Company Mariy Apostolov Manager Registered auditor in charge of the review 1

7 Interim financial report for the period ending on 30 June 2018 Interim statement of financial position (continued) In BGN 000s Notes 30 June 31 December Capital and reserves 0 Share capital Revaluation reserve Reserves Retained earnings Total equity Liabilities Deferred tax liabilities Deferred income funding Employees benefits Liabilities to related parties Contract guarantees Total non-current liabilities Guarantees under contracts Trade and other liabilities Employees benefits Liabilities to related parties Liabilities linked with income taxes Total current liabilities Total liabilities Total equity and liabilities The notes on pages 7 up to 41 are an integral part of this financial statement. Date: Executive Director Vladimir Malinov Chief Accountant Svetlana Koeva Certified according to the Review Report of Grant Thornton Ltd Audit Company Mariy Apostolov Manager Registered auditor in charge of the review 2

8 FINANCIAL STATEMENT Notes to the financial statement Interim statement of changes in equity In BGN 000s Share Revaluation Reserves Retained Total capital reserves earnings equity Balance as at January 1, Profit for the year Total comprehensive income for the period Transactions with owners, recorded in the equity Dividends to the sole shareholder (27 738) (27 738) Total transactions with owners (27 738) (27 738) Profit allocation for 2017 Balance as at 30 June (5 940) In BGN 000s Share capital Revaluation reserves Reserves Retained earnings Total equity Balance as at January 1, Profit for the year Total comprehensive income for the period Transactions with owners, recorded in the equity Dividends to the sole shareholder (29 854) (29 854) Total transactions with owners (29 854) (29 854) Profit allocation for (6 634) - The transfer from revaluation surplus to retained earnings - (37) Balance as at 30 June The notes on pages 7 up to 41 are an integral part of this financial statement. Date: Executive Director Vladimir Malinov Chief Accountant Svetlana Koeva Certified according to the Auditor s Report of Grant Thornton Ltd Audit Company Mariy Apostolov Registered auditor in charge of the review Manager 3

9 FINANCIAL STATEMENT Notes to the financial statement Interim Cash Flow Statement For the period ending on 30 June In BGN 000s Notes Cash flows from operating activities Proceeds from trade contractors Payments to trade contractors (23 534) (13 805) Payments to employees and social security institutions (31 907) (29 310) Payments for income tax (2 185) (3 013) Received penalties on delayed payments Paid/refunded other taxes and excise duty (16 764) (14 212) Other cash flows from operating activities (856) (729) Cash flow from operating activities Cash flows from investment activities Acquisition of property, plant and equipment (26 255) (11 647) Acquisition of intangible assets (36) (20) Received/refunded from funding non-current assets (net) (102) Receipt of interest on deposits Total cash flows from investing activities (25 934) (10 518) Cash flows from financing activities Dividends paid (18 492) (14 927) Proceeds from interest on loans granted Total cash flows from financing activities (18 108) (14 258) Net change in cash and cash equivalents Cash and cash equivalents as at January Net effect of changes in exchange rates (5 914) Cash and cash equivalents as at 30 June The notes on pages 7 up to 41 are an integral part of this financial statement. Executive Director Chief Accountant Vladimir Malinov Svetlana Koeva Date: Certified according to the Review Report of Grant Thornton Ltd Audit Company Mariy Apostolov Registered auditor in charge of the review Manager 4

10 FINANCIAL STATEMENT Notes to the financial statement Notes to the financial statements 1. Status and activity Basis of preparation Functional currency and presentation currency Use of estimates and assumptions Income Other income Technological expenses Expenses for materials Expenditure on hired services Wages and salaries of employees Other operating expenses Financial income and expenses Property, plant and equipment Intangible assets Investments in jointly controlled undertakings Long-term receivables Inventories Trade and other receivables Cash and cash equivalents Equity and reserves Deferred income from financing Employees benefits Trade and other liabilities Related parties Contract guarantees Determining fair values Conditional assets and conditional liabilities Events after the reporting period Significant accounting policies Application of new and revised IFRS

11 FINANCIAL STATEMENT Notes to the financial statement 1. Status and activity Bulgartransgaz EAD (the "Company") is a company with headquarters in Bulgaria. Company is registered in the Commercial Register at the Registry Agency with UIC Registered office of the Company: Bulgaria, Sofia, district Lyulin - 2, 66, Pancho Vladigerov Blvd. The Company is a state controlled entity. The sole shareholder of Bulgartransgaz EAD is Bulgarian Energy Holding EAD. Main activity of the Company includes storage and transmission of natural gas, maintenance and operation, management and development of gas transmission networks; maintenance and operation, management and development of underground gas storages; development of programs and activities for compliance of gas transmission and storage activities with European Energy Law requirements; development of a pricing policy for access and transmission through gas transmission networks, administration of natural gas transactions and organization of balancing of the natural gas market in line with the existing legislation; engineering, investment, production and service activity, import of goods, machinery and equipment related the Company's activities; centralized operational management, coordination and control on the operational regime of the gas transmission networks. By virtue of decision of the EWRC Bulgartransgaz EAD has been certified as Independent transmission operator of the gas transmission system of Bulgaria in line with the requirements of Directive 2009/73/ЕC of the European Parliament and of the Council of concerning common rules for the internal market in natural gas, Regulation (ЕC) No.715/2009 of the European Parliament and of the Council of on conditions for access to the natural gas transmission networks and Chapter Eight а of the Energy Act. The decision has been approved in line with the opinion of the European Commission of Under Art. 39, Para. 1 of the Energy Act, the Company holds licenses issued by the regulatory authority Energy and Water Regulation Commission (EWRC): License for the transmission of natural gas in the Republic of Bulgaria (License L / ); License for transit transmission of natural gas on the territory of the Republic of Bulgaria (License L / ); License for storage of natural gas in the Republic of Bulgaria (License L / ). By decision of EWRC I1-L-214 of License L / about the activity "transit transmission of natural gas" issued to Bulgartransgaz EAD is amended to License for the activity "transmission of natural gas". The three licenses are with a 35-years term. The Company pays license fees for each license specified in a tariff approved by the Council of Ministers. The fees are: Initial, which has been paid in connection with the issuance of the licenses and annual fees for the duration of the license, payable by the licensee for each year following the issuance of the license. Bulgartransgaz EAD is an undertaking of public interest in the meaning of paragraph 1, item 22(к) of the Additional provisions of the Accounting Act. In line with the requirements of Regulation (ЕC) 715/2009 of the Commission of 13 July 2009 on conditions for access to the natural gas transmission networks, Energy Act and the regulations Bulgartransgaz EAD effectively introduced as of the entry-exit pricing model for the 6

12 FINANCIAL STATEMENT Notes to the financial statement offered natural gas access and transport services for the gas transmission network, owned by the company, including the national gas transmission network (NGTN) and the gas transmission network for transit transmission (GTNTT). The entry-exit tariff model changes the price setting model for the natural gas access and transport services offered by Bulgartransgaz EAD where the transfer is from a postal stamp system with uniform prices, set completely for transported natural gas quantities, charged at exit points of the gas transmission network, to an entry-exit model with a two component tariff system and a prevailing component based on the booked capacity. The new system is a result from the requirements laid down in the European and national regulatory framework in the field of natural gas. In this context the company had over the reporting period undertaken a number of activities ahead of the implementation of the tariff model and the establishment of its main parameters. EWRC s Decision НГП-01/ approves Bulgartransgaz EAD allowed revenue for the period and the basic parameters of the tariff model. Based on the Decision and the Methodology setting natural gas access and transport prices through Bulgartransgaz EAD gas transmission networks, the transmission operator sets prices of access and transport at entry and exit points for the first pricing period The main features of the implemented entry-exit tariff model are as follows: Multiannual pricing model revenue cap method. The first regulatory method is 3 years; Setting of capacity and commodity charge at entry and exit points/zones; Recovery through the capacity and commodity prices of the revenue allowed за for the performance of the transport service, approved by EWRC for each regulatory period; Providing incentives to the operator to improve its efficiency; Level playing field for all transmission network users. Users are treated equally, regardless of the size, ownership, or any other factors; Providing price stability, transparency in the price setting process; Application of the cost allocation matrix model at entry and exit points/zones; Possibility to establish a single exit national zone; Possibility to reduce capacity prices at entry and exit points to/from the storage facilities. As of Bulgartransgaz introduced effective daily balancing regime in line with the Natural Gas Market Balancing Rules and the Methodology setting the daily Imbalance Charge in line with the requirements of Regulation 312/2014 establishing a Network Code on Gas Balancing of Transmission Networks. The anticipated effect of the application of the Regulation is the operators to carry out marketbased balancing by using short-term standartised products, the network users to carry out the primary balancing, and the operators to play a role in any residual balancing with a view of achieving an overall daily balanced system, where the main responsibility lies with the users, increased liquidity and competition, growth in the churn rate of hubs (the ratio between the gas trade volumes to the physically supplied ones). The implementation of the new balancing regime fulfils the requirements of the Regulation, more particularly these regulating the provision of information and the daily financial settlement of the accumulated daily imbalances with monthly settlement period. The Company has a two-tier management system - Supervisory Board and Management Board. Members of the Supervisory Board as at 30 June 2018 are: Ventsislav Tsvetanov, Kiril Georgiev, 7

13 FINANCIAL STATEMENT Notes to the financial statement Vladimir Mitrushev, and Members of the Management Board of Bulgartransgaz EAD are: Tanya Zaharieva, Delyan Dimitrov, Vladimir Malinov. As of the company is represented and managed by its Executive Director Vladimir Malinov. As at 30 June 2018 Members of the Audit Committee of the company are: Snejanka Kaloyanova, Irena Mihaylova and Dian Boev. 2. Basis of preparation This interim financial statement for the period, ending on 30 June 2018 is prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. It does not contain all of the information required for the preparation of the complete annual financial statements in line with the International Financial Reporting Standards (IFRS) and must be read together with annual financial statement of the company as at The Interim Financial Statement gives some of the elements in a way that is different from their representation in the 2017 Interim Financial Statement striving at providing more relevant information on the effect of transactions and other events or conditions on the financial status of the company. The change relates to the following positions in the interim Profit and loss Statement and the other Comprehensive Revenue and the Interim Cash Flow Statement: Revenue from negative natural gas imbalance in the amount of BGN thousand, indicated in line Other operating revenue in the first half of 2017, are reclassified to line Operating revenue for the first half of 2017 in this Interim Financial Statement. Payment for acquired intangible assets for the first half of 2017 totaling to BGN 20 thousand, are reclassified from line Acquired Property, plant and equipment to line Acquired Intangible Assets in the cash flows from Investment Activity in the Interim Financial Cash Flow Statement for the first half of 2017 in this Interim Financial Statement. Receipt of interests on deposits in the first half of 2017, totaling to BGN 119 thousand, reclassified from line Receipt from interests and penalties on delayed payments from operating activity to line Receipt from interests on deposits in the cash flows from investment activity in the Interim Cash Flow Statement for the first half of 2017 in this Interim Financial Statement. The change deals only with the way of representing elements of the Interim Profit and loss Statement and the Other Comprehensive Revenue and the Interim Cash Flow Statement for the period, ending on 30 June 2017 and does not affect the way of their calculation. The financial statement has been prepared in line with the going concern basis. The financial statement has been approved by Bulgartransgaz EAD Management Board on 26 July Detailed information on the corporate accounting policies is given in Note Functional currency and presentation currency This financial statement is presented in Bulgarian lev (BGN), which is the functional currency of the company. The entire financial information that is presented is in BGN and it has been rounded to the nearest thousand, unless otherwise stated. 8

14 FINANCIAL STATEMENT Notes to the financial statement 4. Use of estimates and assumptions In preparing these Interim Financial Statement, the management has done assessments, estimates and assumptions to recognise and measure the assets and liabilities, income and expenses reported. Actual results may differ from such assessments, estimates and assumptions of the management and on rare occasions be the same as the estimates. The only exceptions are the assessment of obligations to pay income tax, which is set in the interim financial statement by means of the calculated average annual effective profit tax rate, applied to revenue before taxation for the interim period and the newly approved IFRS 9 and IFRS 15. (а) Estimates Information about critical estimates that are made in applying the accounting policies that have the most significant effect on the amounts recognized in the financial statement is included in the relevant Notes. (b) Uncertainty in the assumptions and estimates In preparing this interim financial report the management has made a number of assumptions and estimates regarding the recognition and measurement of assets, liabilities, income and costs. The actual results may differ from the assumptions and estimates of the management and in rare instances may be fully in line with the preliminary evaluated results. Information on significant assessments, estimates and assumptions, which impact most the recognition and measurement of the assets, liabilities, income and costs is given below. Impairment of non-financial assets Such amount shall be considered impairment loss with which the book value of a cash-generating asset or unit exceeds their recoverable value, which is the higher of the fair value less costs to sell and its value in use. To measure the value in use the management of the company measures the expected future cash flows for each cash-generating unit and determines the suitable discount factor with a view of measuring the current value of these cash flows. When calculating the estimated future cash flows the management makes assumptions for the future gross profits. Such assumptions are connected with future events and circumstances. The actual results may differ and impose material adjustments in the company s assets in the next accounting year. In most cases when determining the applicable discount factor an estimate of the suitable adjustments against the market risk and asset-related risk factors is made. Useful life of depreciable assets The management reviews the useful life of depreciable assets at the end of each reporting period. Inventories Inventories are calculated at the lower value of the cost of acquiring and the net realisable value. When determining the net realisable value the management takes into consideration the moist reliable available information as at the date of the estimate. To determine the impairment the management must assess the rotation of assets mostly through their putting in use, including their use for technological purposes. The management of the company believes that the book value of inventories, consisting mainly of natural gas and spare parts, represents the best estimate of their net realizable value as at the date of the report on the financial position in line with the 9

