ANNUAL MANAGEMENT REPORT FINANCIAL STATEMENTS INDEPENDENT AUDITOR S REPORT
CONTENTS PAGE ANNUAL MANAGEMENT REPORT - FINANCIAL STATEMENTS STATEMENT OF FINANCIAL POSITION 1 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 2 STATEMENT OF CHANGES IN EQUITY 3 STATEMENT OF CASH FLOWS 4 5-41 INDEPENDENT AUDITOR S REPORT -
Bulgargaz EAD Annual Management report for 2016 This Company Management Report for 2016 presents financial statements comments and analysis and other important information as regards to the financial position and results of Bulgargaz EAD s activity, comprising the period, 1 st January, 2016 31 st December, 2016. This report has been made pursuant to Art 39 of the Accountancy Act, and Article 187д, Article 247, Paragraph 1, 2 and 3 of the Commercial Act. The Company management report also contains information as required under Annex 10 of Ordinance 2 of Financial Supervision Commission related to entities under Para 1д of additional provisions of Public Offering of Securities Act on the basis of Art 100н, Paragraph 7, item 2 of the same Act. I. Company Overview Bulgargaz EAD is a sole shareholder joint stock trading company, registered under the requirements of the Commercial Act, with seat and address of management: the Republic of Bulgaria; Sofia Region; Stolichna Municipality; 1000 Sofia; Serdika District; 47, Petar Parchevich Str. Bulgargaz EAD s principle subject of activity is public supply of natural gas and the related sales and purchase thereof; natural gas purchase for the purposes of its storage in a gas storage facility; marketing research and analyses of the Bulgarian natural gas market. Bulgargaz EAD carries out its activities as regards to public supply of natural gas for the territory of the Republic of Bulgaria, in compliance with License No Л-214-14/29.11.2006, issued by the State Energy and Water Regulatory Commission (SEWRC), for a period of 35 years. With an Amendment Act to the Energy Act (amended, State Gazette, issue 17 as of 06.03.2015) the Commission was reorganized into the Energy and Water Regulatory Commission (EWRC). Ownership and Management Bulgargaz EAD is a sole shareholder joint stock company within the organizational structure of Bulgarian Energy Holding EAD (BEH). The registered share capital is distributed into 214 450 488 registered shares. The total amount of the Company share capital is subscribed and entirely paid in by the Bulgarian Energy Holding EAD. All shares are with a nominal value of BGN 1. The Company shares are ordinary, registered, unprivileged and voting shares. The sole owner of the Bulgargaz EAD share capital is Bulgarian Energy Holding EAD and the latter is 100% owned by the State. A share gives one voting right in the General Meeting of the Shareholders, a dividend right and a liquidation share that are equal to the nominal value of the share. Page 1 of 26
Bulgargaz EAD Annual Management report for 2016 Company Structure Bulgargaz EAD has one tier system of management. The Company management bodies are: The Sole owner of the capital empowered to make decisions referred to the competence of the General Meeting; Board of Directors (BoD). Until 6 th January, 2015 the Company was managed by a Board of Directors, comprising of: Botyo Tomov Velinov Anna Emilova Dimitrova Dafinka Yordanova Yankova Chairman of the BoD; Member of the BoD; Member of the BoD and CEO. On 6 th January, 2015, in the Commercial Register a Decision of BEH EAD s BoD was registered, for appointing of a new Member of the BoD of Bulgargaz EAD and a new BoD, respectively, comprising as follows: Botyo Tomov Velinov Iliyan Kirilov Dukov Dafinka Yordanova Yankova Chairman of the BoD; Member of the BoD; Member of the BoD and CEO. On February 10, 2015 in the Commercial Register a Decision of BEH EAD s BoD was registered, for appointing of a new CEO of Bulgargaz EAD and a new BoD, respectively, comprising, as follows: Botyo Tomov Velinov Iliyan Kirilov Dukov Petyo Angelov Ivanov Chairman of the BoD; Member of the BoD; Member of the BoD and CEO. On 19 th February 2016, in the Commercial Register a Decision of BEH EAD s BoD was registered, for appointing of a new CEO of Bulgargaz EAD and a new BoD, respectively, comprising, as follows: Botyo Tomov Velinov Iliyan Kirilov Dukov Nikolay Angelov Pavlov Chairman of the BoD; Member of the BoD; Member of the BoD and CEO. Page 2 of 26
Bulgargaz EAD Annual Management report for 2016 BULGARGAZ EAD`S ORGANISATIONAL STRUCTURE Company s Management responsibility The Management confirms that adequate accounting policy is applied during preparation of the Financial Statements for 2016, and that the latter are prepared based on a going concern principle. The Company s management is responsible for keeping proper accounting records, for the expedient management of assets and for undertaking the necessary actions for prevention and detection of possible fraud and other irregularities. Information about BoD Remuneration under Management and Control Contracts In 2016 and 2015, the BoD members received remuneration, as follows: In BGN As of 31 st December, 2016 As of 31 st December, 2015 BoD remunerations 165 560 106 399 Social security expenses 16 056 12 813 Compensation 3 284 1 053 Total: 184 900 120 265 Page 3 of 26
Bulgargaz EAD Annual Management report for 2016 Information about Company Shares Acquisition and Ownership by BoD members BoD members do not own Company shares. There are no privileges and exclusive rights regarding shares and bonds acquisition foreseen for BoD members. BEH owns 100% of the shares. Information about BoD members shares in trade companies, as unlimited liability partners; holding more than 25% of other companies equity, as well as their participation in the management of other companies or co-operations as procurators, managers or Board members (pursuant to the requirements of Article 247, Paragraph 2, Item 4 of the Commercial Act). Botyo Tomov Velinov Member of the BoD from 03.10.2013; Chairman of BoD as of 12.12.2013: Does not participate as an unlimited liability partner in trade companies; Owns more than 25 % of the equity of SVARGAZ OOD, EVERFRESH EOOD, FRIYAGAS OOD; Participates in the management of EVERFRESH EOOD and FRIYAGAS OOD as a Manager. Iliyan Kirilov Dukov - Member of the BoD as of 06.01.2015: