A significant portion of the net profit posted by Naftogaz as a separate legal entity in 2017 (almost UAH 12.6 billion) relates to Gas Sales and Gas Transit Arbitrations. Increased profits from gas transit activities partially offset by higher losses per result of gas sales activities contributed to a general increase in net profits in 2017 comparing to 2016. Naftogaz’s separate financial statements are available via this link.
Gas Transit Segment
Gas transit volumes via the territory of Ukraine reached almost UAH 93.5 bln in 2017 - 14% higher than in 2016 and the highest level in six years.
Gas transit revenues increased by 20% in 2017 comparing to 2016, mainly due to increased volumes. The segment posted a profit of UAH 36.5 billion - 27% higher than 2016.
Wholesale Gas Trading Segment
Total gas sales volume in 2017 was 21.6 bcm - 5% lower than 2016.
Naftogaz continued performing public service obligations (PSO) in 2017, purchasing domestically produced gas from Ukrgasvydobyvannia and Chornomornftogas and managing its further resale to certain groups of customers including end customers. Naftogaz duly performs public service obligations imposed by the Ukrainian government despite the losses incurred from such activities and the high level of outstanding receivables from customers.
The wholesale gas trading segment reported a loss of UAH 7.4 billion in 2017 - 2.5 times higher than 2016. In particular, PSO activities produced loss of UAH 10.7 billion in 2017. In accordance with the Law of Ukraine “On the Natural Gas Market”, Naftogaz as a gas market player with public service obligations is eligible for compensation of economically justified expenditures incurred, less any income obtained in the course of fulfilling such obligations plus adequate margin as established by the relevant resolution by the Cabinet of Ministers of Ukraine.
Naftogaz sells imported gas to other customers outside the PSO in line with discretionary prices set by the company on a monthly basis depending on market conditions. Gas sales on general market conditions resulted in profit of UAH 3.3 billion.
|UAH bln||Revenues||Gross (loss) /profit||(Loss) / profit before income tax|
Gross trading accounts receivable increased by UAH 3.7 billion in 2017, mainly due to increased outstanding receivables due from regional gas distribution companies for resale to households because of payment discipline deterioration.
90% of total trade receivables under PSO occurred in 2017.
|Group of customers||Gross trade accounts receivable,UAH bln||Provision for impairment, UAH bln|
|Customers buying gas under PSO||48.39||38.63||+25%||(6.41)||(4.61)||39%|
Effects of Final Awards rendered by the Arbitral Tribunal
On 22 December 2017 the Arbitral Tribunal rendered the Final Award in the Gas Sales Arbitration. This defined the net obligation of Naftogaz to Gazprom at USD 2.03 billion due to gas price revision adjusted in line with the Naftogaz retrospective gas price revision claim. It also identified a Naftogaz obligation in respect of minimum gas purchase volume for 2018-2019 up to the expiry date of the current Gas Sales Contract.
During January-February 2018, Naftogaz and Gazprom had a number of negotiations to agree the gas supply process for 2018. In February 2018, Naftogaz made a prepayment for gas deliveries planned for March 2018. Gazprom later returned this payment following refusal to conduct gas supplies. Such actions from Gazprom currently prevent Naftogaz from fulfilling the Final Award regarding minimum gas purchase in 2018.
On 28 February 2018, the Arbitral Tribunal rendered the Final Award in the Gas Transit Arbitration process. It ruled that the amount of USD 4.67 billion must be paid in favour of Naftogaz by Gazprom for its failure to deliver minimum gas transit contract volumes.
Furthermore, the Tribunal has performed a set-off in respect to amounts owing between the parties pursuant to the Gas Sales Arbitration and Gas Transit Arbitration, supporting a respective Naftogaz request. Consequently, the single amount of USD 2.56 billion payable by Gazprom to Naftogaz was ordered by the Tribunal, plus interest on this payment after 28 February 2018.
This payment issue remains unresolved as of today. Numerous public statements by Gazprom to appeal the final award in the Gas Transit Arbitration lead to higher risks of non-settlement of the amount stated above by Gazprom. In response, Naftogaz does not recognise the outstanding single amount as receivable as of 31 December 2017, and is currently assessing the alternatives available to recover this sum from Gazprom, including, but not limited to, possible arrest of Gazprom assets outside of the Russian Federation.
In separate financial statements, Naftogaz recognised the effects from both Final Awards of the Arbitral Tribunal as at 31 December 2017 in the amount of set-off, as awarded by the latter. Prior to the Final Award in the Gas Sales Arbitration process, Naftogaz assessed its liabilities in respect of gas purchased in 2014-2015 at UAH 12.6 billion as at 22 December 2017. In other words, expenses under the set-off performed are lower than respective income. At the same time, income recognised was included in Naftogaz taxable income for 2017 in the corporate income tax return, and resulted in UAH 10.28 billion in additional income tax payable.
Additionally, despite the fact that the Tribunal rejected the Naftogaz claim on VAT compensation of losses for under-deliveries after 1 January 2016, Naftogaz treats the amount awarded as the contractual price of services adjustments that is subject to VAT under the Tax Code of Ukraine. As a result, Naftogaz has recognised respective VAT liabilities amounting to UAH 4.7 billion in March 2018, payable by 30 April 2018.
Total volume of subsidies consumed in 2017 was UAH 51.1 billion - 53% higher than 2016, mainly due to the increased cost of gas for households. Households (68%) and municipal heating entities producing heat for households (22%) accounted for the majority of subsidies. As of 31 December 2017, the outstanding amount of subsidies due to Naftogaz from the State under existing protocols was UAH 12.9 billion.
Taxes and Payments to the Budget
In 2017, Naftogaz as a separate legal entity paid UAH 23.2 billion in taxes - 45% higher than 2016. The bulk of these payments were VAT obligations that comprised 89% of total taxes paid.
In addition, Naftogaz paid UAH 13.3 billion in dividends as per the results of 2016. In total, Naftogaz as a separate legal entity has paid UAH 36.5 billion in taxes and dividends to the State Budget in 2017.
Naftogaz group remains Ukraine’s biggest taxpayer, having paid UAH 107.3 billion in taxes and dividends to the state budget in 2017.
Corporate Communications Department
NJSC Naftogaz of Ukraine