15 FINANCIAL STATEMENT Notes to the financial statement requirements of IAS 2 Inventories. Impairment of financial assets IFRS 9 Financial Instruments is effective as of and it introduced a new model of the expected credit loss for amortization of financial assets. The management of the company assessed the effect of IFRS 9 on the financial statement and concluded that this effect is quantitatively negligent from the perspective of the retrospective application of the standard. The additional loss from amortization, which can be recognized for the short-term trade and other receivables as of the start of the reporting period amounts up to BGN 102 thousand. The possible effect for the transitional period as of 30 June 2018 is within BGN 25 thousand recovery of loss from amorization. The management assesses the adequacy of impairment of clients unrecoverable and hard to recover debts based on the expected credit loss. Such assessment is based on data on receivables age analysis, historical experience for the level of writing off unrecoverable receivables, and analysis of the solvency of the respective client, changes in the contracted payment terms and conditions, specific factors that impact the exposure of counterparties to credit risk, such as location, industry, financing cost, etc. If the financial position and the results of the business activity of the clients deteriorate beyond what was expected, the value of the receivables to be written off in the next accounting periods may be higher than the estimated as at the reporting date. The assessment of the expected credit loss of long-term receivables has been prepared on individual basis, and all available facts and circumstances related to the existence and assessment of the receivables have been taken into account, including the expected outcome of the judicial proceedings, filed by the company. The credit loss represents the difference between all contractual cash flows due to the company and all cash flows that the company expects to receive. The expected credit losses are the probability weighted assessment of credit losses, which require the estimate of the company. The expected credit losses are discounted with the initial effective interest rate (or the initial effective interest rate adjusted for purchased or initially created financial assets with credit impairment). Obligation to pay defined benefit plans The management estimates once per year with the help of an independent actuary the obligation to pay defined benefit plans. The actual value of the obligation may defer from the estimate due to its uncertainty. The estimate of the obligation to pay defined benefit plans amounting to BGN thousand. Fair values Some accounting policies and disclosures of the Company require an assessment of fair value for both financial and non-financial assets and liabilities. The company has established a control framework for the assessment of fair values. A review is regularly carried out of the significant unobservable input data and adjustments of the estimates. If information supplied by third parties such as quotations from brokers or similar services is used to estimate the fair values, then the evidence obtained from third parties is measured to support the conclusion that such assessments meet the requirements of IFRS, including the level in the fair value hierarchy in which such assessments should be classified. Significant issues related to the assessments are reported to the Audit Committee of the company. 10

16 FINANCIAL STATEMENT Notes to the financial statement Upon the estimation of the fair value of an asset or liability, the company uses observable data as much as possible. The fair values are categorized into different levels of the fair value hierarchy based on input data to the valuation techniques as follows: Level 1: quoted prices (unadjusted) in active markets for similar assets or liabilities. Level 2: input data other than quoted prices included in Level 1 that directly (i.e. prices) or indirectly (i.e. derived from prices) are available for viewing for the asset or liability. Level 3: input data for the asset or liability that are not based on observable market data (unobservable input data). If input data that are used to estimate the fair value of the asset or liability can be categorized into different levels of the fair value hierarchy, then the fair value estimation is categorized in its entirety in this level of the fair value hierarchy whose input information is relevant to the overall estimation. The Company recognizes transfers between levels of the fair value hierarchy at the end of the reporting period in which the change has occurred. Provisions and conditional obligations The Company is currently defendant in several court cases the outcome of which may result in obligations other than the sum of the provisions recognized herein. Provisions will not be considered here in greater detail to avoid any prejudice linked to the company s position in the above court cases. 5. Income In BGN 000s Income from transit transmission of natural gas Income from transmission of natural gas through the national gas transmission system Income from balancing Income from natural gas storage Income from royalty-free gas Operating income comprise mainly income from services provided in transmission of natural gas in the country, the transmission of natural gas from the Romanian border to the borders with Greece, Turkey and Macedonia (transit transmission under an agreement with OOO Gazprom Export - Russia) and natural gas storage in Chiren Underground Gas Storage and balancing of the natural gas market. To perform the service of transmission of natural gas from the Romanian border to Turkey, Greece and Macedonia natural gas is needed to operate compressor stations which is gas for technological purposes. Technological gas that is required for the operation of compressor stations for transmission from Romania to Turkey, Greece and Macedonia is supplied free of charge to the Company by the users of this network, for which the service is carried out. Bulgartransgaz EAD take into account this unremunerated gas as a current income and expense and it has no influence on financial result. Having regard to the Natural Gas Market Balancing Rules effective as of Bulgartransgaz EAD, in its capacity of balancing entity carries out trade balancing of the natural gas market, namely a compensation for the differences between the inputs of a given user at the entry points and the offtake of this user at the exit points of the network. The obligation of the balancing entity 11

17 FINANCIAL STATEMENT Notes to the financial statement is to cover individual imbalances of the gas transmission network users. Hence and also in the context of the entry-exit model effective as of Contracts for access and transport have been signed with the clients and the company generates income from balancing of the balancing zones of the gas transmission networks on the territory of Bulgaria the national balancing zone and the transit balancing zone. 6. Other income In BGN 000s Income from financing Income from sale of goods Income from optic cables rent Income from using resources auxiliary network Income from connection 57 - Income from services provided in Training and Recreation Centre Republika Colocation revenue Incomes from liquidation of properties, plant and equipment Income from insurance 2 42 Income from consultancy services - 21 Others Technological expenses The total costs for technological needs for the first half of 2018 amounts to BGN thousand (2017: BGN thousand) including technological costs for natural gas transmission from the border with Romania to Turkey, Greece and Macedonia to the amount of BGN thousand (2017: BGN thousand). The amount of the free of charge natural gas received for technological needs for transit transmission gas pipeline for 2016 amount to thousand BGN (2015: thousand BGN). The unremunerated technological gas received for natural gas transit transmission from the border with Romania to Turkey, Greece and Macedonia is recognized as current income. The unremunerated gas that is received is consumed to maintain the operation of compressor stations in connection with transit transmission. It is accounted for as a current expense for technological needs. 8. Expenses for materials In BGN 000s Electric Energy, water and heat Basic materials, including: Spare parts Other

18 FINANCIAL STATEMENT Notes to the financial statement Auxiliary materials, including Fuels and lubricants Vehicle spare parts and accessories Economic inventory Tools Other auxiliary materials Expenditure on hired services In BGN 000s Insurance Security Waste collection tax, property tax and vehicle taxes Service subscription Consultancy services Gas pipeline inspection Repairs and Maintenance Communications Civil contracts Vehicles expenses Rent Laboratory tests Advertising Transport services 9 12 Other expenses for hired services Wages and salaries of employees In BGN 000s Wages and social expenses for the staff Social security contributions

19 FINANCIAL STATEMENT Notes to the financial statement 11. Other operating expenses In BGN 000s Costs for 5% Security of the Electricity System Fund Excise duties Impairment of receivables Business trips Membership fees in organisations Representation expenses Single taxes Licence fees Training and Qualification Fines on legal acts End-of-life disposal of property, plant and equipment - 43 Others Financial income and expenses Acknowledged profits and losses In BGN 000s Foreign exchange losses, differences, net - (6 898) Expenses on commissions (13) (15) Interest income (4) - Financial costs (17) (6 913) Foreign exchange profits, differences, net Interest income Financial incomes Net financial (costs)/income acknowledged in profit and loss (6 001) 14

20 FINANCIAL STATEMENT Notes to the financial statement In BGN 000s Book value 13. Property, plant and equipment Land and buildings Machinery and equipment Buffer Gas Transport vehicles Economic inventory Under construction Advance payments for acquisition of non-current assets Balance as at January 1, Acquired Written-off (3) (1 122) (3 071) (4 196) Transfers (55 445) - - Balance as at 30 June Total Amortization and Depreciation Balance as at 1 January Amortization costs Amortization for written-off assets (3) - - (3) Balance as at 30 June Balance value Balance as at 1 January Balance as at 30 June

21 FINANCIAL STATEMENT Buffer gas of the company is a specific non-current asset, a major part of which is the gas stored in the underground gas storage facility Chiren, and the remaining part is in the gas transmission system. Buffer gas is divided in depreciable and non-depreciable. The depreciable gas in Chiren UGS is the quantity of gas that will remain in the gas storage facility after the end of operation of the gas storage facility. Non-depreciable buffer gas is the part of buffer gas in Chiren UGS, which could be withdrawn at a pressure of the gas pipeline of 35 bar using the existing equipment. Buffer gas in the transit and main gas pipeline is further split in depreciable and non-depreciable, where the depreciable is the gas quantity that cannot be withdrawn at the time of gas pipeline liquidation. More detailed information about the buffer gas allocation is presented below: Balance value BGN thousand Depreciable Non-depreciable 2017 Buffer gas - main gas pipelines Buffer gas Chiren UGS Buffer gas - transit gas pipelines Buffer gas - main gas pipelines Buffer gas Chiren UGS Buffer gas - transit gas pipelines All amortization and impairment costs are included in the profit or loss report and the other comprehensive income on the line Depreciations costs. The company has not pledged any property, plant and equipment as security under its obligations. Property, plant and equipment commissioned Material assets, built and commissioned in the first half of 2018 are, as follows: Reconstruction of protective equipment at the crossing of the transit gas pipeline to Greece over Struma river near the town of Boboshevo at a cost of BGN 744 thousand; Main and local optic cables to transmission gas pipelines in the section of VA Nikolaevo to CS Polski Senovets at a cost of BGN thousand; Optic cable main line Batultsi-Nikolaevo-Pleven and local optic cable Zlatna Panega at a cost of BGN thousand; Expansion of transit gas pipeline to Turkey in the section CS Lozenets PF Nedialsko at a cost of BGN thousand. Property, plant and equipment under construction The main sites under construction as of 30 June 2018 are the following: 16

22 FINANCIAL STATEMENT United Milk Compnay Botevgrad Chiren with a value of BGN thousand, Modernization of automatic management system of GTU and station system at CS Valchi dol and CS Polski Senovets with a value of BGN thousand, Expansion of the gas transmission infrastructure of Bulgartransaz EAD to the Bulgarian- Turkish to the Bulgarian-Serbian border with a value of BGN thousand. Advance payments for the acquisition of assets The advance payments for the acquisition of assets totalling to BGN thousand (2017: BGN thousand) refer mainly to prepaid amounts under contracts for construction and installation works of the optic cable line Ihtiman-Dupnitsa, the Balkan Gas Hub Feasibility Study, gas pipeline branch Targovishte, construction and installation works of the optic cable line to the transit gas pipeline to Greece GMS Dupnitsa, overall of machine room to compressor workshop CS Polski Senovets, construction and installation works of the optic cable line CS Polsi Senovets АGRS Targovishe, АGRS Lovech - reconstruction, Reconstruction of gas pipeline branch Vratsa 1. Commitments for acquisition of property, plant and equipment The commitments for acquisition of property, plant and equipment are all contracts the company had concluded on the construction and commissioning of assets. In general they are related to the gas transmission network including all facilities required for its maintenance. 14. Intangible assets In BGN 000s Book value Software Patents and licenses Other Total Balance as at January 1, Acquired Balance as at June 30, Amortization Balance as at January 1, Amortization costs Balance as at June 30, Balance value As at January 1, Balance as at June 30, All amortization costs are included in the Profit or Loss Statement and the Other Comprehensive Income Statement in line Amortization Costs. The Company has not pledged intangible assets as collateral for its liabilities. 17

23 FINANCIAL STATEMENT 15. Investments in jointly controlled undertakings By virtue of Decision of the Board of Directors of Bulgarian Energy Holding EAD and authorization by the Bulgarian energy minister in 2017 Bulgartransgaz EAD capitalhas been increased in line with article 193 of the Act of Commerce by means of contribution in kind, representing 50% of Bulgartel EAD shares, property of BEH EAD. Such contribution in kind totals to 3 thousand shares of Bulgartel EAD capital at a value of BGN thousand by the issuance of thousand new ordinary registered shares with voting right and nominal value of BGN Long-term receivables The material value of long-term receivables represents Bulgartransgaz EAD receivables from Corporate Trade Bank AD in insolvency (CTB AD (in insolvency)) amounting to BGN thousand (2017: BGN thousand) As of the corporate management had assessed the recoverable value of these receivables and an impairment loss has consequently been acknowledged of BGN thousand (2017: BGN thousand). Special circumstances are in place concerning some of the receivables from CTB AD (in insolvency) in gross amount of BGN thousand, therefore the corporate management had taken steps to pull out this amount of the insolvency assets and its recovery in favour of Bulgartransgaz EAD. 17. Inventories In BGN 000s Natural gas Materials Works in progress Finished products Fuel Other A substantial part of stocks is the natural gas stored in Chiren UGS. On the basis and in pursuance of the Orders No. D /May 21, 2014 of the Minister of Economy and Energy and Amendment No.ЕРД / of the Minister of Energy, 115 bcm natural gas regarding a need arisen for additional obligations to the community are stored in Chiren UGS. The company has no stocks provided as security obligations. 18. Trade and other receivables In BGN 000s Receivables from sales of services Discount for depreciation and uncollectibility (326) (326) Receivables from sales of services, net of devaluation VAT for refund Prepayment expenses Other

24 FINANCIAL STATEMENT Total trade and other receivables, including: Current All receivables are short-term. The net balance value of the trade and other receivables shall be acknowledged as reasonable approximate evaluation of their fair value. 19. Cash and cash equivalents In BGN 000s Sums in checking accounts Short-term deposits with maturity up to three months Cash Cash and cash equivalents The company has no restricted cash and cash equivalents. 20. Equity and reserves Share capital The share capital is divided into registered shares. All shares have a nominal value of 1 BGN. Sole capital shareholder is Bulgarian Energy Holding EAD, whose principal is the Ministry of Energy. The share entitles to one vote at shareholders General Meeting, dividend right and liquidation quota which is commensurate with the nominal share value. Reserves Corporate reserves consist of statutory reserves, other reserves and reserves from taking into account the effect from applying the revised IAS 19 Employees Benefits. Statutory reserves The statutory reserves include a "Reserve Fund" with source of formation at least 1/10 of the profit, while the resources of the fund reach 1/10 of the registered capital at least. As at 30 June 2018 the statutory reserves of the company amount to BGN thousand. The interim period had seen the statutory reserves increase with BGN thousand as a result from 2017 profit allocation. Other reserves The other reserves total to BGN thousand and have been formed in 2009 by virtue of a Decision of Bulgarian Energy Holding EAD, when, following deductions for the Reserve Fund, retained earnings for 2008 has been transformed in Other reserves. Actuarial profits and losses The generated actuarial profits/losses for the period 2011 by 2017 amount to BGN thousand and have been formed from the loss from revaluations of liabilities to pay old-age benefits. Revaluation reserve 19