Does not participate as an unlimited liability partner in trade companies; Owns more than 25 % of the equity of Yapi Investments OOD, Lift Corp OOD, Nilis OOD, Imokorp EOOD and Inmax EOOD; Participates in the management of Nilis OOD, Imocorp EOOD and Inmax EOOD as a Manager; Nikolay Angelov Pavlov CEO, Member of the BoD from 19.02.2016: Does not participate as an unlimited liability partner in trade companies; Does not own more than 25% of trade companies equity; Does not participate in the management of other companies, co-operations as procurator, manager or member of BoD. Information about Contracts under Article 240б of the Commercial Act concluded during 2016. In the first half of 2016, the BoD members or other related persons thereof had not concluded any contracts with the Company that were beyond its usual activity or significantly divert from the market conditions. II. Company Activity Results in 2016 In 2016, Bulgargaz EAD carries out its activities in compliance with the regulations. The Company activity results represent a financial profit, after taxes amounting to BGN 36 683 thousand (as at 31st December, 2015, amounting to BGN 20 365 thousand). Page 4 of 26
Bulgargaz EAD Annual Management report for 2016 General Factors Affecting Company s Activities Bulgargaz EAD s activity, Public supply of natural gas, is regulated in accordance with the Bulgarian Energy Act and the bylaws Licensing Ordinance, Natural Gas Trading Rules and Natural Gas Price Regulation Ordinance. Natural gas public supply is a regulated activity by EWRC. Bulgargaz EAD natural gas purchasing prices are market based, while Company s natural gas selling prices are regulated. Bulgargaz EAD, in its capacity of a natural gas trader, is not in an equal position in comparison with other natural gas traders, whose activities are not regulated in accordance with the aforementioned regulations. As of January 1, 2013, Bulgargaz EAD has also carried out an unregulated activity sales of small volumes of natural gas beyond the territory of the Republic of Bulgaria. The Company has no branch network and does not develop research and development activity. Important events having occurred during 2016, directly related to Bulgargaz EAD s activity. 1.With an amendment of Ordinance No2, dated 2013 for regulation prices of natural gas (State Gazette, issue 105, 2016) are regulated the order and conditions for compensation of energy companies expenses, related to obligations imposed by the public, where such obligations are imposed to more than one energy company. By an amendment in the Ordinance are established both the order and conditions for payment of additional expenses by the Public Supplier as occurred as a result of supply of natural gas volumes nominated by end suppliers following the agreed deadlines preceding the delivery year. 2. By a decision under Protocol No 227, dated 30 th November, 2016 EWRC adopted rules for natural gas market balancing (State Gazette, issue 99, 2016) on the basis of natural gas trade rules and in accordance with the requirements of Regulation (EC) No 312/2014 of the Commission for establishing of Network Code for balancing of gas transmission networks. 1. Quantitative Indicators Implementation Delivered and Sold Natural Gas Volumes The natural gas deliveries, securing needs of the Company s clients, during the reporting period, are carried out through long-term contracts. The natural gas volumes delivered and sold in 2016, compared to 2015, are presented in Table 1: Table No.1: Type of delivery Unit Volume (report) (report) change % Change Delivered Mln.cub.m³ 3 007 2 664 343 12.88% Sold Mln.cub.m³ 3 041 2 652 389 14.67% Page 5 of 26
Bulgargaz EAD Annual Management report for 2016 During the reporting period, deliveries totalled to 3 007 mln.m 3 natural gas (2015: 2 664 mln. m 3 ), which is an increase of 343 mln.m 3 or 12.88%. During the reporting period 3 041 mln.m 3 natural gas was sold, compared to 2 652 mln.m 3 in 2015, which is an increase of 389 mln.m 3 or 14.67%. The increase was mainly due to Distribution companies and Chemistry sector higher consumption. 1.1. Delivered natural gas volumes The delivered natural gas volumes in 2016 and 2015 are presented in Table 2. Table No.2: mln.m³ No Type of delivery Relative Share % Change 1 Imported natural gas 3 002 2 596 99.83% 97.45% 15.64% 2 Local production deliveries 5 55 0.17% 2.06% -90.91% 3 Delivery to UGS 0 13 0.00% 0.49% -100.00% Total: 3 007 2 664 100.00% 100.00% 12.88% Page 6 of 26
Bulgargaz EAD Annual Management report for 2016 In 2016, in order to meet the natural gas needs of its clients, Bulgargaz EAD delivered 99.83% of natural gas from import, and 0.17 % of local production. Delivered natural gas volumes, allocated by sources, are indicated in Table 3 below. Table No.3: mln.m 3 No Type of delivery 2016 (report) 2015 (report) Relative share Change (%) 1 Imported natural gas 3 002 2 596 99.83% 97.45% 15.64% 1.1. Gazprom Export: 3 002 2 596 99.83% 97.45% 15.64% 1.1.1 GMS Issaccea 2 949 2 559 98.07% 96.06% 15.24% 1.1.2 GMS Negru Voda 53 37 1.76% 1.39% 43.24% 2 Local production deliveries 5 55 0.17% 2.06% -90.91% 2.1. Petroceltic Bulgaria EOOD 5 55 0.17% 2.06% -90.91% 3 Delivery from UGS 0 13 0.00% 0.49% -100.00% 3.1. D Leasing AD 0 13 0.00% 0.49% -100.00% Total 3 007 2 664 100.00% 100.00% 12.88% Page 7 of 26