25 FINANCIAL STATEMENT Revaluation reserve totals to BGN thousand. As of 31 December 2017 a review of the fair values and useful property, plant and equipment assets life have been reviewed. The next review to be made by the company is at the end of the financial According to the applicable law the revaluation reserve, formed from the revaluation of property, plant and equipment cannot be allocated to dividends. 21. Deferred income from financing In BGN 000s Notes Balance at the start of the period Financing received Income recognized for the period 6 (101) - Recovered financing (3 287) (10 059) Balance at the end of the period Deferred income from financing is acknowledged in the statement of financial position refers mostly to non-current assets whose acquisition and/or construction is partly funded by outside organisations. A major part of the assets, subject to financing, are part of the corporate investment programme and as of the date of the financial report have been commissioned. Funds have further been granted to the company to finance assets currently under construction. In May 2014 Bulgartransgaz EAD and the European Bank for Reconstruction and Development (EBRD) signed a Grant Contract No.057 where a grant from the KIDSF was granted to the company for the construction of three transmission gas pipelines with automatic gas-regulation stations near Panagyurishte, Pirdop, Bansko - Razlog. The total value of the project is estimated to EUR thousand, EUR of which is the grant from the KIDSF. The estimated cofunding from Bulgartransgaz amounts to EUR thousand. Having regard to the Grant Agreement Bulgartransgaz EAD signed a Contracts for consultancy for the design of transmission gas pipeline to Svishtov at a value of EUR ,22, transmission gas pipeline to Panagyurishte and Pirdop at a value of BGN and transmission gas pipeline to Razlog and Bansko at a value of BGN Fifty per cent (50%) of the total amount of the price of contracts will be paid with funds from KIDSF European Bank for Recovery and Development (EBRD). A consultancy contract for the project management unit at a value of EUR has also been signed. One hundred per cent (100%) of the value of this contract is financed by KIDSF ЕBRD. As at the date of the financial statement the Bank has financed EUR ,59 for the activities carried out. On April 3, 2015 Bulgartransgaz EAD signed a Grant Agreement INEA/CEF/ENER/M2014/0014 with the financing institution INEA for the realization of a Feasibility Study for the Interconnection Turkey-Bulgaria. The total value of the study is estimated at EUR of which the grant aid under the Connecting Europe Facility amounts up to EUR As of the date of the financial report Bulgartransgaz EAD has received payments under the GA to the amount of EUR in advance payments and EUR 86 thousand final payment following the approval of the Final Technical and Financial Report in compliance with the terms and conditions of art of the GA. On October 23, 2015 Bulgartransgaz EAD signed a Grant Agreement with INEA for the realization of Action BG-S-M-15 entitled 3D field seismic studies as part of the project for the expansion of Chiren UGS , consisting of 3D field seismic studies on the Chiren structure area and 3D seismic studies quality control and processing of the acquired data with an estimated total value of EUR The amount of the grant is 50% of the action amount up to 20

26 FINANCIAL STATEMENT Euro. As of the date of the Financial Statement 40% of the grant or EUR thousand have been received in compliance with the terms and conditions of art of the GA. On April 27, 2016 Bulgartransgaz EAD signed a Grant Agreement with INEA for the realization of Action BG-S-M-15 entitled Preparatory activities for the implementation of PCI Rehabilitation, modernization and expansion of the Bulgarian gas transmission system at an estimated total value of EUR thousand. The amount of the grant is 50% of the action amount up to EUR As of the date of the Financial Statement 40% of the grant or EUR have been received in compliance with the terms and conditions of art of the GA. On November 3, 2016 Bulgartransgaz EAD and INEA signed a Grant agreement the Action BG-S-M-16 entitled "Implementation of a software package to model and determine the optimum operating regimes of the Chiren UGS in connection with its expansion" as part of PCI Expansion of Chiren UGS capacity with a total estimated value of EUR The amount of the grant is 50% of the action amount up to Euro. Bulgartransgaz EAD has received an advance payment of EUR thousand (40% of the grant) in compliance with the terms and conditions of art of the GA. As of the date of the Financial Statement the funds have been restored to INEA, since the GA has been terminated at the end of On 17 May 2017 Bulgartransgaz EAD and INEA signed a Grant agreement the Action BG-S-M-16 entitled "Preparatory activities for the rehabilitation of the section PF Valchi dol VA Preselka part of the transmission system, PCI 6.8.2, part of PCI Rehabilitation, modernization and expansion of the Bulgarian gas transmission system with a total estimated value of EUR The amount of the grant is 50% of the action amount up to Euro. As of the date of the Financial Statement 40% of the grant or EUR have been received in compliance with the terms and conditions of art of the GA. On 17 May 2017 Bulgartransgaz EAD and INEA signed a Grant agreement the Action BG-S-M-16 entitled "Feasibility Study for Balkan Gas Hub, as part of PCI Infrastructure necessary for the development of the Bulgarian Gas Hub with a total estimated value of EUR The amount of the grant is 50% of the action amount up to Euro. As of the date of the Financial Statement 40% of the grant or EUR have been received in compliance with the terms and conditions of art of the GA. 22. Employees benefits In BGN 000s Obligation under defined benefits plans at the time of retirement non-current Obligation under defined benefits plans at the time of retirement current Total obligations under Employees benefits Obligations under defined benefit plans upon retirement In line with the Labour Code and the Collective Labour Agreement when terminating the employment relationship after the employee had acquired the old-age pension entitlement, the company must pay a compensation in the amount of up to six gross work salary and further a compensation in line with the Collective Labour Agreement. The company bears the legal obligation to pay compensations to employees when retiring in line with the requirements of IAS 19 Employment Benefits based on the estimated payments for the next years, currently discounted with a long-term interest rate of safe bonds. 21

27 FINANCIAL STATEMENT The obligation, acknowledged in the Financial Status Statement under the defined benefit plans represents the present value of the obligation under the defined benefits at the end of the reporting period. The approximate amount of the obligations under the defined benefit plans at the time of retirement to every reporting period and the costs, acknowledged in the profit and loss statement are based on the actuarial report. 23. Trade and other liabilities In BGN 000s Payables to suppliers Obligations to employees in lieu of unused paid annual leave Payables to employees for remuneration Obligations to insurers Other liabilities Liabilities to the budget: Liabilities for 5% of Security of the Electricity System Fund Obligations for social security contributions Income tax of physical entities Liabilities to customs VAT payment Liabilities for expense tax Other liabilities to the budget Related parties Mother-company and ultimate controlling party for the Company is Bulgarian Energy Holding EAD (BEH). The Company has transactions with the following companies from the group of BEH: Bulgarian Energy Holding EAD Bulgargaz EAD NEK EAD ESO EAD Mini Maritsa Iztok EAD Bulgartel EAD South Stream Bulgaria AD Controlling company Subsidiary of BEH Subsidiary of BEH Subsidiary of BEH Subsidiary of BEH Jointly controlling company with ESO (BEH subsidiary by November 2017) Subsidiary of BEH The transactions with related parties are presented as follows: Providing services for transmission, storage and balancing of natural gas to Bulgargaz EAD; Payments for purchased natural gas from Bulgargaz EAD; Purchase of electricity from ESO EAD Contract for settlement of the relations on the use of Bulgartel EAD of resources from the auxiliary network of Bulgartransgaz EAD and utilization of Bulgartransgaz EAD of the 22

28 FINANCIAL STATEMENT facilities of Bulgartel EAD from its public electronic communications network. Transactions with other related parties Transactions value in Final balances receivables/liabilities In BGN 000s BЕH ЕАD Dividend (9 246) - Bulgargaz EAD Sales: (9 246) - Services for transmission, storage and balancing Penalties for overdue payments Interest long-term receivables Long-term receivables Current part of the long-term receivables Purchase of: Purchase of natural gas (6 683) (3 462) (392) (1 160) Guarantees under contract - - (7 456) (9 666) (6 683) (3 462) (7 848) (10 826) Bulgartel EAD Sales: Provision of resources, use of optical fibres and colocation Interest for overdue payments

29 FINANCIAL STATEMENT Bulgartel ЕАD Purchase of: (24) (23) (256) (268) Use of resources of the auxiliary network and communication services - - (1) (1) Guarantees (24) (23) (257) (269) ЕSО ЕАD Opened guarantee Electricity transfer services (34) (49) (11) (10) (34) (49) 15 6 South Stream Bulgaria ЕАД Purchase of lands, rights in rem, building permit, DSP, etc. (13 143) - (15 328) - (13 143) - (15 328) - Total receivables related persons Total liabilities related persons - - (32 690) (11 105) Aggregated calculations with related parties are as follows: In BGN 000s Non-current receivables from related parties Current receivables from related parties In BGN 000s Non-current liabilities to related parties Current liabilities to related parties Contract guarantees In BGN 000s Non-current guarantees under contracts Current guarantees under contracts The main part of the corporate obligations under received guarantees represent: guarantees retained sums under contracts for construction works that are paid pit depending on the stage of completion of construction sites in line with the contractual provisions; sums (credit limit) that guarantee payments under Access and Natural Gas Transport Contracts, that every network user must pay in as a collateral to the nominations for capacity and access. 24

30 FINANCIAL STATEMENT Booking of sums under provided credit limit by Bulgartransgaz EAD is automatic process at the time of capacity booking procedures in the amount laid down in items 8.10 and 8.11 of the General Terms and Conditions to the Access and Transport Contracts, signed with clients after sums that guarantee payments for the purchase and sale of natural gas for balancing. 26. Determining fair values Some accounting policies and disclosures of the Company require an assessment of fair value for both financial and non-financial assets and liabilities. Fair values have been determined for the purposes of accounting and disclosing based on the below methods. Where applicable the respective notes give additional information on the assumptions, made when determining the fair value of the specific asset or liability. (i) Property, plant and equipment The fair values of a property is the expected amount at which such property can be exchanged on the date of its acquisition between the willing buyer and seller in a market-based transaction following due marketing and the parties acted knowingly. The fair value of property, plant and equipment is based on market principle and the acquisition price approach by using market prices of similar items where available and value of the replacement, where appropriate. The approximate assessment of the depreciated value of the replacement reflects the corrections both for physical tear and wear, and functional and economic aging. The methods used for to determine the fair value of long-term tangible assets are laid down in note 13 Property, plant and equipment. (ii) Trade and other receivables The fair values of trade and other receivables are determined as a current value of the future cash flows, discounted with a market value as of the reporting date. Short-term Краткосрочни noninterest bearing receivables are determined according to their original value as per the invoice in case the discounting effect is minor. The fair value is determined upon initial recognition and for the purposes of the publication for every reporting period. The company reports non-current receivables from related parties, subject to interest in line with a market interest rate and therefore such receivables are not discounted. (iii) Non-derivative financial liabilities The fair values determined for the purposes of disclosure are calculated based on the current value of future cash flows of principals and interests, discounted with a market-based interest rate as of the date of reporting. 27. Conditional assets and conditional liabilities In Favour of the company as of bank guarantees have been issued by third parties, totaling to BGN thousand. Directive 2009/29/EC defines the basic parameters of emissions trading for the period , as for the production of electricity it is not supposed to allocate free quotas and all quotas must be purchased by installations through tender. Possibility of free allocation on transitional principle of installations producing electric power is provided by Art. 10(c) only in the event that the Member State meets certain requirements. Bulgaria took the opportunity to compensate the electricity under Art. 10(c) by which sector "Electricity Production" will move progressively from free allowances to quotas provided by tender. 25

31 FINANCIAL STATEMENT In exchange for providing free allowances each installation that meet the specified requirements will have to implement projects for the amount equal to free allowances allocated. In connection with the above and in accordance with Directive 2009/29/EC and Communication (2011/ C 99/03) of the Commission, Guidance document on the optional application of Article 10(c) of Directive 2003/87/EC, the Ministry of Energy prepared a National Investment Plan (NIP) including investment projects. Taking into account the requirements set, Bulgartransgaz EAD applied and was included in the NIP. The projects for modernization of 4 compressor stations CS Ihtiman, CS Lozenets, CS Petrich and CS Strandja were approved for funding from the account National Investment Plan, given the fact that the realization of these projects is expected to decrease the CO2 emitted by the aforementioned compressor stations in the environment with about 15%. Currently with Orders No.Е-РД / , No.Е-РД / and No.Е-РД / of the Minister of Energy, Bulgartransgaz EAD had seen costs refunded from the account National Investment Plan for CS Ihtiman, totaling to BGN ,51, CS Petrich BGN ,63, and CS Losenets BGN ,02, which is the full amount of the financial means provdied for in the NIP, set out in line with the corrected value of the investment due to a change in the reference value of the greenhouse gas emissions under Order No.РД / of the Minister of Industry and Energy. Concerning CS Strandja with Order No.Е-РД / of the Minister of Energy costs for the project realization have been partially refunded, totaling to BGN ,06. The refund of costs in their full amount as provided for in the NIP is expected, totaling to BGN ,12. The company is a party to Case АТ ВЕН Gas initiated by the European Commission (EC) regarding an official proceeding to investigate whether BEH EAD and its subsidiaries Bulgargaz EAD and Bulgartransgaz EAD distort the competition rules of the EU in the natural gas market in the country. The procedure was initiated in relation to the European Commission concerns that BEH EAD and its subsidiaries impede their potential competitors from gaining access to the Bulgarian gas transmission network and natural gas storage facility by explicitly or implicitly denying access to third parties or delaying it as well as a possible prevention of access of competitors to the main gas pipeline for import by booking capacity on the territory of Romania. On the Parliament of the Republic of Bulgaria decided to take all necessary steps to protect the interests of the Republic of Bulgaria and the companies: Bulgarian Energy Holding EAD, Bulgargaz EAD and Bulgartransgaz EAD, including actions to appeal a possible prohibition decision by the EC under Case COMP/B1/AT BEH Gas. As of the date of preparation of the company Interim Financial Statement, the EC has not taken a formal decision to terminate BEH Gas case, nor a decision on the possible amount of the financial penalty for Bulgarian Energy Holding EAD and its subsidiaries Bulgargaz EAD and Bulgartransgaz EAD. The Company management has analysed and evaluated the available information regarding the possible outcome of BEH Gas Case and is unable to assess reliably the potential or expected effects of the outcome of the case. 28. Events after the reporting period By virtue of a decision of the Board of Directors of BEH EAD under MoM / , item I.3 the proposal for capital increase of the company to the amount of the 2017 retained earnings has been made. As of the date of the Interim Financial Statement the procedure has not ended up with a Permission by the Minister of Energy. 26

32 FINANCIAL STATEMENT 29. Significant accounting policies The significant accounting policies set out below have been applied consistently in all periods presented. (a) Income Income is gross inflows from economic benefits over the period, generated in the course of the Company's normal business, where such inflows result in increase in the equity other than the increases, related to contributions of the sole owner. No amounts, collected in the name of third parties, e.g. VAT, and no amounts, collected in the name of other companies, are included in the incomes. 27

33 FINANCIAL STATEMENT (i) Income from sale of materials, production and goods Income from sale of goods in the normal course of business is acknowledged at the fair value of the received or expected to be received remuneration, net of returns, trade discounts or works. Income from sale of goods is recognized at the time when there is convincing evidence, usually in the form of an executed contract of sale, that significant risks of ownership are transferred to the buyer, receipt of the remuneration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing participation of the Management in the governance of goods and the amount of revenue can be measured reliably. Income for each transaction is recognized simultaneously with the expenses incurred for it. The Company recognizes income from sale of goods in food establishments and others. (ii) Income from services Income from rendered services is acknowledged at fair value of what has been received, what is to be received or is due to compensation, net of returned goods, trade discounts or works. The income and expenses related to the same transaction are acknowledged in the same reporting period. In cases when the outcome cannot be estimated reliably, the income is recognized only to the extent that the costs are recoverable. Income from sales of services comprise mainly of license activities of the Company, namely the services rendered in transmission of natural gas in the country, transmission from the Romanian border to the borders with Greece, Turkey and Macedonia and natural gas storage. (iii) Income from balancing Income from balancing in the normal course of business is acknowledged at the fair value of the received or expected to be received remuneration, net of returns, discounts or rebates. The income and expenses related to the same transaction are acknowledged in the same reporting period. In cases when the outcome cannot be estimated reliably, the income is recognized only to the extent that the costs are recoverable. Income from balancing include incomes from natural gas sale, received as a result from the activity, income from the differences in the prices of the natural gas purchased for physical balancing and natural gas realised along the gas transmission network for transit transmission and the national gas transmission network. (iv) Income from gratuitous gas for compressor stations of transit gas pipeline Income from gratuitous gas for compressor stations along transit gas pipeline is recognized in profit and loss in fair value. The amount of such incomes is disclosed in Note 5 Incomes. (v) Rental income Rental income is recognized in profit and loss on a straight-line method for the rental period. Additional payments received are recognized as an integral part of the total rental income for the renting period. Rental income from property subleased by the Company is recognized as other income. (vi) Income from financing Income from financing is recognized in profit and loss in the amount of depreciation accrued for sites constructed with funds from funding programs. With the entry into force of IFRS 15, the Company will assess and recognize the income in the following way (5 steps): 1. Identifying the contract with a customer; 2. Identifying the performance obligations; 3. Determining the transaction price; 28

34 FINANCIAL STATEMENT 4. Distribution of the transaction price to the performance obligations; 5. Recognition of income when performance obligations are met. Income shall be recognized either at a certain point in time or over the time when (or by) the Company fulfils the performance obligations by transferring the promised goods or services to its customers. The Company will recognize the obligations under the contract as remuneration received in respect of outstanding performance obligations and will account for those amounts as other liabilities in the financial statement. Similarly, if the Company fulfils a performance obligation before receiving the remuneration, it will acknowledge in its financial statement either contractual obligation or receivable, depending on whether anything else is necessary, other than the expiration of time before the remuneration is due. (b) Expenses Expense is a decrease in the economic benefit over the reporting period in the form of expiry or decrease in assets or accumulation of liabilities, thus resulting in decrease of equity independently from that due to distribution to the sole owner. Expenses of the Company are recognised at the time of their occurrence and based on the principles of accrual accounting and compatibility. Where the economic benefit is expected to last for a couple of reporting periods, thereby making the connection with the income only general or indirect, the expenses are recognised in the Profit and Loss Report and any other overall revenue based on system and rational procedures rescheduling procedures. The objective behind similar procedures is expenses to be recognised in these reporting periods when the related economic benefit, linked with these items will be acquired and completely used. Any expense which will not result in future income or other economic benefit or when it will be established that it is more likely such economic benefit to not be classified as an asset in the Financial Position Statement shall be immediately recognised as running cost. A reported obligation with no asset acquisition is also recognised to be an expense, i.e. the provision. All expenses of the Company are initially reported in line with economic elements costs for: materials, raw materials and consumables, external services, depreciations, personnel, taxes, charges, and any other similar payments, assets impairment, provisions under liabilities, balance sheet value of the sold assets, excise duty, contribution to the Security of the Electricity Systems Fund, fines, penalties, lacks, representative moneys, training and qualifications, technological losses, etc. After being reported as costs by economic elements, all costs for the company are distributed as expenses also for: main, auxiliary, social and governance activity. Costs for the main activity relate to the natural gas services offered: (c) Natural gas transit transmission to third countries on the basis of contractual relations with customers; Access and transport of natural gas through the national gas transmission network, property of the Company, along high pressure gas pipelines, from the gas metering stations to the gas distribution stations, to be further on supplied to natural gas end customers; Storage activity involving natural gas injection and its subsequent withdrawal to be further on supplied to end customers. Carried out in Chiren UGS; and Balancing - purchase and sale of natural gas with a view to covering the individual imbalances of the gas transmission networks users. Financial income and expenses Financial income includes income from interest on funds invested, profit on foreign currency transactions, and interest income on long-term receivables. Interest income is recognized in profit 29

35 FINANCIAL STATEMENT and loss as it is accrues using the method of effective interest rate. Financial expenses include interest expenses on loans, as expenses resulting from an increase of liabilities due to approach by one period of the date fixed for the implementation of the liability under defined benefit plans, and other financial operations - bank charges, commissions and others. Loan expenses, which are not directly attributable to the acquisition, construction or production of a qualifying asset, are recognized in profit and loss using the method of effective interest rate. Profit and losses from foreign currency exchange differences are accounted for on a net basis or as financial income or financial costs, depending on whether the exchange rate differences represent a net profit or net loss. (d) Property, plant and equipment (i) Recognition and evaluation. Specific assets. Initial recognition Property, plant and equipment are initially evaluated at their acquisition cost, which includes costs directly related to acquisition of the asset. Cost of acquisition of self-constructed assets includes the following: material costs and direct labour; costs directly related to bringing the asset to the condition necessary for its intended use; when the company has the obligation to dismantle an asset or restore the terrain, the estimate of costs of dismantling and restoring the site on which they are located; Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When property, plant and equipment include components with different useful lives, they are accounted for separately. Subsequent evaluation For the purposes of subsequent valuation of property, plant and equipment the Company applies the revaluation model in IAS 16. The revalued amount is the fair value on the date of revaluation, less subsequent depreciation and accumulated impairment losses. The fair value of property, plant and equipment is determined based on market evidences presented in the report prepared by an independent certified appraiser. Revaluation of property, plant and equipment is carried out every three years. When the fair value changes significantly for a shorter period this revaluation may be done more frequently. Land, buildings and equipment, the buffer gas, including specialized transport vehicles owned by the Company are estimated based on an assessment report prepared by an independent certified appraiser as at June 30, 2015 (see also Note 13). As at December 31, 2017 a review of the fair value of property, plant, equipment and transport vehicles (cargo and specialized) and the net realizable value of inventories, and impairment test has been made. All passenger cars other noncurrent assets and assets under construction are presented in financial statement based on historical cost less accumulated depreciation and impairment losses. Specific fixed asset to Bulgartransgaz EAD is the buffer gas in Chiren UGS and in the pipeline. It is a constant quantity that only supports usability of the storage and pipeline without participating in the quantity transported or used for own technological needs natural gas. These quantities should not decrease because it will reduce the capacity of Chiren Underground Gas Storage and pipeline. Buffer gas in Chiren UGS and in transit and main gas pipeline is divided into depreciable and nondepreciable buffer gas. Depreciable buffer gas in Chiren UGS is that quantity of gas that will remain 30

36 FINANCIAL STATEMENT in the underground reservoir after closure the exploitation of gas storage and cannot be used for commercial purposes. Non-depreciable buffer gas is a part of buffer gas in Chiren UGS that could be produced at a pressure of 35 bar of the gas pipeline upon currently available facilities. Buffer gas in the gas pipeline is divided also into depreciable and non-depreciable buffer gas on the basis of the above assumption. Quantities buffer gas and their value also are disclosed in Note 13. Profits and losses upon written off of property, plant and equipment (defined a balance between the proceeds and the balance sheet value of the asset) are recognized net within other income / other expenses in profits and losses. When revalued assets are sold, the amounts included in the revaluation reserve are reclassified to retained earnings or loss. At the end of each reporting period part of revaluation reserve is realized in accordance with the use of the asset. The amount of the revaluation realized represents the difference between depreciation based on the revaluated balance sheet value of the asset and depreciation based on the acquisition cost. (ii) Subsequent costs Subsequent costs are capitalized only when it is likely that future economic benefits of these expenses will be received by the Company. Current repairs and maintenance are recognized as an expense upon their occurrence. (iii) Depreciation Property, plant, facilities and equipment are depreciated from the date on which they are installed and ready for use or about the acquired in a commercial manner, from the date when the asset is completed and ready for use. Depreciation is recognized to the extent of the initial value of the asset minus the expected residual value of the asset on a straight-line method, based on the expected useful lives of each of the components of property, plant, facilities and equipment. Depreciation is accounted for in profit or loss unless it is included in the balance sheet value of another asset. Depreciation of assets acquired under finance leases are charged to the shorter period between the contract and their useful live unless it is reasonably certain the acquisition of ownership by the end of the contract term. Land is not depreciated. The expected useful live terms for the current and comparative period are as follows: Buildings Plants, facilities and equipment Computer equipment and office furniture Transport vehicles Depreciable buffer gas Others 7-70 years 3-50 years 3-12 years 3-15 years 60 years 3-15 years Depreciation methods, useful lives and residual values are reviewed as at each reporting date and corrected if necessary. (e) Intangible assets (i) Intangible assets Intangible assets acquired by the Company, having determined useful life are presented at acquisition price less accumulated depreciation and impairment losses. (ii) Subsequent costs Subsequent expenses are capitalized only when it increases the future economic benefits of the specific asset to which they relate. All other expenses recognized as an expense at the time of their occurrence. 31

37 FINANCIAL STATEMENT (iii) Depreciation Intangible assets are amortized on a straight line basis in profit or loss based on the estimated their useful economic life from the date on which they are ready for use. The estimated useful live for the current and comparative period are as follows: Licenses for storage, transmission and transit transmission of natural gas Software licenses and mobile telecommunications and radio-telephone network Software products Others 4 35 years 2-10 years 2-8 years 3-25 years Depreciation methods, useful lives and residual values are reviewed as at each reporting date and corrected if necessary. (f) Leased assets Lease contracts under which the Company assumes substantially all risks and benefits of the ownership are classified as finance leases. Upon initial acknowledgement the leased assets are accounted at the lower of fair value and the present value of the minimal lease payments. After the acknowledgement, the asset is accounted for in accordance with the accounting policy applicable to the respective asset. Other than these leases are operating lease contracts and they are not acknowledged in the statement of financial position of the Company. (g) Joint ventures The Company determines the type of the joint venture in which it participates, based on the rights and obligations provided for in the Joint Activity Agreement. The joint venture is a contractual agreement in line with which the Company and other independent parties undertake an economic activity, which is subject to a joint control and the parties holding the joint control over the joint venture have the right to the joint venture net assets. The Company shall account for its interest in the joint venture at cost. 32

38 FINANCIAL STATEMENT (h) Impairment (i) Non-derivative financial assets The new impairment requirements under IFRS 9 use more future-oriented information to recognize the expected credit losses - the "expected credit losses" model that replaces the "losses incurred" model, presented in IAS 39. The instruments within the scope of the new requirements include loans and other types of debt financial assets, measured at amortized cost and at fair value through other comprehensive income, trade receivables, contract assets recognized and measured under IFRS 15, as well as loan commitments and certain financial guarantee contracts (with the issuer) that are not carried at fair value through profit or loss. Recognition of credit losses is no longer dependent on the occurrence of a credit loss event. Instead, the Company considers a wider range of information in the credit risk assessment and measurement of the expected credit losses, including past events, current conditions, reasonable and sustained estimates that affect the collectability of the expected future cash flows of the instrument. In applying this forward-looking approach, a distinction is made between: financial instruments of credit quality that has not deteriorated since the initial recognition or of low credit risk (Phase 1) financial instruments of credit quality that has not deteriorated since the initial recognition or of credit risk that is not low (Phase 2) "Phase 3" covers financial assets with objective evidence of impairment at the reporting date. The calculation of the expected credit losses is determined by the probability-weighted estimate of credit losses over the expected period of the financial instruments. The Company applies a simplified approach in accounting of trade and other receivables, and recognizes impairment loss as expected loss over the entire period. This is the expected shortage in the contractual cash flows, given the potential for default at any time in the financial instrument's term. The entity uses its accumulated experience, external indicators and long-term information to calculate the expected credit losses by customer allocation by industry and time structure of receivables. The Company uses its accumulated experience, external indicators and long-term information to calculate the expected credit losses by applying a provision matrix. The entity allows 1% for the values of expired term of days, 1.5% for the values of expired term of days and fully derecognize the values of more than 90 days expiry. (ii) Non-financial assets The accounted values of non-financial assets of the Company, other than inventories and deferred tax assets, are reviewed on each reporting date to determine whether there are signs of impairment. If any such indication exists, an estimate of the recoverable amount of the asset is made. An impairment loss is acknowledged if the balance value of an asset or cash-generating unit (CGU), part of which it is, exceeds its recoverable value. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate before tax that reflects current market assessments, value of the money in time and the risk specific to the asset or CGU. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest possible group of assets that generates cash inflows from continuing use that are to a large extent independent of the cash inflows from other assets or CGU. Impairment losses are recognized in profit and loss. Impairment losses recognized for CGU is allocated so as to reduce the accounting amounts of assets in the unit proportionately. An 33

39 FINANCIAL STATEMENT impairment loss is recovered to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognized. (i) Inventories Inventories include: fuels, operating and free of charge gas, owned by the Company, used to cover the technological needs, balancing natural gas, spare parts, equipment, office materials, stationery and consumables, goods; work in progress and finished goods, including produced condensate. Inventories are accounted at the lower of their cost and their net realizable value. The cost of inventories is based on a "weighted average", and includes the acquisition costs of inventories, production costs or processing and any other costs relating to bringing the inventories to their present location and condition. The cost of manufactured goods and unfinished production includes labour costs, social security expenses and depreciation. Net realizable value is the estimated sale price in the ordinary course of business, less the estimated costs to complete the production cycle and those expenses that are necessary to make the sale. Spare parts and spare equipment are considered as property, plant, facilities and equipment when the company expects to use them longer than one accounting period and they are used only in connection with a certain property, plant, facilities and equipment. Significant accounting policy 29 (d) applies for their accounting. (j) Financial instruments (i) Non-derivative financial assets Recognition and derecognition Financial assets and liabilities are recognized when the entity becomes a party under the contractual terms of the financial instrument. The company shall deduct the financial liability (or part of the financial liability) from its statement of financial position if and only if extinguished i.e. when the obligation stated in the contract is fulfilled, cancelled or its term has expired. Classification and initial measurement of a financial asset Except for those trade receivables that do not have a significant financial component and are measured at the transaction price under IFRS 15, all financial assets are initially measured at fair value, adjusted by the transaction costs (if applicable). Financial assets, other than those that are created and effective as hedging instruments, are classified into one of the following categories: Amortized cost; Fair value through profit or loss; Fair value through other comprehensive income. The classification is determined by both: The Company Business model for financial asset management; Characteristics of the contractual cash flow of the financial asset. All income and expenses related to the financial asset, recognized in profit or loss, are included in financial expenses, financial income or other financial items, except for the impairment of trade receivables that is included in other expenses. Subsequent measurement of financial assets Financial assets measured at amortized cost Financial assets are measured at amortized cost if they meet the following requirements (and are 34