Bulgargaz EAD Annual Management report for 2016 In 2016, Bulgargaz EAD continued to purchase the necessary natural gas volumes from import via a long term contract with OOO Gazprom Export. In 2016, natural gas volumes, produced from Petroceltic Bulgaria EOOD`s gas fields, amounted to 5 mln.m 3. (2015: 55 mln. m 3 ) 1.2 Natural gas production and injection Natural gas volumes produced and injected in UGS Chiren in 2016 and 2015 are represented in table No 4. Table No.4: Production change 2016/2015 Injection change 2016/2015 Period Producti Producti Injection on on Injection Mln.m 3 Mln.m 3 Mln.m 3 Mln.m 3 Mln.m 3 % Mln.m 3 % January 89-77 - 12 15.58% - - February 82-70 - 12 17.14% - - March 66-62 - 4 6.45% - - April - 3 1 - (1) -100.00% 3 100% May - 50-1 - - 49 4900.00% June - 59-18 - - 41 227.78% July - 87-98 - - (11) -11.22% August 3 56 10 57 (7) -70.00% (1) -1.75% September 17 37-69 17 100.00% (32) -46.38% October - 25-45 - - (20) -44.44% November 20-9 - 11 122.22% - - December 67-50 - 17 34.00% - - Total 344 317 279 288 65 23.30% 29 10.07% The natural gas volumes produced in 2016 totalled to 344 mln.m 3 (in 2015: 279 mln. m 3 ), which is an increase of 65 mln. m 3 or 23.30%. The increase was due to Distribution companies and Chemistry sector higher consumption. As of 31 st December, 2016 Bulgargaz EAD holds 210 mln.m 3 natural gas available in UGS Chiren (as at 31 st December, 2015: 238 mln.m 3). 2. Natural gas sales 2.1. General Consumption Bulgargaz EAD s aims to ensure reliable supply of natural gas to its customers, in accordance with the quantity and quality contractual requirements. In 2016, the Company sold to its clients 3 041 mln. m³ natural gas (in 2015: 2 652 mln. m³), which is an increase of 389 mln. m³ or 14.67% more than the gas sold during the same period in the preceding year. The increase is due to the higher consumption of Distribution companies and Chemistry sector. Page 8 of 26
Bulgargaz EAD Annual Management report for 2016 Sales per months to the total sold volumes for the period are represented in table No 5. Table No.5: Reporting period Change 2016/2015 mln.m 3 Share in % mln.m 3 Share in % mln.m 3 % January 380 12.50% 304 11.46% 76 25.00% February 292 9.60% 271 10.22% 21 7.75% March 288 9.47% 262 9.88% 26 9.92% April 220 7.23% 222 8.37% -2-0.90% May 219 7.20% 196 7.39% 23 11.73% June 187 6.15% 182 6.86% 5 2.75% July 155 5.10% 171 6.45% -16-9.36% August 161 5.29% 166 6.26% -5-3.01% September 187 6.15% 146 5.51% 41 28.08% October 256 8.42% 199 7.50% 57 28.64% November 311 10.23% 246 9.28% 65 26.42% December 385 12.66% 287 10.82% 98 34.15% Total 3 041 100.00% 2 652 100.00% 389 14.67% 2.2. Consumption Structure A comparison of the natural gas sales to clients in 2016 and 2015, allocated by main industry sectors, is presented in table No 6. Page 9 of 26
Bulgargaz EAD Annual Management report for 2016 Table No.6: Change 2016 report 2015 report 2016/2015 Sectors Share in share in mln.m 3 % mln.m 3 % mln.m 3 % Energy 917 30.15% 911 34.35% 6 0.66% Chemistry 1 108 36.44% 1 007 37.97% 101 10.03% Metallurgy 94 3.09% 90 3.39% 4 4.44% Construction materials 44 1.45% 44 1.66% 0 0.00% Glass and Porcelain 239 7.86% 229 8.63% 10 4.37% Distribution companies 458 15.06% 186 7.01% 272 146.24% Other 181 5.95% 185 6.98% -4-2.16% Total 3 041 100.00% 2 652 100.00% 389 14.67% In 2016 the sold natural gas volumes increased by 389 mln.m 3 (or 14.67%). The increase was due to higher consumption of existing and new clients from Chemistry sector and Distribution companies. The data disclosed in table No.6, and illustrated in the chart above, outline the tendency in the consumption structure of natural gas, as follows: the major consumers of natural gas remain the companies in the field of chemical industries, energy and gas distribution companies; the highest increase in natural gas consumption is observed in the gas distribution companies and chemical industries; 3. Natural Gas Prices for Delivery and Sale on the Internal Market Comparison of average weighted prices for delivery and sale of natural gas in 2016 and 2015. Page 10 of 26
Bulgargaz EAD Annual Management report for 2016 Table No.7 Period Weighted average price of delivery up to the entry of gas transmission system BGN /1000 m³ Weighted average price for sale including transmission fee BGN /1000 m³ Change BGN % 2016 278.01 328.52 50.51 18.17% 2015 475.18 511.44 36.26 7.63% The information represented in table No.7 shows that during 2016 there was a positive difference between weighed average sale price and weighted average delivery price of natural gas BGN 50.51 (in 2015: positive difference amounting to BGN 36.26). In the weighted average sale price is included transmission fee, amounting to BGN 19.73, which is not a subject to the Company s license. If the effect of transmission fee on the sale price is taken into account, the average weighted sales price would be: Period Weighted average delivery price up to the entry of gas transmission system BGN /1000 m³ Weighted average sale price, excluding transmission fee BGN /1000 m³ Change BGN % 2016 278.01 308.79 30.78 11.07% 2015 475.18 491.71 16.53 3.48% ІII. Risk Factors Key elements that bring risk to Company activity are: EWRC s decisions upon approval of natural gas marginal prices for the internal market, trading and other receivables and liabilities as well as currency risk related to change in the exchange rates of foreign currency. In conducting its activity the Company is exposed to the following types of risk: Regulatory Risk The specificity of Bulgargaz EAD activity relates to the fact that the Company is a Public Supplier of natural gas. The Company purchases natural gas to meet its clients needs at market prices and sells these quantities under regulated prices. The lack of correspondence between the aforementioned prices might cause risks to the Company in conducting its functional obligations. The intervention of the regulatory authority in Company s trading policy as regards lower prices, than those, formed in accordance with the respective legislation, lead to lower revenues and sale below cost. When the revenues are not sufficient to cover the actual expenses for natural gas purchase and sale, it is difficult for the Company to proceed with the payments of the amounts due. Fines and penalty payment are foreseen in the terms and conditions of gas supply contracts. Page 11 of 26
Bulgargaz EAD Annual Management report for 2016 Currency Risk Currency risk relates to changes in foreign currencies exchange rates that lead to profit/loss realization, resulting from the revaluation of assets in foreign currency. The main risk for Bulgargaz EAD arises out from the necessity to purchase natural gas in USD and sell it in BGN. Thus, the Company is exposed at risk of exchange rate fluctuations. The approved by EWRC marginal price for each regulatory period is determined at a fixed USD-BGN exchange rate. The Company is exposed at risk of loss of continuous increase of USD exchange rate within the period of prices application, compared to the exchange rate, as applied at the time of their approval. Credit Risk The credit risk for the Company represents a risk of financial loss, if a customer or counterparty to a financial instrument, fails to meet its contractual obligations. That risk arises out of Company s receivables from customers. Bulgargaz EAD s customers of are heating companies, having difficulties in collecting their receivables and experiencing serious obstacles to discharge their liabilities on due dates. Bulgargaz EAD conducts continuous monitoring on its receivables, observes its clients conduct and considers in details its main debtors activities. The Company enters into deferred payment agreements with some clients facing difficulties to discharge their current liabilities. As an extreme measure to resort to is natural gas delivery suspension. The Company also protects its interests through court proceedings. Liquidity Risk Liquidity risk occurs when the Company is not able to meet its current financial obligations and commitments. They are presented in short term liabilities of the Company, namely payment liabilities for transmission and storage, liabilities towards the State in the form of taxes and excise duties, liabilities under commercial loans and regular payments related to operational activity. Short term liabilities require a careful planning of all cash inflows and outflows, based on monthly forecasts. IV. Prospects and Development Company s development prospects relate to the implementation of its strategic and operational objectives. Strategic Objectives Bulgargaz EAD main strategic objective is ensuring natural gas supply for Company s clients. High priority objective relates to the development of alternative sources and routes of natural gas supply to build up Company s geographical delivery portfolio and contribute to increasing security and reliability of natural gas supply. Currently, Page 12 of 26
Bulgargaz EAD Annual Management report for 2016 natural gas supply from import is still performed through one single entry point and meanwhile national gas production is extremely insufficient. The aforesaid may lead to a great risk taking into consideration the conflict between Ukraine and the Russian Federation. Maintaining constant financial stability and increasing the economic efficiency by Company s activities effectiveness; Collaboration and participation in natural gas market development and growth in Bulgaria and the region; Mutual participation with other companies in research and development of natural gas fields. Entering into neighbouring country gas markets. Operational Objectives: Maintaining Company s financial stability; Development and implementation of a uniform automatic system for operational monitoring of import, consumption and balance of natural gas. In the short-run, Company s major objective is securing Bulgargaz EAD financial stability in a situation of market uncertainty in Bulgaria and higher inter-company indebtedness. The Company is optimising its cash flow position by increasing Company s receivables collection from clients, receivables sale to third parties, as well as funds securing in the form of loan. V. Financial Status Bulgargaz EAD s financial status is reviewed and analysed on the basis of the Company financial and accounting documents Statements: profit or loss Statements and other comprehensive income, and Statements of cash flows for 2016, compared to the same period of 2015, as well as Statement on the Company s financial position for 2016, compared to the same period of 2015. The transaction with Societe Generale Expressbank AD, concluded at the end of 2015, and finally closed in March of 2016, is presented as financing (commercial loan), and not as natural gas sales and purchase transaction. Main Financial Indicators In thousands BGN Indicators 2016 (report) 2015 (report) Change Change (%) Total revenues 1 013 452 1 399 440 (385 988) (27.58%) Total expenses (966 543) (1 366 110) 399 567 (29.25%) EBITDA 47 013 33 462 13 551 40.50% EBIT 46 909 33 330 13 579 40.74% EBT 39 661 23 863 15 798 66.20% Non-current fixed assets 112 81 31 38.27% Total assets 337 205 456 646 (119 441) (26.16%) Current assets 321 648 424 350 (102 702) (24.20%) Current liabilities 57 796 190 059 (132 263) (69.59%) Page 13 of 26
Bulgargaz EAD Annual Management report for 2016 Indicators 2016 (report) 2015 (report) Change Change (%) Cash 66 847 33 258 33 589 100.99% Working capital 263 852 234 291 29 561 12.62% Equity 254 681 226 136 28 545 12.62% Share capital 214 450 206 297 8 153 3.95% Reserves 2 807 757 2 050 270.81% Retained profit /(unrecoverable loss) 741 (1 283) 2 024 (157.76%) Profit/loss for the period 36 683 20 365 16 318 80.13% Number of personnel 54 54 0 - The main financial-economic results from the Company activity in 2016 and 2015 are presented, as follows: Statement of profit or loss and other comprehensive income In thousands BGN change Thousand % of the Thousand % of the Thousand BGN total BGN total BGN % Revenues 1 013 452 100.00% 1 399 440 100.00% (385 988) (27.58%) Revenues from sale of natural gas 998 391 98.51% 1 356 556 96.94% (358 165) (26.40%) Other income 15 061 1.49% 42 884 3.06% (27 823) (64.88%) - penalties under overdue receivables/liabilities 13 301 1.31% 39 058 2.79% (25 757) (65.95%) - sanctions for 105% volume 837 0.08% - 0.00% 837 - - penalties for volumes not taken under Art.7.4 and 7.5 415 0.04% - 0.00% 415 - - income from not regulated activity - 0.00% 2 560 0.18% (2 560) (100.00%) - other income 508 0.05% 1 266 0.09% (758) (59.87%) Expenses as per economic elements (966 543) 100.00% (1 366 110) 100.00% 399 567 (29.25%) Cost of sold natural gas (933 324) 96.56% (1 340 141) 98.10% 406 817 (30.36%) Recovered/ (accrued ) impairment (23 907) 2.47% (15 886) 1.16% (8 021) 50.49% - recovered/ (accrued) impairment of receivables (23 101) 2.39% 368 (0.03%) (23 469) (6377.31%) - recovered/ (accrued) impairment of natural gas (806) 0.08% (16 254) 1.19% 15 448 (95.04%) Costs of materials (76) 0.01% (100) 0.01% 24 (24.00%) -fuel gas (20) 0.00% (33) 0.00% 13 (39.39%) -main materials (6) 0.00% (9) 0.00% 3 (33.33%) - fuels and lubricants (23) 0.00% (28) 0.00% 5 (17.86%) - stationary and consumables (12) 0.00% (13) 0.00% 1 (7.69%) - sanitary materials (5) 0.00% (5) 0.00% - - - advertising materials (7) 0.00% (7) 0.00% - - - other materials (3) 0.00% (5) 0.00% 2 (40.00%) Hired services costs (6 264) 0.65% (6 238) 0.46% (26) 