40 FINANCIAL STATEMENT not to be measured at fair value through profit or loss): The Company manages assets within a business model that aims at holding the financial assets and collecting contractual cash flows; According to the contractual terms of the financial asset, cash flows arise at specific dates, which are only principal payments and interest on the outstanding amount of the principal; This category includes non-derivative financial assets such as loans, receivables with fixed or determinable payments that are not quoted in an active market. After initial recognition, they are measured at amortized cost using the effective interest method. Discounting shall not be applied when its effect is insignificant. This category also classifies cash and cash equivalents, trade and other receivables, and bonds that have previously been classified as held-to-maturity in accordance with IAS 39. Cash and cash equivalents Cash and cash equivalents include cash and sight deposits with original maturities of three months or less from the date of acquisition, that are associated with insignificant risk of change in their fair value and are used by the Company to manage short-term commitments. Deposits with maturity of over three months are classified as short-term receivables in the financial statement. (ii) Non-derivative financial liabilities Classification and measurement of financial liabilities As accounting for financial liabilities remains largely the same under IFRS 9 compared to IAS 39, the application of IFRS 9 does not effect the Company's financial liabilities. For the sake of completeness, accounting policies are explained below. The financial liabilities of the Company include trade and other payables. Financial liabilities are initially measured at fair value and, where applicable, adjusted with regard to the transaction costs, unless the Company has determined a financial liability as measured at fair value through profit or loss. Subsequently, financial liabilities are measured at amortized cost, using the effective interest method. All interest costs and, if applicable, changes in the fair value of the instrument, recognized in profit or loss, are included in the financial expenses or financial income. Financial liabilities are initially recognized on their transaction date on which the Company becomes party under the contractual provisions of the instrument. The Company derecognises a financial liability when its contractual obligations are fulfilled, cancelled or no longer valid. Financial assets and liabilities are netted and the net amount is presented in the statement of financial position when, and only when the Company has a legal right to net the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. (iii) Share capital Common shares Common shares are classified as equity. Marginal costs directly related to the issuance of the common shares are recognized as a deduction from equity, net of any tax effects. The capital of the Company is presented at historical cost at the date of last registration. (k) Leasing (i) Payments under lease contracts 35

41 FINANCIAL STATEMENT Payments under operating lease are recognized in profit or loss based on the straight-line method within the lease contract period. The minimum lease installments under financial lease are allocated among financial costs and reduction of the outstanding obligations. Financial costs are allocated to each period during the lease term so to achieve a constant periodic interest rate of the remaining part of the obligation. (ii) Determining whether an Agreement contains a Lease Upon occurrence of agreement, the Company determines whether it is or it contains a lease. That is the case if the following two criteria are met: implementation of the agreement depends on the use of specific asset or assets; and agreement forwards the right to use the asset(s). Upon occurrence or after reassessment of the agreement, the Company divides payments and other remunerations required under this Arrangement, to such lease payments and those for other elements on the basis of their relative fair value. If the Company concludes that for a finance lease it is impossible to separate the payments reliably, the asset and liability are recognized in an amount equal to the fair value of the basic asset. After that the liability is reduced when the payments are made and it is recognized as imputed finance cost on the liability, using the interest rate determined by the Company. (l) Employee benefits (i) Defined contributions plans The defined contribution plan is a plan for post-employment benefits under which company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. The Government of Bulgaria is responsible for providing pensions under defined contribution plans in Bulgaria. Obligations for payment of contributions for retirement plans with defined contributions are recognized as staff costs in the current profit and loss. Contributions under a defined contribution plan that are due more than 12 months after the end of the provision of services of the employees, are discounted to their present value. (ii) Defined benefit plans The Company has an obligation to pay income upon retirement to those employees who retire in accordance with Art. 222, 3 of the Labor Code (LC). Pursuant to the provisions of the Labor Code and the Collective Labor Agreement in Bulgartransgaz EAD upon termination of the employment contract of an employee of the Company, who acquired the right to pension, the Company pays a compensation of twelve gross wages in the event that the employee has acquired length of service in the Company over 10 years as of the date of retirement and compensation of five gross wages if the employee has acquired length of service in the Company up to 10 years. As at the date of the financial statement, the management estimates the total amount of the potential expenditures for every employee based on a report prepared by an actuary. Note 22 to the financial statement indicates the amount of the obligation accrued and the main assumptions, based on which the valuation of the obligation is made. According to the requirement of the standard (Paragraph 78 of IAS 19) the rate with which the obligation will be discounted have to correspond to the market income as at the balance sheet s date, which bear high quality corporate bonds. Provided that there is no developed capital market it the market income of the government bonds should be used. It is appropriate also as a discount rate to be used the future rate of return on assets of the Company. Due to the long-term nature of the obligation and the lack of such financial instruments that reflect profitability for a longer period of time, it is estimated that, as a discount rate can be applied the expected rate of profitability upon the instruments with longer maturities than the existing, following the requirements of Paragraph 81 of IAS

42 FINANCIAL STATEMENT Calculations are performed annually by a qualified actuary using the method of projected credits units. The Company recognizes all actuarial profit and loss, arising from defined benefit plans to the account of the other comprehensive income. (iii) Short-term employee benefits Obligations for short-term employee benefits are measured on an undiscounted basis and are accounted as operating expenses as the services related to them are provided. As liability is recognized the amount that is expected to be paid under a short-term bonus in cash or plans for profit-sharing if the Company has a present legal or constructive obligation to pay this amount as a result of services in the past provided by the employee and this obligation can be estimated reliably. Company acknowledges as obligation the undiscounted amount of the estimated cost of paid annual holiday, that are expected to be paid to employees for their work for the past reported period. (m) (i) Government grants National Investment Plan Decision C (2013) 8455 on "State aid SA (2013/N) allows Bulgaria to use derogation under article 10c, para.5 of Directive 2003/87/EC on the allocation of free of charge allowance of greenhouse gas emissions in line with Article 10c of Directive 2003/87/EC in exchange for investments in electricity generating installations and in energy infrastructure (National Investment Plan pursuant to Article 10c of the Directive for Emission Trading Scheme (ETS)). The government support of the Company s projects included in the NIP of the R. Bulgaria shall be treated as grants from the state related to incomes in the form of transfer of non-monetary resource for use by the Company. In 2016 Bulgartransgaz EAD in line with Section V Account NIP of the Ordinance on organization and control of the NIP implementation, has submitted an Application for reimbursement of costs incurred for implementation of the following projects: BG-$-0101 for Modernization of CS Ihtiman BG-$-0102 for Modernization of CS Petrich BG-$-0103 for Modernization of CS Lozenets BG-$-0104 or Modernization of CS Strandzha So far with Orders No Е-РД / , Е-РД / and Е-РД / of the Minister of Energy, Bulgartransgaz EAD has received reimbursement of costs from the National Investment Plan Account for CS Ihtiman to the amount of BGN, CS Petrich to the amount of BGN and CS Lozenets to the amount of ,02 BGN, which is the full amount of the financial means provided for in the NIP, determined in line with the adjusted investment value due to change in the reference value of greenhouse emissions under Ordinance РД / of the Minister of Economy and Energy. Concerning CS Strandzha, with Ordinance Е-РД / of the Minister of Energy, the project costs have been partially reimbursed to the amount of BGN ,06. The full amount of the financial means set out in the NIP - BGN ,12 is to be reimbursed. (ii) Trading allowances for greenhouse gas emissions Due to no accounting standard or interpretation under IFRS that specifically deal with the accounting transactions related to emissions of greenhouse gases (CO2 emissions), the Company's management has developed accounting policies that are considered as most relevant and reliable to meet the needs of the users of financial information. Under the national plan for the allocation of quotas for trade in greenhouse gas emissions for the period , approved by the European Union s Commission, Bulgartransgaz EAD is entitled to a certain amount of allowances. 37

43 FINANCIAL STATEMENT Emissions provided are not reported as an asset, and upon sale, if any, the gross value of the sale of emissions is accounted. Quotas for greenhouse gas emissions (CO2 emissions) received free from the state are not recognized in the statement of financial position and are subject to off-balance sheet monitoring. When the annual emissions exceed the available quota, the obligation for the excess is measured at the fair value of greenhouse gases to the end of the reporting period for which are due and provision is accrued. Total number of the quotas reached is determined by presenting a report verified by an independent, accredited verification body. Further clarification regarding the granted free of charge quotas are set out in Note 27 Contingent liabilities. (iv) Grants provided by the State bound with assets Grants, provided by the State, are initially recognized as deferred income at fair value when there is reasonable assurance that they will be received and that the Company will meet the conditions connected with the funds, and then recognized in profit and loss as other income on a systematic basis for useful life of the asset. Grants that compensate the Company for expenses incurred are acknowledged in profit or loss on a systematic basis in the periods in which the costs arise. (n) Foreign currency (i) Foreign Currency Transactions The transactions in foreign currency are recorded into the functional currency at the exchange rate applicable on the day of the transaction. Monetary assets and liabilities denominated in foreign currencies are recorded into the functional currency at the exchange rate of the BNB on the day of the statement of financial position. Profit or loss from exchange differences arising on monetary positions is the difference between devaluated cost in the functional currency in the beginning of the period, corrected with the effective interest and payments during the period, and the devaluated cost in foreign currency accounted at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are reported at fair value are converted to the functional currency at the exchange rate on the date to which the fair value was determined. Non-monetary assets and liabilities in foreign currency which are assessed at historical cost are converted into the functional currency at the exchange rate on the date of the transaction. Exchange rate differences arising of conversion are accounted in profit and loss. Since January 1, 1999 the exchange rate of the Bulgarian lev (BGN) is fixed to the euro (EUR). The exchange rate is BGN / EUR 1.0. (o) Taxes The annual profit/income tax comprises current and deferred taxes. The income tax is recognized in profit and loss with the exception of this one that relates to business combinations or items that have been recognized directly in the equity or in other comprehensive income. The current tax is the expected tax payable or receivable on the taxable income or loss for the year applying the tax rates entered into force or substantively enacted at the reporting date and all correction to outstanding taxes of previous years. Deferred taxes are calculated on temporary differences between the amounts of assets and liabilities recognized in the financial statement and the amounts used for taxation purposes. Deferred tax is not recognized for: temporary differences on initial recognition of assets and liabilities in a transaction that is not a business combination and that don not affect profit or loss, neither accounting nor taxable purposes; differences related to investments in subsidiaries and jointly controlled entities to the extent it is probable that they will not reverse in the foreseeable future; and 38

44 FINANCIAL STATEMENT taxable temporary differences arising from the initial recognition of goodwill. Deferred tax is assessed by applying the tax rates that are expected to apply to temporary differences when they appear back on the basis of laws that are in force or were entered substantially in force at the reporting date. Deferred tax assets and liabilities are offset only, if there is a legal basis for the deduction of current tax assets and liabilities, and they refer to income taxes imposed by the same taxation authority. A deferred tax asset is accrued for unused tax losses, credits and deductible temporary differences, as far it is probable that future taxable profit to be available, against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced as far it is no longer probable that future benefit will be realized. In determining the current and deferred tax, the Company takes into account the impact of uncertain tax positions and whether additional taxes or interest may be payable. The Company considers that accruals for tax liabilities are adequate to all open tax years on the basis of assessment of many factors, including interpretations of tax law and former experience. This assessment is based on estimates and assumptions and may involve judgments about future events. A new information may occur, that changes the Company s judgment about the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expenses in the period when such determination is made. 30. Application of new and revised IFRS (a) New and Amended Standards and clarifications to IFRS which have entered into force as of January 1, The company approved the following new accounting standards, amendments and clarifications that have come into effect over the reporting period: IFRS 15 Revenue from contracts with clients and the clarifications to IFRS 15 Revenue from contracts with clients. The approval of IFRS 15 affects mostly the following areas, linked with the probability for change at the moment of acknowledgement of sale and increase of disclosures. When assessing the impact of this new standard the company reached to the following assessment of the offered services: The company mostly offers access, transport, storage and balancing and transit of natural gas through its gas transmission network. According to IFRS 15, the revenue will be acknowledged when the company discharges its obligation and meets the requirement to transfer the service to the client. In addition, revenue will be acknowledged for these contracts to the degree to which it is probable that no material deviation in the amount of the cumulative revenue will take place. A special analysis of the contract for transit transmission through the territory of the Republic of Bulgaria to neighboring countries - Turkey, Greece and Macedonia with term of validity until 2030 has been carried out. The analysis focuses on the obligations of Bulgartransgaz EAD to perform, time of implementation, the formation of the agreed remuneration, which is calculated on the basis of nominated and actually transported quantities, the conditions set out for the payment of the remuneration. Based on the corporate assessment, the time and amount of revenue generated from the access, transport and balancing and transit, which must be acknowledged in line wuh IFRS 15, are similar to these acknowledged in this Interim Financial Statement. 39

45 FINANCIAL STATEMENT As of the date of issuing this Interim Financial Statement the company has hired a consultant who is to extend systematic assistance for the expected impact from the introduction of the new IFRS effective as of IFRS 9 "Financial Instruments IFRS 9 supersedes IAS "Financial Instruments: recognition and measurement". It materially changes the guidelines for financial assets classification and assessment and introduces the model of "expected credit losses" for financial assets impairment. When applying the IFRS 9 the company applied a transitional relief and decided not to recalculate previous periods. Any differences arising out from applying IFRS 9 in connection with the classification, measurement and impairment will be recognized in the retained earnings. The application of IFRS 9 impacted the impairment of financial assets. The expected credit loss model applies to impair financial assets. Тhis affects corporate trade receivables for which a simplified model of recognizing the expected credit loss is applied, since they have not any material component of financing. The application of IFRS 9 results in minor effect that relates to a reduction in trade and other receivables with BGN 103 thousand, reduction in non-current financial assets with BGN 227 thousand and reduction of retained earnings totaling to BGN 330 thousand. Since the quantitative effect is minor the management of the company had not reported the effect in the Interim Financial Statement. Concerning the classification of financial assets of the company the management does not expect any changes, since the financial assets of the company are kept with a view to collecting the related cash flows. No other standards and clarifications that are approved and effective as of 1 January 2018 have significant impact on the financial status of the company, and the financial results are as follows: - Annual improvements to IFRS Cycle (Changes in IFRS 1 and IAS 28) - IAS 40 Investment Property Transfers of Investment property - Application of IFRS 9 Financial Instruments together with IFRS 4 Insurance Contacts - Changes in IFRS 4 - IFRS 2 Share-based payment Classification and measurement of transactions with payment based on shares - International Financial Reporting Interpretations Committee (IFRIC) 22 Foreign Currency Transactions and Advance Considerations. 40