0.42% - natural gas storage costs (3 944) 0.41% (589) 0.04% (3 355) 569.61% - expenses on management contracts (112) 0.01% (255) 0.02% 143 (56.08%) - license fees (739) 0.08% (822) 0.06% 83 (10.10%) - expenses for services related to unregulated activity - 0.00% (2 560) 0.19% 2 560 (100.00%) - insurances (141) 0.01% (250) 0.02% 109 (43.60%) - rents (230) 0.02% (258) 0.02% 28 (10.85%) - court charges and expenditures (731) 0.08% (1 175) 0.09% 444 (37.79%) - communications (93) 0.01% (79) 0.01% (14) 17.72% - audit committee remuneration (57) 0.01% (30) 0.00% (27) 90.00% - consulting and audit services (51) 0.01% (70) 0.01% 19 (27.14%) - repair and technical maintenance (27) 0.00% (14) 0.00% (13) 92.86% - office maintenance (1) 0.00% (2) 0.00% 1 (50.00%) - public utility (22) 0.00% (25) 0.00% 3 (12.00%) - subscription service (22) 0.00% (21) 0.00% (1) 4.76% - parking and other vehicle expenses (19) 0.00% (18) 0.00% (1) 5.56% - visa services (2) 0.00% (1) 0.00% (1) 100.00% - translation services (1) 0.00% - 0.00% (1) - - security (45) 0.00% (46) 0.00% 1 (2.17%) - labour medicine service (3) 0.00% (4) 0.00% 1 (25.00%) Page 14 of 26
Bulgargaz EAD Annual Management report for 2016 change Thousand % of the Thousand % of the Thousand BGN total BGN total BGN % - publications services (2) 0.00% (12) 0.00% 10 (83.33%) - EWRC s fee - price approval (7) 0.00% (4) 0.00% (3) 75.00% - other charges (15) 0.00% (2) 0.00% (13) 650.00% Depreciation/amortization expenses (104) 0.01% (132) 0.01% 28 (21.21%) Employee benefit expenses (2 496) 0.26% (2 346) 0.17% (150) 6.39% - remuneration expenses (2 115) 0.22% (2 005) 0.15% (110) 5.49% - compensated leaves expenses (54) 0.01% (30) 0.00% (24) 80.00% - current service costs (retirement benefits) (8) 0.00% (8) 0.00% - - - social security expenses (319) 0.03% (303) 0.02% (16) 5.28% Other expenses (372) 0.04% (1 267) 0.09% 895 (70.64%) - penalties for overdue payments (198) 0.02% (1 092) 0.08% 894 (81.87%) - business trips and representative expenses (81) 0.01% (33) 0.00% (48) 145.45% - training (14) 0.00% (1) 0.00% (13) 1300.00% - one-off taxes (14) 0.00% (18) 0.00% 4 (22.22%) - membership in organization (38) 0.00% (34) 0.00% (4) 11.76% - others (27) 0.00% (89) 0.01% 62 (69.66%) profit/ (loss) from operating activity 46 909 33 330 13 579 40.74% Net financial income / (costs) (7 248) (9 467) 2 219 23.44% Financial income 15 100.00% 11 002 100.00% (10 987) (99.86%) - interest income on long-term receivables - 0.00% 71 0.65% (71) (100.00%) - interest income on cash and cash equivalents 15 100.00% 237 2.15% (222) (93.67%) - profit from exchange rate differences - 0.00% 10 694 97.20% (10 694) (100.00%) Financial costs (7 263) 100.00% (20 469) 100.00% 13 206 (64.52%) - financial assets sale effect - 0.00% (4 568) 22.32% 4 568 (100.00%) - interest expenses under related parties loans (992) 13.65% (1 734) 8.47% 742 (42.79%) - interest expenses under commercial liabilities to related parties (1 751) 24.11% (3 225) 15.76% 1 474 (45.71%) - interest expenses under buyback agreements (108) 1.49% (129) 0.63% 21 (16.28%) - interest expenses under overdue tax liabilities (1 754) 24.15% (10 798) 52.75% 9 044 (83.76%) - interest expenses for payment of liabilities under plans with defined incomes (6) 0.08% (6) 0.03% - - - loss from foreign exchange rate differences (2 644) 36.40% - 0.00% (2 644) - - bank charges (8) 0.11% (9) 0.04% 1 (11.11%) Profit/(loss) before tax 39 661 23 863 15 798 66.20% Income Tax (expense)/ revenue (2 978) (3 498) 520 (14.87%) Net profit /(loss) for the period 36 683 20 365 16 318 80.13% Other component of the comprehensive income Remeasurement of retirement defined benefit plans, net of taxes 15 2 13 650.00% Other comprehensive income for the year, net of taxes 15 2 13 650.00% Total comprehensive income for the period 36 698 20 367 16 331 80.18% Revenue In 2016, the Company sold 3 041 mln. m 3 of natural gas, amounting to BGN 998 391 thousand (in 2015: 2 652 mln.m 3, BGN 1 356 556 thousand). The 2016 net revenue from natural gas sales amounts to BGN 65 067 thousand (in 2015: BGN 16 415 thousand), which is an increase amounting to BGN 48 652 thousand. In 2016, there was a positive difference between natural gas average weighted sale price and average weighted delivery price, amounting to BGN 30.78, while in 2015 the difference amounted to BGN 16.53. Expenses Expenses as per economic types include: cost of natural gas sold, impairment expenses, material costs, hired services expenses, depreciation/amortization expenses, labour remunerations expenses, social security and allowances expenses, etc. In 2016 they amounted Page 15 of 26
Bulgargaz EAD Annual Management report for 2016 to BGN 966 543 thousand (in 2015: BGN 1 366 110 thousand), which is a decrease of BGN 399 567 thousand or 29.25%. The largest relative share in the total expenses represents the cost of natural gas sold - 96.56%. In 2016, compared to 2015, the cost of natural gas as sold was 30.36 % lower. In 2016 receivables impairment costs amounted to BGN 23 101 thousand (in 2015: recovered impairment BGN 368 thousand), which include: Natural gas receivables impairment in 2016 BGN 9 130 thousand (in 2015 recovered impairment BGN 3 860 thousand); Corporative Commercial Bank AD s receivables impairment in 2016 BGN 13 971 thousand (in 2015 BGN 3 492 thousand). In natural gas impairment costs is observed decrease of 95.04%, compared to the same period in 2015. The Company charged impairment on the natural gas in stock, amounting to BGN 806 thousand (in 2015: BGN 16 254 thousand). Hired services costs in 2016 amounted to BGN 6 264 thousand (in 2015: BGN 6 238 thousand), which is an increase of BGN 26 thousand or 0.42%. In 2016 natural gas storage expenses were higher due to additional costs for the Company (Public Supplier) arising out from supply of quantities of natural gas nominated by end suppliers following the agreed deadlines, preceding the delivery year (amendment in Ordinance No 2, dated 2013 for regulation of natural gas price (State Gazette issue 105, 2016). It is observed a decrease in expenses under management contract, services expenses related to unregulated activity, insurance expenses, court fees as well as publication costs. In 2016 the other expenses amounted to BGN 372 thousand (in 2015: BGN 1 267 thousand), which is a decrease of BGN 895 thousand or 70.64 %. This is due to a decrease in penalty expenses for delayed payments under current liabilities to Bulgartransgaz EAD amounting to BGN 894 thousand. Operating activity result is positive, amounting to BGN 46 909 thousand in 2016 (in 2015: BGN 33 330 thousand), which is an increase of BGN 13 579 thousand, or 40.74%. The net financial profit and loss result is negative, amounting to BGN 7 248 thousand (in 2015 negative, amounting to BGN 9 467 thousand), which is a decrease of BGN 2 219 thousand. For the reporting period, the loss from change in foreign currency exchange rate was BGN 2 644 thousand (in 2015: profit, amounting to BGN 10 694 thousand). In 2016 was not reported expense effect form discounted financial assets, which in 2015 amounted to BGN 4 568 thousand. During the reporting period a decrease in interest expenses under overdue tax liabilities was observed - BGN 9 044 thousand or 83.76%, paid in 2016. Interest expenses under loans from related parties decreased by BGN 742 thousand or 42.79%, as well as for interest expenses under trade liabilities to related parties by BGN 1 474 thousand or 45.71%. After considering the financial income and expenses for 2016, the financial results before tax is profit, amounting to BGN 39 661 thousand (in 2015: BGN 23 863 thousand) that represents an increase amounting to BGN 15 798 thousand or 66.20%. Page 16 of 26
Bulgargaz EAD Annual Management report for 2016 Statement on Financial Position As at 31 th December, 2016, the Company s total assets amounted to BGN 337 205 thousand (31 st December, 2015: BGN 456 646 thousand). Changes in the structure of the assets for the period are presented in the table below. In thousands of BGN 31 st December, 2016 31 st December, 2015 change BGN thousands % of the total BGN thousands % of the total BGN thousands % Assets Non-current assets Plant and equipment 112 0.72% 81 0.25% 31 38.17% Intangible assets 205 1.32% 25 0.08% 180 720.00% Trade and other receivables - 0.00% 13 970 43.26% (13 970) (100.00%) - other receivables - 0.00% 13 970 43.26% (13 970) (100.00%) Deferred tax assets 15 240 97.96% 18 220 56.42% (2 980) (16.35%) Total non-current assets 15 557 100.00% 32 296 100.00% (16 739) (51.83%) Current assets Inventories 60 457 18.80% 99 347 23.41% (38 890) (39.15%) - natural gas 60 434 18.79% 99 329 23.41% (38 895) (39.16%) - materials 23 0.01% 18 0.00% 5 27.78% Trade and other receivables 194 344 60.42% 291 745 68.75% (97 401) (33.39%) -trade receivables from natural gas sales 128 146 39.84% 234 320 55.22% (106 174) (45.31%) - court and rewarded receivables 56 0.02% 515 0.12% (459) (89.13%) - prepaid advances for natural gas deliveries 42 503 13.21% 56 639 13.35% (14 136) (24.96%) - prepaid advances for supply of tangible fixed assets 6 0.00% - 0.00% 6 - - receivables from related parties (under assignment 20 281 6.31% - 0.00% 20 281 agreement) - - receivables from related parties (deposits and guarantees) 648 0.20% - 0.00% 648 - - other receivables 2 704 0.84% 271 0.06% 2 433 897.79% Cash and cash equivalents 66 847 20.78% 33 258 7.84% 33 589 101.00% Total current assets 321 648 100.00% 424 350 100.00% (102 702) (24.20%) Total assets 337 205 456 646 (119 441) (26.16%) Non-current assets As at 31 st December, 2016 the non-current assets amounted to BGN 15 557 thousand (31 st December, 2015: BGN 32 296 thousand), which is a decrease of BGN 16 739 thousand or 51.83%. As at 31 st December, 2016, the non-current assets were comprised from non-current tangible and intangible assets, amounting to BGN 317 thousand and deferred tax assets BGN 15 240 thousand. Current assets As at 31 st December, 2016, the current assets amounted to BGN 321 648 thousand (31 st December, 2015: BGN 424 350 thousand), which is a decrease of BGN 102 702 thousand (or 24.20%), as a result of: Decrease in Inventories due to higher natural gas production during 2016 heating season; A decrease in receivables from natural gas sales, as a result of the higher collection during the first half of 2016, and Assignment Agreements as concluded with NEK EAD and ESO EAD; Page 17 of 26
Bulgargaz EAD Annual Management report for 2016 In March, 2016, assignment contract was concluded for assigning Toplofikacia Sofia s receivables to NEK EAD at nominal value. The assigned receivables amount to BGN 51 114 thousand. In September, 2016 an assignment agreements was concluded for assigning Toplofikacia Sofia EAD, Toplofikacia Burgas EAD, Toplofikacia Pleven EAD receivables to NEK EAD at nominal value. The assigned receivables amount to BGN 25 652 thousand. In November, 2016 an assignment agreements was concluded for assigning Toplofikacia Ruse EAD receivables to ESO EAD at nominal value. The assigned receivables amount to BGN 290 thousand. In December, 2016 an assignment agreements was concluded for assigning Toplofikacia Sofia EAD, Toplofikacia Burgas EAD and Toplofikacia Pleven EAD receivables to NEK EAD at nominal value. The assigned receivables amount to BGN 15 439 thousand. As at 31 st December, 2016, the inventories amounted to BGN 60 457 thousand (31 st December, 2015: BGN 99 347 thousand), which represents a decrease of BGN 38 890 thousand, or 39.15%. Compared to 2015, the inventory decrease was due to the higher production in 2016-65 mln.m 3 or 23.30%. As at 31 st December, 2016, the trade and other receivables amounted to BGN 194 344 thousand (31 st December, 2015: BGN 291 745 thousand), which is a decrease of BGN 97 401 thousand or 33.39% compared to the end of 2015. The prepaid advance for natural gas supply as at 31 st December, 2016, amounting to BGN 42 503 thousand (31 st December, 2015: BGN 56 639 thousand) represents a decrease by BGN 14 136 thousand or 24.96%, compared to 31 st December 2015. The most significant trade receivables, including consumed but not paid natural gas as at 31 st December, 2016 came from the following companies: Name of client: in TBGN Toplofikacia Sofia EAD 78 968 Toplofikacia Pleven EAD 16 400 Lukoil Neftohim Burgas AD 10 055 Toplofikacia Burgas EAD 4 734 Toplofikacia Vratsa EAD 4 059 Aresgas AD 2 395 Citygas Bulgaria EAD 2 387 Others: 9 154 Total: 128 146 As at 31 st December, 2016, Bulgargaz EAD`s bank accounts cash amounted to BGN 66 847 thousand (31 st December, 2015: BGN 33 258 thousand), which is an increase of BGN 33 589 thousand. Improvement in the Company`s cash and cash equivalents is in accordance with the short-term objectives set out by the Management securing financial stability and setting aside cash to guarantee the natural gas deliveries for autumn-winter season 2016/2017. Page 18 of 26