46 REPORT ON BULGARTRANSGAZ EAD ACTIVITY FOR THE PERIOD JANUARY JUNE

47 Table of Contents 1. STATUS AND ACTIVITY ANALYSIS OF THE ACTIVITY NATURAL GAS TRANSMISSION NATURAL GAS TRANSIT TRANSMISSION NATURAL GAS STORAGE ANALYSIS OF THE FINANCIAL STATUS BASIC FINANCIAL INDICATORS BULGARTRANSGAZ EAD INCOMES AND EXPENSES INCOMES. ANALYSIS AND DYNAMICS OF THE INCOMES STRUCTURE EXPENSES. ANALYSIS AND DYNAMICS OF THE EXPENSES STRUCTURE ASSETS, EQUITY AND LIABILITY. ANALYSIS AND DYNAMICS OF ASSET, EQUITY AND LIABILITY STRUCTURE CASH FLOWS FINANCIAL INDICATORS FINANCIAL RESULTS ANALYSIS OF MARKET PROSPECTS

48 1. STATUS AND ACTIVITY Bulgartransgaz EAD is registered in the Trade Register at the Registry Agency with UIC Registered office of the Company: Bulgaria, Sofia, district Lyulin - 2, 66 Pancho Vladigerov Blvd. Bulgartransgaz EAD is a state controlled entity. The sole shareholder of Bulgartransgaz EAD capital is Bulgarian Energy Holding EAD. Bulgartransgaz EAD being a combined operator has the following responsibilities: uniform management and reliable functioning of the natural gas transmission system and the underground gas storage facility (UGS); Maintaining the balance between natural gas import, production and consumption; Natural gas transport through the gas transmission system and natural gas storage in UGS in compliance with the quality and reporting requirements; Ensuring the optimal operational regime of the transmission system when carrying out the natural gas transmission activities; Maintaining the gas transmission system s facilities and sites and UGS in compliance with the technical and health and safety requirements; Development of the gas transmission system and UGS in compliance with the long-term forecasts and plans for gas supply development; Providing access to users to the natural gas transport and storage facilities on equal basis; Administrating natural gas transactions and organizing the balancing of the natural gas market. Besides the licensed activities, Bulgartransgaz EAD performs: hot tapping, stopple operations, design of gas installation and facilities, leasing of dark optical fibres from highway cables which are not used for technological needs to be used by telecommunication operators, who have permits issued by the Communications Regulation Commission under the Electronic Messages Act, construction and installation works on Technological Part of gas installations and facilities based on Bulgartransgaz EAD registration and membership in the Construction Chamber. By decision of the Energy and Water Regulatory Commission (EWRC) Bulgartransgaz EAD is certified as an independent transmission operator (ITO) of the gas transmission system in Bulgaria in compliance with the requirements of Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas, Regulation (EC) No 715/2009 of the European Parliament and of the Council of 30 April 2005 on conditions for access to the natural gas transmission networks and Chapter Eight a of the Energy Act. The decision was adopted in compliance with a European Commission Opinion of 22 April Bulgartransgaz EAD carries out the natural gas transmission through the national gas transmission network and the transit transmission network and natural gas storage in line with 3

49 the licenses issued by the EWEC: Licenses for natural gas transmission (Licenses No. L and No. L of ). License for natural gas storage on the territory of the Republic of Bulgaria (License No. L of ). All licenses are for 35 years. The Company pays license fees for each license specified in a tariff approved by the Council of Ministers. 2. ANALYSIS OF THE ACTIVITY Bulgartransgaz EAD activities involving natural gas transmission, transit transmission network and storage are performed on the basis of issued licensees. The general requirements to the performance of these activities are laid down in the Energy Act and the regulations thereto in line with the European laws in the sector. The EWRC carries out the ongoing monitoring on Bulgartransgaz EAD s activity including analysis and evaluation of the information for the reported results and periodical regulatory reviews. Price for natural gas transmission In line with the requirements of Regulation (ЕC) 715/2009 of the Commission of 13 July 2009 on conditions for access to the natural gas transmission networks, the Energy Act and the regulations Bulgartransgaz EAD effectively implemented as of an entry-exit pricing model for the access and transport services along the gas transmission system, property of the company, which includes the national gas transmission network (NGTN) and natural gas transmission network for transit transmission (GTNTT). The implementation of the entry-exit tariff model replaces the pricing of the access and transport services offered by Bulgartransgaz EAD from the post stamp with individual prices set out for actually transmitted quantities charged at exit points of the gas transmission network with an entry-exit model with a twocomponent tariff system and prevailing component based on the booked capacity. The new system results from the requirements, imposed by the European and national regulatory framework in the natural gas sector. The company has therefore undertaken over the reporting period a series of actions to develop the tariff model and its major parameters. By virtue of Decision НГП-01/ of the EWRC the allowed revenue of Bulgartransgaz EAD has been approved for the period and the basic parameters of the tariff model. Based on the Decision and the Methodology laying down the access and transport along Bulgartransgaz EAD networks the TSO sets the access and transport prices at entry and exit points for the first pricing period The main characteristics of the entry/exit tariff model are the following: Multi-year pricing model - "Revenue cap" method. The first regulatory period is 3 years; Setting the price for natural gas access and transmission by entry and exit points/zones; 4

50 Reimbursement through the access and transmission costs of the necessary revenues for carrying out the transmission activity, approved by the Commission for each regulatory period; Ensuring incentives to improve the operator s performance; Equal conditions to all transmission networks users. Users shall be treated equally regardless of size, ownership or other factors; Ensuring price stability, transparency of the price setting process; Applying the Matrix Approach for cost allocation by entry and exit points/zones; Possibility to form a unified exit national zone; Possibility to reduce the prices for access to entry and exit points to/from the natural gas storage facilities. Natural gas storage price BGN 2.49/1000 nm³/month, approved by EWRC with Decision No.Ц-001/ Natural gas transit transmission price under a long-term contract with OOO Gazprom Export. In 2016 following a company application, the EWRC with Decision No. Ц-20 of set the following prices for services provided for natural gas transmission through the transit transmission network: o Price for the service interruptible transmission in the forward direction - BGN 15.78/1000 nm 3, VAT excluded o Price for the service reverse flow transmission on commercial basis - BGN 9.78/1000 nm 3, VAT excluded A cubic meter of natural gas shall refer to the natural gas quantity in a volume of one cubic meter at temperature of 20 С (293,15 К) and absolute pressure of 0, МРа. Daily balancing regime As of Bulgartransgaz EAD introduced an effective daily balancing regime in line with the Natural Gas Market Balancing Rules and the Methodology setting out the daily imbalance charge in line with the requirements of Regulation 312/2014 establishing a Network Code on Gas Balancing of Transmission Networks. The expected effect of the Regulation implementation is for the operators to carry out marketbased balancing by using short-term standardized products, the network users to perform primary balancing, and the operators to play a role in the residual balancing, with a view to overall daily balanced system, for which mostly the users will be responsible, increased liquidity and competition, increase of the hubs churn rate (the ratio between the commercial gas quantities and the physically supplied gas). By introducing the new balancing regime, the requirements of the Regulation are fulfilled, in particular in the section for provision of information and daily financial clearance of the accumulated daily imbalances with a monthly settlement period. 5

51 Change in the unit of measure, used in reporting the natural gas, transported to national exit points Consequently to introducing the entry-exit tariff model in line with the requirements of the European and national regulatory framework in the natural gas field Bulgartransgaz EAD changed in 2017 the unit of measure, used for the reporting of natural gas from a unit measuring the quantity (nm 3 ) to a unit measuring the energy (MWh). 2.1 Natural Gas Transmission The natural gas supply to users on the territory of Bulgaria is performed mainly through the national gas transmission network which is a complex facility consisting of 1,835 km main gas pipelines and high pressure gas pipeline branches, three compressor stations (CS) CS Kardam 1, CS Valchi Dol and CS Polski Senovets with 49 MW total installed capacity, gas regulating stations, gas metering stations, electrochemical protection system, communication system, information system and other ancillary facilities. The natural gas transmission network has a capacity sufficient to meet the current natural gas consumption. Currently about 45 % of the system s maximum technical capacity is being used. The natural gas transported through the national gas transmission network is supplied mostly by imports from Russia. Bulgartransgaz EAD being a transmission system operator (TSO), via Chief Dispatching Division ensures uniform management, reliable functioning and transmission of natural gas through the gas transmission system and its metering in compliance with the quality requirements. Maintenance is also carried out at the sites and facilities of the gas transmission system in line with the technical requirements and the safety operation rules in compliance with the European regulations on environment protection and the network development plans of the gas transmission system. According to the Chief Dispatching Division, the natural gas quantities transported through the national gas transmission system for the respective period are the following: Transported Natural Gas Quantities, MWh Transport Correction 2017 / 2018 in % January February March April May June Total: (18,41%) (6,67%) (5,43%) (18,59%) (3,33%) ,73% (9,37%) There is a decrease by 9,37% of the transported MWh natural gas quantities during the first half of 2018 compared to the transported MWh quantities for the same period in The 6

52 decrease is due to the MWh less transported quantities to interconnection exit points in line with the signed contracts. There is a decrease in the transported MWh quantities in five months of the reported period, except for June, namely with 18,41%, 6,67%, 5,43%, 18,59% and 3,33% for January, February, March, April and May compared to the transported energy for the same months of In June of the same year the transported energy was with 0,73% more than over the same month in The smallest MWh natural gas was transported in April MWh, and the largest MWh - in January MWh. The diagram below shows the dynamics of change in the transported MWh natural gas for the respective period. Transported natural gas quantities for the first half of 2017 and 2018 (in MWh) January February March April May June 2017 г г. Traditionally, year 2018 sees the trend of seasonality in the natural gas transmission and as it was mentioned above the largest MWh transported in January. Over the next three months the transported gas gradually decreases where the last two months of the reviewed period see a smooth increase. 2.2 Natural Gas Transit Transmission Bulgartransgaz EAD performs natural gas transit transmission through the territory of Bulgaria to neighbouring countries Turkey, Greece and Macedonia. Quality and quantity analysis of the natural gas entry flows through the transit directions is carried out at the Gas Metering Station (GMS) Negru Voda 2 and 3. The natural gas delivery along the directions is carried out at GMS Malkoclar for Turkey, GMS Strimonohori for Greece and GMS Jidilovo for Macedonia. 7

53 The natural gas transit transmission contract in the above directions has been signed in 1998 with OOO Gazprom Export and with Annex No 11 of 2006 the deadline has been extended to The agreed transit fee is in US dollars for transported Nm 3 natural gas at 100 km and is annually updated with the reported inflation in the EU countries for the previous year. The value of the service is calculated on the basis of the transport quantities nominated and actually passed through. The natural gas transit quantities to neighbouring countries for the given period are the following: Transited Natural Gas Quantities for Turkey, Greece and Macedonia by months, Nmcm Month January Turkey Greece Macedonia Total , , , ,822 54,065 39, , ,883 February 1 230, , , ,671 38,045 41, , ,268 March 1 258, , , ,046 13,491 26, , ,565 April May June 1 153, , , ,231 8,081 6, , , , , , ,797 4,098 4, , , , , , ,939 3,592 4, , ,363 Total: 6 922, , , , , , , ,393 There is a decrease in the total transited quantities during the first half of 2018 (7 574,393Nmcm) compared to the quantities transited during the same period in 2017 (8 356,882Nmcm) with 782,489 Nmcm (9,36%). There is a decrease in the natural gas quantities transported to Greece, Turkey and Macedonia. The natural gas quantities transited to the Turkey over the first six months of 2018 have decreased by 1 141,211 Nmcm (16,49%) compared to the reported quantities over the first half year of ,001 Nmcm (27,33%) increase in the transited natural gas quantities to Greece has been reported for the first half of the year compared to the same period in Greater natural gas quantities have been transported to Macedonia for the first half of by 0,279 Nmcm (0,23%) compared to the quantities transported in The allocation of the cross-border transport by directions and by months during the reported period of 2017 and 2018 is shown in the diagrams below. 8

54 Transited natural gas by directions in the first half of 2017 (in Nmcm) January February March April May June Turkey Greece Macedonia Transited natural gas by directions in the first half of 2018 (in Nmcm) January February March April May June Turkey Greece Macedonia In 2018 the actually transited natural gas quantities to Turkey are 5 780,794 Nmcm representing 81,42% of the contracted capacity for the same period amounting to 7 100,000 Nmcm. The actually transited quantities in this direction have dropped by 16,49% compared to the physically transited quantities for the first half of ,005 Nmcm. The greatest natural gas quantities were transited in January ,885 Nmcm representing 102,73% of the nominated quantities for transit transmission ,000 Nmcm. In the following four months the transited quantities decrease and the smallest natural gas quantity 9

55 was transited in May 534,058 Nmcm which is 50,86% of the nominated quantity for the same month 1 050,000 Nmcm. The actually transited natural gas quantities to Greece during the first half of 2018 are 1 672,506 Nmcm representing 112,25% of the capacity contracted for the same period amounting to 1 490, 000 Nmcm. The greatest natural gas quantities were transited in March 298,046 Nmcm representing 149,02 % of the nominated quantities for transit transmission - 200,000 Nmcm. The smallest natural gas quantity was transited in April 246,231 Nmcm which is 123,12% of the nominated quantity for the same month 200,000 Nmcm. It must be noted that for all months of the reported period of 2018, except January, the greatest natural gas quantities out of the nominated ones have been transited to Greece. The greatest quantity beyond the nomination has been transited in March with 98,046 mcm which is 49,02% in excess (nominated 200,000 mcm, transported 298,046 mcm). Over the first six months of 2018 the actually transited natural gas quantities to Macedonia are 121,093 Nmcm representing 30,12% of the capacity contracted for the same period amounting to 402,000 Nmcm. There is a 0,23% drop in the actually transited quantities in this direction compared to the first half of ,372 Nmcm. The greatest natural gas quantities were transited in February 41,355 Nmcm representing 61,72 % of the nominated quantities for transit transmission - 67,000 Nmcm. The smallest natural gas quantity was transited in June 4, Nmcm which is 6,11% of the nominated quantity for the same month 67,000 Nmcm. The percentage allocation of transited natural gas quantities by directions (Turkey, Greece and Macedonia) for the first half of 2017 and 2018 is shown on the diagram below. Transited natural gas by directions in the first half of 2017 (in Nmcm) Transited natural gas by directions in the first half of 2018 (in Nmcm) 76.32% 22.08% 82.83% 15.72% 1.45% Turkey Greece Macedonia 1.60% Turkey Greece Macedonia In the allocation of the transited natural gas by direction there is a drop by 6.51% in the share to Turkey compared to the share in the first half of Its share during the period January - June 2017 is 82,83%, and 76,32% in There is a growth by 6,36% in the share of the transited quantities to Greece, which represent 22,08% of the total transited natural gas for the first half of 2018 compared to 15,72% for the same period in The share of the 10