Bulgargaz EAD Annual Management report for 2016 Changes in the equity and liabilities structure: 31 st December, 2016 31 st December, 2015 change TBGN % of the total TBGN % of the total TBGN In thousands of BGN % Equity and liabilities Equity Share capital 214 450 84.20% 206 297 91.23% 8 153 3.95% Statutory reserves 2 752 1.08% 701 0.31% 2 051 292.58% Other reserves 55 0.02% 56 0.02% (1) (1.79%) Retained earnings /(accumulated loss) 37 424 14.69% 19 082 8.44% 18 342 96.12% Total equity 254 681 100.00% 226 136 100.00% 28 545 12.62% liabilities Non-current liabilities Trade and other liabilities 24 661 99.73% 40 378 99.82% (15 717) (38.92%) - liabilities to related parties 24 661 99.73% 40 378 99.82% (15 717) (38.92%) Liabilities for retirement employee benefits 67 0.27% 73 0.18% (6) (8.22%) Total non-current liabilities 24 728 100.00% 40 451 100.00% (15 723) (38.87%) Current liabilities Loans 0 0.00% 42 514 22.37% (42 514) (100.00%) - loans from related parties 0 0.00% 30 460 16.03% (30 460) (100.00%) - financing under buyback contracts for natural gas purchasing 0 0.00% 12 054 6.34% (12 054) (100.00%) Trade and other liabilities 57 720 99.87% 147 472 77.59% (89 752) (60.86%) - trade liabilities 6 974 12.07% 2 078 1.09% 4 896 235.61% - liabilities to related parties 22 915 39.65% 28 032 14.75% (5 117) (18.25%) - received advances from clients for sale of 596 1.03% 727 0.38% (131) natural gas (18.02%) - VAT to be paid 19 914 34.46% 103 966 54.70% (84 052) (80.85%) - VAT interest for delayed payment 4 909 8.49% 12 072 6.35% (7 163) (59.34%) - excise to be paid 2 109 3.65% 396 0.21% 1 713 432.58% - payables to personnel 92 0.16% 82 0.04% 10 12.20% - liabilities to insurance companies 64 0.11% 14 0.01% 50 357.14% -other liabilities 147 0.25% 105 0.06% 42 40.00% Liabilities for retirement employee benefit 76 0.13% 73 0.04% 3 4.11% Total current liabilities 57 796 100.00% 190 059 100.00% (132 263) (69.59%) Total liabilities 82 524 230 510 (147 986) (64.20%) Total equity and liabilities 337 205 456 646 (119 441) (26.16%) Share capital structure As at 31 st December, 2016, the registered share capital amounted to BGN 214 450 thousand (31 st December, 2015: BGN 206 297 thousand) - an increase of BGN 8 153 thousand from 2015 s distributed profit. As at 31 st December, 2016, the retained earnings from previous years amounted to BGN 741 thousand. The net profit for 2016 was BGN 36 683 thousand. Non-current liabilities The Company s non-current liabilities as at 31 st December, 2016, amounted to BGN 24 728 thousand (31 st December 2015: BGN 40 451 thousand), which represents a decrease of BGN 15 723 thousand or 38.87%. The non-current liabilities are formed by deferred liabilities for transmission and storage of natural gas to related parties. Page 19 of 26
Bulgargaz EAD Annual Management report for 2016 Current Liabilities The current liabilities have a greater relative share than the non-current liabilities. As at 31 st December, 2016, the current liabilities amounted to BGN 57 796 thousand (31 st December, 2015: BGN 190 059 thousand), which is a decrease of BGN 132 263 thousand or 69.59%. As at 31 st December, 2016 the Company had no current loan liabilities, all liabilities had been fully discharged (31 st December, 2015: BGN 42 514 thousand). The aforementioned was due to a deal with SG Expressbank AD for sale and purchase of natural gas under buyback conditions, completed in March 2016, as well as discharging intragroup loan from Bulgarian Energy Holding EAD. There is a decrease in the trade and other liabilities with BGN 89 752 thousand or 60.86%, compared to the end of 2015. This is due to liabilities decrease to National Revenue Agency, amounting to BGN 89 502 thousand, and decrease in liabilities to related parties by BGN 5 117 thousand. Statement of Cash Flows In the table below is stated data for changes in the cash flows in 2016, compared to 2015. In thousands BGN Change TBGN TBGN TBGN % Net cash flows from operating activity 88 466 48 555 39 911 82.20% Net cash flows from investing activity (272) (30) (242) (806.67)% Net cash flows from financing activity (54 605) (15 821) (38 784) (245.14)% Net change in cash and cash equivalents during the period 33 589 32 704 885 2.71% Cash and cash equivalents at the beginning of the period 33 258 554 32 704 5 903.25% Cash and cash equivalents at the end of the period 66 847 33 258 33 589 101.00% The net cash flow from operating activity of Bulgargaz EAD in 2016 is positive - BGN 88 466 thousand (in 2015: BGN 48 555 thousand), an increase of BGN 39 911 thousand or 82.20%. The latter is formed from difference between proceeds from clients for delivered natural gas, and payments to suppliers for purchased natural gas, services and VAT amounts payable. In 2016 Bulgargaz EAD s payments for VAT and excise amounted to BGN 281 913 thousand (as at 31 st December, 2015: BGN 185 294 thousand). The net cash flow from financing activity for the reporting period is negative, amounting to BGN 54 605 thousand (as at 31 st December, 2015: negative BGN 15 821 thousand), which was formed from payments on loans and financing agreements BGN 42 014 thousand in total. Post-reporting date events On 6 th February, 2017 an entry was made in the Trade Registry of decision of Bulgarian Energy Holding EAD BoD s regarding appointment of new Executive Director and new Board of Directors, respectively: Page 20 of 26