56 transited natural gas to Macedonia remains relatively the same for the first half of 2017 and 2018 and increases with 0.15% compared to 2017, amounting respectively to 1,60% (for 2018) and 1,45 % (for 2017) of the total transported natural gas quantities through the natural gas transit transmission network of the company. 2.3 Natural Gas Storage The activity "Natural gas storage" is performed in the country s only underground gas storage facility Chiren (Chiren UGS), owned by Bulgartransgaz EAD. UGS Chiren is a complex system of underground and ground facilities exploitations wells, gas gatherings, a compressor station of 10 MW total installed capacity, equipment for gas preparation, treatment, control and metering and other auxiliary equipment. The technological process associated with the realization of the "natural gas storage" service is seasonal (cyclic) and is expressed in the withdrawal and injection of gas from/to the underground gas storage facility. In the first half of 2018, 2 455,254 MWh are withdrawn from and 1 852,140 MWh are injected in Chiren UGS. The total withdrawn and injected natural gas for the period January June 2017 and 2018 are shown in the table below: Withdrawn and injected natural gas quantities in 2018 and 2017 in MWh Month Withdrawal 2017 Withdrawal 2018 Injection 2017 Injection 2018 January February March April May June Total: The natural gas owned by customers in the storage facility as of January 1, 2018 amounts to 2 295,589 MWh. The data in the table include the natural gas virtually withdrawn and injected. The actually withdrawn gas for technological needs and the virtually withdrawn over the first half of 2018 totals to MWh, which is with 4,76% or MWh less compared to the gas withdrawn over the same period in The actual and virtually injected gas in Chiren UGS over the first six months of 2018 totals to MWh, which is with 16,60% or MWh more than the gas injected over the same period of The following diagram shows the dynamics of the natural gas stored for customers in the 11

57 Chiren UGS for the first half of 2018 and the previous year 2017 (as at the end of the respective months). Natural gas available for customers in Chiren UGS at the end of the first half of 2017 and 2018 (in MWh) 1,800,000 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 January February March April May June 2017 г г As at 30 June 2018 the available gas of clients in Chiren UGS totals to ,408 MWh, which is with MWh (17,07%) more than the gas available at the end of the first half of 2017, a fact signalling an increase in the use of the storage facility. 3. ANALYSIS OF THE FINANCIAL STATUS Bulgartransgaz EAD financial and economic status is analysed and examined on the basis of the prepared financial and accounting documents and the report on the financial status of the company for the period January June 2018 compared to the same reported period in Basic Financial Indicators BGN 000s. Financial Indicators Report Report Change 2018/2017 Total revenues from operational activity 1) ,05% EBITDA 2) (0,43%) EBIT 3) (1,46%) EBT 4) ,83% EBITDA margin 50,35% 48,18% (4,31%) Total assets ,47% LTTA ,85% Working capital 5) ,82% Cash available ,00% Equity ,08% 12

58 Long term bank receivables 0 0 0,00% Staff number ,70% 1) Total revenues from operational activity includes revenues from free of charge gas for technological needs 2) EBITDA Earnings before interest, taxes, depreciation and amortization; 3) EBIT Earnings before interest and taxes; 4) EBT Earnings before taxes 5) Working capital Current assets minus current liabilities 13

59 3.2. Bulgartransgaz EAD Incomes and Expenses The main incomes of Bulgartransgaz EAD in the period 01 January 30 June 2018 come from the licensed activities of transport, transit transmission and storage of natural gas. Further to the overall report the value of the natural gas used for technological needs for the purposes of the transit transmission which is received free of charge by the network users for whom the transit transmission is carried out, is written as an income. In the financial report, the natural gas for technological needs for transit transmission is reported in both parts - income and expense. The supplier OOO Gazporm Exports issues monthly invoices with null value for the supplied free of charge natural gas. For customs and accounting purposes this gas is valued at a price of the natural gas at the entry of the gas transmission network approved by the Energy and Water Regulatory Commission to the public supplier Bulgargaz EAD. Concerning the Natural Gas Market Balancing Rules effective as of Bulgartrangaz EAD as a Balancing entity, carries out the commercial natural gas market balancing, namely compensating the differences between the natural gas input by a network user at the entry point and the natural gas offtaken by such user at the exit points of the network. The obligation of the balancing entity is to cover the individual imbalances of network users of the gas transmission networks. Having regard thereto and in line with the entry-exit tariff model in force as of new Access and Transport Contracts have been signed with the clients, and the company generates balancing revenue corresponding to the balancing zones of the gas transmission networks on the territory of Bulgaria national balancing zone and transit balancing zone. 14

60 Incomes. Analysis and dynamics of the incomes structure A comparative analysis of the reported incomes during the first half of 2018 and the same period in 2017, and the dynamics of their change BGN 000 Revenues from the activity Report Report Change 2018/2017 value average weight value average weight absolute value % Income from transmission to customers in the country ,77% ,69% ,30% Income from cross-border transmission ,14% ,73% (9 335) (8,56%) Income from natural gas storage ,72% ,61% (144) (11,28%) Income from free of charge gas on the transit gas pipeline ,15% ,24% (450) (1,47%) Income from balancing ,28% ,67% ,56% Other incomes from the activity ,94% ,06% ,74% Net income from sales Financial income: Total income: ,00% ,00% ,05% ,55% ,83% ,99% ,00% ,00% ,14% The total incomes earned during the first half of 2018 amount to thousand BGN, and the net incomes from sales (including the value of the free of charge gas on the transit gas pipeline) amount to thousand BGN. Compared to the same period in 2017, the total amount of the incomes earned by the company increased by thousand BGN (11,14%), and the net incomes from sales (including the value of the free of charge natural gas) also have increased by thousand BGN (4,05%). The free of charge gas provided under the long-term contract for transit transmission to the amount of thousand BGN is accounted within the net incomes from sales. This gas is used mainly for fuel of the compressor stations along the transit gas pipeline and generates no real income for the company. The incomes from the free of charge gas along the transit transmission system for the period January-June are lower compared to the same period of 2017, and such drop is with BGN 450 thousand (1,47%). The subtraction of revenue from free of charge gas, reported over the 15

61 first half year of 2018 and 2017 shows that the revenue from sales for 2018 are higher than the ones reported in 2017 with BGN thousand (5,19%), and this is the result of the realized higher revenue from transport to clients in the country, balancing revenue and other operating revenue. In the total structure of the incomes earned during the first half of 2018, the incomes from cross-border transmission of natural gas have the biggest share amounting to thousand BGN with a relative share in the net incomes from sales of 53,73%. The reported incomes from cross-border transmission in the period January-June 2018 compared to the reported ones during the same period of 2017 are less with BGN thousand (8,56%), and at the same time a drop is also observed from 782,489 mcm or 9,36% of the transited natural gas quantities for the period. During the period January June of 2018 the incomes generated from natural gas transmission to the amount of thousand BGN being 23,69% of the company s net sales are by thousand BGN (31,30 %) higher compared to the same period in 2017 regardless of the fact that the transported natural gas quantities are less with MWh or 9,37% compared to the ones transported in the first half of The increase of revenue from transmission of natural gas is a result of the introduced entry-exit tariff model as of 1 October During the period January-June 2018 the incomes reported from natural gas storage amount to thousand BGN (0,61% of the net incomes from sales) which were BGN thousand over the reported ones during the same period in Over the period revenue from balancing totalling to BGN thousand have been generated (3,67% of net revenue from sales). When comparing with the same period of the previous 2017 year a growth in revenue from balancing is witnessed with BGN thousand (199,56 %), which is a result of the terms and conditions under the sugned new contracts for transport of natural gas in connection with the entry-exit model effective as of 01 October 2017 Company s other incomes being 2,06% of the net incomes from sales are with thousand BGN more than the generated ones in the first half of For the period , thousand BGN are reported, and during the same period of thousand BGN. The higher Other incomes during the current period are mostly due to the reported revenue from financing which are with BGN thousand more than the realized BGN thousand over the same period of Bigger are also the revenue generated by the rent of optic cable with BGN 68 thousand compared to the first half of BGN thousand are the revenue reported in this reporting period generated by connection and gas-hazardous works, where such works have not been reported over the first half year of The reported financial revenue over the first half of 2018 are almost six fold more than the ones reported over the same period of Compared to the reported BGN thousand over the period raise is accounted with BGN thousand over the same period of 2018 when BGN thousand are realized. This is due to the higher revenue from the change in the exchange rate over the current period (totaling to BGN thousand, where the realized one over the first half year of 2017 is BGN thousand. 16

62 Incomes and expenses from exchange rate differences do not represent a real cash expense but accounting report of the change in the value of available cash in foreign currency resulting from a change in the exchange rate of the dollar. This recalculation is carried out at the end of each month in order to correctly represent the BGN equivalent of foreign exchange. The structure of the reported net incomes from sales (including the value of the free of charge natural gas on the transit gas pipeline) for the first half of 2018 compared to the reported ones in the same period of 2017 is shown on the diagram below: Incomes from the activity г. Incomes from the activity г. 61,14% 0,72% 53,73% 0,61% 17,15% 16,24% 1,28% 3,67% 18,77% 0,94% 23,69% 2,06% Income from transmission to domestic customers Income from cross-border transmission Income from natural gas storage Income from free of charge gas through the transit gas pipeline Income from balancing Other income from the activity 17

63 Expenses. Analysis and Dynamics of the Expenses Structure BGN thousand Operating expenditure Statement Statement Change 2018/2017 value average value average absolute in % weight weight value Technological costs ,30% ,04% (364) (1,03%) Technological costs for natural gas transmission to customers ,30% ,74% (600) (13,98%) in the country Technological costs for natural gas storage 605 0,47% 875 0,65% ,63% Technological costs for natural gas cross-border transmission ,53% ,66% (34) (0,11%) Expenses by economic elements ,70% ,96% ,56% Costs of materials ,39% ,13% (230) (7,43%) Costs of external services ,57% ,35% (179) (5,36%) Depreciation costs ,82% ,75% 260 0,57% Costs to cover staff ,09% ,48% ,60% Social security costs ,75% ,77% 162 4,53% Other expenses ,09% ,49% ,77% Operating costs ,00% ,00% ,76% Costs, including: ,70% ,59% ,69% Changes in balances of sold production and work in (129) (0,09%) (117) (0,08%) 12 (9,30%) progress Booked value of sold assets ,79% ,66% ,86% Financial expenses ,18% ,91% (1 506) (17,08%) Total costs ,00% ,00% ,47% The expenses reported over the first half of 2018 are as follows: o o o Technological costs for natural gas transport through the national and transit gas transmission networks and storage amounting to thousand BGN (26,04 %) of the operating costs; Costs by economic elements amounting to thousand BGN (73,96 % of the operating costs); Financial costs amounting to thousand BGN; The structure of Bulgartransgaz EAD reported operating costs, including the expenses by economic elements for the first half of 2018 compared to the structure of costs for the same period of 2017 is shown in the diagram below: 18

64 Expenses for the activity Expenses for the activity ,53% 72,70% 22,66% 73,96% 0,47% 3,30% 0,65% 2,74% Technological costs for natural gas transmission to domestic customers Technological costs for natural gas storage Technological costs for natural gas cross-border transmission Expenses by economic elements Expenses by economic elements Expenses by economic elements ,89% 29,01% 45,63% 30,39% 3,75% 3,54% 3,28% Costs of materials Costs of external services Depreciation costs 12,50% 3,78% 3,17% 2,88% 14,18% Personnel costs Social security costs Other costs Comparing the company s general costs reported in the period January-June 2018 to the general costs during the same period in 2017, there is an increase by thousand BGN (4,47 %), namely from thousand BGN in the first half of 2017 to thousand BGN in the same period in The operating costs are by thousand BGN (3,76 %) higher than those reported in the same period in The increase of the operating costs compared to those reported in the first half of 2017 is due to the higher expenses by economic elements by thousand BGN (5,56 %). There is increase in the cost price of the sold goods by thousand BGN (74,86 %) compared to the reported value in the period January-June 2017, amounting to thousand BGN. This increase in the book value is due to the natural gas sold to contractors in connection with the gas imbalance. There is a decrease of the technological costs for the first half of 2018, in which period they amount to thousand BGN and are by 364 thousand BGN (1,03 %) less than the reported thousand BGN in the same period in 2017, due to the reduction of the technological costs for natural gas transport to domestic customers and for cross-border transmission. When comparing the technological costs of cross-border natural gas transmission with the data reported for the first half of 2017, there is a decrease by 34 thousand BGN (0,11 %), from BGN thousand for the first half of 2017 to BGN 30,554 thousand for the same period in

65 The technological costs for natural gas transport to domestic customers amount to BGN 3,693 thousand, with a decrease of BGN 600 thousand (13,98%) compared to the same period in The technological costs for natural gas storage amount to 875 thousand BGN and are higher than the reported ones in the period January-June of the previous year by BGN 270 thousand (44,63 %). The costs by economic elements have increased by thousand BGN (5,56 %) compared to those incurred in the first half of This is mainly due to the increase in the personnel costs resulting from the update of the basic salary, in accordance with the signed Collective agreement. The higher "Other costs" also contribute to the increase in the costs by economic elements. The reported costs for materials for the period January-June 2018 amount to thousand BGN and account for 2.13% of the operating costs, and their decrease by BGN 230 thousand (7,43 %) compared to the same period in 2017 is mainly due to lower reported costs of electricity, water and heat by BGN 229 thousand (15,65 %). The lower cost is mainly due to the lower number of operating hours of the gas compressor units in CS Valchi Dol, namely for the first half of 2017 and for the first half of 2018, resulting in MW/h electricity consumed for the first half of this year, while for the same period in 2017 it was MW/h. There is also a decrease of BGN 61 thousand (44,85 %) in other costs for materials and of BGN 17 thousand (58,62 %) in the costs for instruments. The costs for external services amount to BGN thousand and account for 2,35 % of the Company's operating costs, with a saving of BGN 179,000 (5,36 %) in the first half of 2018, compared to the reported BGN thousand in the same period in 2017, mainly due to the lower gas pipeline inspection costs by BGN 266 thousand (62 %), which is in line with the approved investment program of the Company. In addition, the repair costs are lower by BGN 49 thousand, the costs for other external services by BGN 30 thousand and for advertising by BGN 27 thousand. The depreciation costs amount to BGN 45,512 thousand and account for % of the Company's operating costs. Their increase by BGN 260 thousand (0,57 %) in the first half of 2018 compared to the same period in 2017, is due to the run in operation of new assets. The personnel and social security costs amounted to BGN 34,048 thousand and are by BGN 3,067 thousand (9,90 %) higher than those incurred in the first half of 2017, which is in result of the above mentioned reason regarding the basic salary update. The other expenses of Bulgartransgaz EAD amount to BGN thousand and account for 10,49 % of the operating costs, marking a growth of BGN thousand (19,77 %) compared to the first half of 2017, when they amount to BGN 11,810 thousand. The increase is mainly due to accrued cost for impairment of receivables of Bulgartransgaz EAD from Corporate Commercial Bank amounting to BGN thousand, according to a Decision of the Board of Directors No. 286/ from a meeting of the Managing Board. A significant increase is 20

66 also recorded in the representation costs, which are by BGN 150 thousand (348.84%) higher than the reported BGN 43 thousand in the first half of 2017, as a result of an organized event on for presentation of the Interim Report from the Feasibility Study for Balkan Gas Hub to the European Commission and stakeholders. An increase of BGN 37 thousand is also reported for the one-off taxes, which amount to BGN 179 thousand, with reported BGN 142 thousand in the period , the reason for this being the higher costs for tax on the representation costs to the amount of BGN 15 thousand, as well as taxes on car costs to the amount of BGN 7 thousand, which have no reported value in the period The incurred donation costs amount to BGN 18 thousand and such costs were not reported in the same period of the previous year. On the other hand, the excise duty costs are lower by BGN 325 thousand (10,17 %) compared to the reported BGN thousand in the first half of 2017, which is in result of the reported lower costs for technological needs. The costs incurred for personnel training and qualification are considerably lower, whereas BGN 57 thousand are reported in the current year, which is by BGN 126 thousand (68,63 %) less than the reported in the first half of 2017 BGN 183 thousand. The reported financial expenses of the Company for the period January-June 2018 amount to BGN 7,312 thousand. They were by BGN 1,506 thousand (17,08 %) less than the incurred BGN 8,818 thousand in the same period of This is due to the lower costs for exchange rate differences (representing 99,77 % of the financial expenses), which change from BGN 8,803 thousand in the first half of 2017 to BGN 7,295 thousand in the same reporting period in Following analysis of the costs and revenues, a conclusion can be made that the revenues from the activities under the three licenses cover the costs incurred by Bulgartransgaz EAD. 21

67 Assets, equity and liability. Analysis and dynamics of asset, equity and liability structure Statement of financial position Total amount of non-current assets, including Statement Relative Value weight Statement Relative Value weight BGN thousand Change 2017/2016 Absolute value in % ,44% ,74% (20 812) (1,17%) Property, plant and equipment ,95% ,88% ,85% Intangible fixed assets ,36% ,32% (408) (5,11%) Long-term receivables 138 0,01% 145 0,01% 7 5,07% Other long-term assets ,39% ,39% (21 728) (69,79%) Long-term receivables from related parties ,74% 26 0,00% (16 578) (99,84%) Investments in jointly controlled entities 0 0,00% ,14% #DIV/0! Current assets, including ,56% ,26% ,01% Stocks ,81% ,63% ,38% Trade and other receivables ,85% ,91% ,53% Prepayments for current assets 17 0,00% 17 0,00% 0 0,00% Receivables from related parties ,96% ,84% (1 578) (7,31%) Cash and cash equivalents ,93% ,89% ,00% Other current assets 0 0,00% 0 0,00% 0 #DIV/0! Total assets ,00% ,00% ,47% Total amount of equity and reserves ,30% ,25% ,08% Total liability, including ,70% ,75% ,57% Non-current liabilities ,91% ,08% ,48% including liabilities to related parties 255 0,01% 231 0,01% (24) (9,41%) Current liabilities ,79% ,67% ,00% including liabilities to related parties ,70% ,36% ,72% Total equity and liabilities ,00% ,00% ,47% As of the Company owns total assets amounting to thousand BGN, and their amount has increased by thousand BGN (6,47 %) compared to the value reported as of ( thousand BGN). Non-current assets represent 73,74 % of the total value of the Company s assets. Their value as of amounts to thousand BGN. There is a drop of 1,17 % in the total value of the non-current assets compared to their value as of ( thousand BGN). The decrease in the value of the non-current assets compared to the reported as of is due to decrease in the value of Other long-term receivables, Long-term receivables from related parties and Intangible fixed assets. 22

68 The decrease in Other long-term receivables by thousand BGN (69,79 %) is due to the depreciation of the receivables acknowledged as of of the Corporate Commercial Bank AD which has declared bankrupt. The depreciation is made based on Decisions approved by Bulgartransgaz EAD Management Board under Protocol No 258/ and Protocol No 286/ As of Bulgartransgaz EAD receivables from it amounts to BGN thousand. The long-term receivables from related parties have decreased by BGN 16,578 thousand (99,84 %) compared to their value as of , which is due to the concluded agreement with Bulgargaz EAD for payment of the liabilities for the provided natural gas transmission and storage services. Property, plant and equipment account for the largest share in non-current assets thousand BGN (98,84% of the Company s non-current assets), and compared to their value as of they have increased by thousand BGN (0,85 %) due to the run into operation of new assets. The balance amount of the Intangible fixed assets decreased by 408 thousand BGN - from thousand BGN as of to thousand BGN at the end of the first half of 2018 due to accrued depreciation of the assets. The non-current assets under item "Investments in jointly controlled entities" include the value of the acquired shares of the capital of Bulgartel EAD to the total amount of BGN thousand, also recorded in the share capital of the Company. The shares represent 50% of the share capital of Bulgartel AD. As of the current assets amount to thousand BGN, of which Stocks thousand BGN, Trade and other receivables amounting to thousand BGN, Receivables from related parties thousand BGN and Cash and equivalents thousand BGN. The value of current assets as of has increased compared to their value as of by thousand BGN (36,01 %). The increase in value of the current assets is due mainly to the increase in Cash and equivalents by thousand BGN (52 %). Receivables from related parties Bulgartransgaz EAD receivables from related parties (long and short-term receivables and deferred payments) amount to thousand BGN as of , and as absolute value decrease by thousand BGN (47,53 %) compared to the reported value as of thousand BGN. 23

69 Long-term receivables from related parties reported as of decrease compared to the data as of the value of receivables is lower by thousand BGN (99,84 %), and the drop is from thousand BGN to 26 thousand BGN as a result of Bulgargaz payment of the long-term part of receivables for services rendered for natural gas transmission and storage. Short-term receivables from related parties dropped from thousand BGN as of to thousand BGN as of , with a difference of 7.31%. Receivables from related parties (long-term and short-term) are shown in the diagram below: Short-term and long-term receivables from related parties (in thousand BGN) Long-term receivables from related parties Short-term receivables from related parties Total receivables from related parties Report Report The main receivables from related parties of Bulgartransgaz EAD are from Bulgargaz EAD for the provided services of natural gas transmission and storage, including overdue receivables. As of they amount to thousand BGN, decreasing by thousand BGN (47,98 %) to thousand BGN as of (receivables from Bulgargaz EAD represent 98,60 % of the trade receivables from related parties). With a view of reducing the receivables and improving collection, an agreement was signed with Bulgargaz EAD on deferred payment of the accumulated receivables for the provided services, and a repayment schedule was signed. As of the long-term receivables from Bulgargaz EAD are fully repaid. Receivables from other related parties remain relatively constant from 213 thousand BGN as of they increase by 68 thousand BGN to 281 thousand BGN as of They represent mostly receivables from Bulgartel EAD for rent of available fibre optic cables. Receivables from Bulgartransgaz EAD related parties are shown in the diagram below: 24

70 Receivables from related parties (in thousand BGN) Receivables from Receivables from Receivables from related parties Bulgargaz EAD other related parties Report Report The Company s equity as of amounts to thousand BGN and has increased by thousand BGN (4,08 %) compared to the value reported at the end of the first half of As of the Company s registered capital amounts to thousand BGN, and its value is by 3,94 % higher than the one as of thousand BGN. Pursuant to Decision of the Board of Directors of Bulgarian Energy Holding EAD, stated in Protocol No / , approved by the Minister of Energy with Protocol No Е-РД / and in accordance with Art. 197 of the Trade Act, the Company equity has increased by issuance of new ordinary registered voting shares with a nominal value of BGN 1 (one) each, representing a balance of Bulgartransgaz EAD net profit for By decision of the Board of Directors of Bulgarian Energy Holding EAD and approval by the Minister of Energy, the Bulgartransgaz EAD equity has increased in accordance with Art. 193 of the Trade act through an in-kind contribution, representing 50% of the shares of Bulgartel EAD, owned by BEH EAD. The in-kind contribution is for 3 thousand shares of the capital of Bulgartel EAD amounting to BGN thousand, by issuing thousand new ordinary registered voting shares with a nominal value of BGN 1. In addition, the undistributed profit of the Company as of 30 June 2018 is by BGN thousand (16,47 %) higher than the reported one at the end of the first half of As of , the accumulated unallocated profit amount to BGN 334,211 thousand, reduced by the due dividend to the sole owner of the capital Bulgarian Energy Holding EAD for 2018 to the amount of BGN 27,738 thousand and transfer of BGN 5,940,000 from the net profit for 2017 to the Reserve fund. The revaluation reserve has decreased from thousand BGN as of to thousand BGN, decreasing by BGN 8,446 thousand (1,01 %). 25

71 Non-current liabilities as of increase by thousand BGN (24,48 %) compared to the reported ones at the end of the first half of 2017 from thousand BGN to thousand BGN as of which is mostly due to increase of the deferred incomes from funding by thousand BGN (88,03%) which is due to the following funding received in 2017: Final payment received from the European Energy Programme for Recovery for projects "Interconnection Bulgaria-Romania (Ruse-Giurgiu)" amounting to EUR thousand. Funds reimbursed by Orders No Е-РД / , No Е-РД / and No Е-РД / of the Minister of Energy for modernization of CS Ihtiman, CS Lozenets, CS Petrich and CS Strandzha. Current liabilities according to the reported data as of amount to BGN thousand and increase by BGN thousand (59%) compared to the reported ones as of (BGN thousand). A major increase was observed in "Guarantees under contract", which as of amount to BGN thousand, being by BGN thousand (165,75%) higher than those reported at the end of the first half of the previous year amounting to BGN thousand. Main part of the liabilities under guarantees received by the Company are the following: guarantees - sums retained under construction contracts, to be paid according to the stage of execution of the sites under the terms of the contract; sums (credit limit) to guarantee payments under the Contracts for natural gas access and transport that each user of the service is bound to provide as collateral for the capacity and access requests. The reservation of sums by Bulgartransgaz EAD under granted credit limit is made automatically during the capacity booking procedures in the amounts specified in items 8.10 and 8.11 of the General terms and conditions of the Contracts for natural gas access and transport signed with the customers after ; sums to secure payments for purchase and sale of natural gas for balancing. Liabilities to related parties (current and non-current) amount to BGN 32,690 thousand (BGN 231 thousand long-term liabilities and BGN 32,459 thousand short-term). They have increased by BGN 16,809 thousand (105,84 %) as compared to The increase is due to the guarantees under the contract concluded with Bulgargaz EAD, established under the concluded new contracts for natural gas transport with regard to the introduced entry-exit tariff model, as well as the current liabilities amounting to BGN thousand to South Stream Bulgaria AD. As of , a current liability to Bulgarian Energy Holding was accrued to the amount of BGN thousand, which is the part of the dividend due for which payment is due. As of June 30 of the previous year, the dividend due to BEH EAD amount to BGN thousand Cash flows One of the important indicators of the company s financial position is the cash flows availability and dynamics over the first half of This is due to the fact that cash flows are the 26

72 absolutely liquid assets and their availability or lack therefore determines the possibility of repayment in due time of the company s liabilities. Bulgartransgaz EAD net cash flows for the period compared to the ones during the same period in 2017 are given in the table below: CASH FLOW Report Report Changes 2018/2017 Net cash flows from operating activities (2,50%) Net cash flows from investment activity (10 518) (25 934) 146,57% Net cash flows from financial activity (14 258) (18 108) 27,00% Net increase/(decrease) of cash and cash equivalents Cash and cash equivalents at the beginning of the period (28,15%) ,02% Foreign exchange rate differences (5 914) (225,84%) Cash and cash equivalents at the end of the period ,00% As of Bulgartransgaz EAD cash and cash equivalents availability is thousand BGN. An increase of 52% compared to the value of the cash and cash equivalents as of has been reported ( thousand BGN). Net cash flows from operating activities over the first half of 2018 amount to thousand BGN, where a 2,50 % decrease is identified compared to thousand BGN reported in the same period of The reason for this is the cash outflow related to commercial counterparties amounting to thousand BGN during the period , while in the same period in 2017, thousand BGN were paid. The cash outflow is thousand BGN higher related to paid taxes and excise duty amounting to thousand BGN in the first half of As of the value of the cash outflow related to paid profit taxes is -2,185 thousand BGN, and in the same period in 2017 such was not reported. The negative value of the cash flows for acquisition of property, plant and equipment, part of the cash flows from investing activities, has increased by 125,42% in the first half of 2018 from thousand BGN in 2017 to thousand BGN for the same period in The net cash flow from financing activities for the period has a negative value of -18,108 thousand BGN and has increased by 27.00% compared to the reported - 14,258 thousand BGN in the same period in The reason for that is a paid dividend to BEH EAD to the amount of thousand BGN, while in the first half of 2017 the paid dividend amounted to thousand BGN. Interest receipts, as part of the cash flow from financial activities, amounted to 384 thousand BGN and are 285 thousand BGN less than the received 669 thousand BGN in the first half of The net cash flows of the Company are presented in the diagram below: 27

73 Cash flow (in thousand BGN) ( ) NCF from operating activities NCF from investment activities NCF from financial activities Cash and cash equivalent at the end of the period Report (10 518) (14 258) Report (25 934) (18 108) Cash flows shown in the diagram reflect the specific use of the financial resources of Bulgartransgaz EAD whose activity is directly linked with the operation of assets of high value and the need of significant investments in their modernization and maintenance. 28