Bulgargaz EAD Annual Management report for 2016 Botyo Tomov Velinov, Chairman of BoD; Iliyan Kirilov Dukov, Member of BoD; Stoyan Ivanov Yanchev, Member of BoD and Executive Director, as disclosed in Note 31 from the Financial Statements. Financial Ratios These are indicators, based on financial statements, which aim to present the overall assessment for the Company s financial performance, profitability and effectiveness in utilising its assets to achieve its operational objectives. In 2016, the financial ratios were improving significantly compared to the same period of 2015, reaching levels close to market ones. Profitability Indicators Sales profitability 3.67% 1.50% Return on equity 14.40% 9.01% Return on assets 10.88% 4.46% Sales profitability The sales profitability indicator is calculated as percentage ratio between the profit after tax and sales revenues. It reveals net profit of BGN 100 income. As at 31 st December, 2016 the sales profitability indicator amounted to 3.67% (31 st December, 2015: 1.50%) Return on equity This indicator reveals the equity profitability level. In 2016 the return on equity ratio was 14.40% (in 2015: 9.01%). Return on assets It reveals the rate of return on the capital of the Company own capital and attracted funds. It is expressed via ratio of the achieved financial result and assets used therein. As at 31 st December, 2016 the return on assets was 10.88% (as at 31 st December, 2015: 4.46%). Liquidity The indicators for liquidity reveal Company`s ability to repay its current liabilities, with its current short-term assets. Indicators Current liquidity ratio 5.57 2.23 Quick liquidity ratio 4.52 1.71 Immediate liquidity ratio 1.16 0.17 Page 21 of 26
Bulgargaz EAD Annual Management report for 2016 As at 31 st December, 2016 the current liquidity ratio was 5.57, therefore, the current liabilities of the Company may be covered, more than five times, by the available current assets (as at 31 st December, 2015: 2.23). The quick liquidity ratio is above 1 (one), therefore, with the available current assets, decreased by the inventories, the current liabilities of the Company can be covered more than 4.52 times. The immediate liquidity ratio reveals the monetary means that cover Company s short-terms liabilities. As at 31 st December, 2016 the immediate liquidity ratio was 1.16, significantly above the optimal levels from 0.2-0.25. Financial independence The financial autonomy indicators reveal Company financial independence from creditors and its ability to meet all liabilities payments in the long run. Indicators Financial autonomy ratio 3.09 0.98 Indebtedness ratio 0.32 1.02 When the financial autonomy ratio is below 1 (one), there is an excess of liabilities over equity. In this case, the current liabilities are not sufficiently secured with Company`s property. When the indicator is above 1 (one), it shows the level of financial independence from using funds from other parties. By 2016 the indicator for financial autonomy ratio was 3.09 (in 2015: 0.98). This significant increase is due to the higher collection of receivables from clients and repayment of current and overdue liabilities in 2016. The indicator for indebtedness ratio represents the Company`s level of dependence from creditors. When the indicator is greater than 1 (one), the Company`s dependence from funds from other parties is greater. By the end of 2016, this indicator decreased up to 0.32, compared to the end of 2015 (1.02), and shows Company s significantly reduced dependence to external creditors. Page 22 of 26
Bulgargaz EAD Annual Management report for 2016 Additional information under Section VІ А, Annex No 10, Ordinance No 2 of the Financial Supervision Commission 1. Information as expressed in value and quantity on major categories of goods, products and/or services as provided, specifying their share in income of sale as a whole and changes as occurred in the reported financial year; Bulgargaz EAD s income includes income from natural gas sale and other services. During the reported period the Company realized profit from sale of natural gas amounting to BGN 998 391 thousand. Natural gas sales income represents 99% of Company s sales for 2016. Company s income structure for 2016 and 2015 and their change are represented in Section V Financial Status. Table Loss or profit Statement, and other comprehensive income above herein. 2. Information on income distributed as per separate category of activities, internal and external markets as well as information on material supply sources, necessary for goods production or provision of services, and reflecting the level of dependence from every single seller of buyer/consumer, as in case that the relative share of anyone of the aforesaid exceeds 10% of sales income or costs, information shall be provided for each person separately regarding their share in sales or purchase and relations with the Company; Company s income structure for 2016 and comparison period, and their relative share of the total amount of income are represented in Section V Financial Status. Table Loss or profit Statement, and other comprehensive income above herein. As regards income from natural gas sales, which represent 99 % of the total income amount for 2016, the sales on the territory of the Republic of Bulgaria amount to BGN 994 607 thousand (3 028.3 mln.m ³ of natural gas), while on the territory of the Republic of Romania amount to BGN 3 784 thousand (12.7 mln.m ³ of natural gas). Information on natural gas sales to clients, exceeding 10% of the total income of sales of natural gas as follows: Natural gas sales Name of client Quantity Nm 3 Amount in BGN % of the total sold quantity Toplofikacia Sofia EAD 647 381.34 205 718 521.78 21.29% Lukoil Neftohim Burgas AD 370 906.87 111 274 344.36 12.20% Neochim AD 361 402.21 112 911 857.90 11.88% Bulgargaz EAD s main supplier of natural gas is OOO Gazprom Export. For 2016 its share of the total volumes of gas delivery amounted to 99.83%. Further, in 2016 there was no other counterparty to exceed 10% of Bulgargaz EAD s total expenses. 3. Information on transactions entered into between Bulgargaz EAD and related parties during reported period, proposals to enter into such transactions, as well as deals beyond its regular activity or significantly deviating from the market conditions, where the Company or its affiliate is a party, and specifying the value of transactions, nature of relations and any other information necessary for assessment of the impact on Company s financial status; Information given in value terms regarding related parties transactions has been provided in the Financial statement in details, Note 30 Related parties transactions. Related parties transactions do not deviate from normal market conditions. Page 23 of 26