Gas transit was the primary source of income
Naftogaz of Ukraine has released its unaudited standalone (not consolidated) financial statements for the first half of 2016. The financial statements are available here.
According to H1 2016 results, Naftogaz has gained over UAH 20 billion in net profit.
The main factors contributing to the positive performance results have been represented by the following profits in the total amount of UAH 34.3 billion:
· UAH 18.8 billion of gross profits from natural gas transit services
· UAH 12.9 billion of gross profits from wholesale trading in natural gas
· UAH 2.6 billion of other income reduced by other expenses (surplus from natural gas revaluation, reversal of allowance for doubtful debts, etc.)
The above income has been partially, in the amount of UAH 12.5 billion, decreased by:
· UAH 5.5 billion of VAT additionally charged on the cost of transit services for Gazprom. From 1 January 2016, in compliance with the Tax Code of Ukraine, Gazprom’s gas transit operations are subject to VAT. Such VAT amount is recognized as an expense because it is not reimbursed by the buyer. Naftogaz expects these VAT amounts to be paid back by Gazprom after so awarded by the Stockholm Arbitration.
· UAH 4.2 billion of financial expenses (loan interests, etc.)
· UAH 2.8 billion of currency exchange losses incurred by the company through hryvnia devaluation. Naftogaz’s debts under foreign currency loans at the beginning of 2016 amounted to approx. USD 2.8 billion. Hryvnia’s exchange rate to US dollar changed from UAH 24.00 per USD 1 early in the year, up to UAH 24.85 per USD 1 in June 2015, which caused the increased debts in the national currency’s equivalent and respective losses reflected in the financial performance report.
The amount of profit received by the company in HY1 2016 does not take into account expenses for increasing doubtful debt allowance of UAH 1.0 billion, since the CMU Resolution No. 899 dd. 3 October 2012 prohibits to accrue such allowance before the financial plan is approved as required by law. As soon as the financial plan is approved, the company will reflect the expenses for doubtful debts allowance increase among other operational expenses, which will impair the financial result.
Results of the natural gas market reform and a mild inflation allowed Naftogaz to substantially improve the financial result year-on-year.
The following factors have influenced a substantial improvement of Naftogaz’s financial performance in HY1 2016 in comparison with the respective reporting period of 2015:
· UAH 15.2 billion increase in gross profit from wholesale trading in natural gas, which resulted from the fact that part of losses from selling gas to households and power utility companies supplying heat to domestic consumers (DHC) incurred during the 2015/16 heating season, in compliance with the International Accounting Standards, was reflected in Q4 2015, and the imported gas was sold to DHC mostly at the beginning of the heating season (see below). At the same time, the gross loss from gas sales to households and DHC during the 2015/16 heating season made UAH 0.5 billion
· UAH 10.0 billion increase in profit from transit services, which for 70% is accounted for by the USD exchange rate increase and for 30% by other factors (growth of transit volumes along with a decreased transit rate according to the effective contract with Gazprom)
· UAH 9.7 billion decrease in FX losses. In the HY1 2016, UAH/USD exchange rate grew up by 3.5%, whereas in the HY1 2015 it grew up by 33.3%
· UAH 0.6 billion due to other factors
At the same time:
· the HY1 2015 financial result included UAH 8.0 billion of revenues from Naftogaz’s share in profits of its subsidiary and associated companies as per their unaudited stand-alone financial statements for 6 months of 2015. Changes that occurred in Naftogaz’s share in profits of the subsidiary and associated companies were not adjusted in the statements for 6 months of 2016.
During the 2015/16 heating season, the company incurred gross loss from gas sales to domestic consumers in the amount of UAH 0.50 billion
Financial results from selling natural gas to households and DHC need to be compared by heating seasons because:
∙ in line with the International Financial Reporting Standards, the company follows the conservatism concept with regard to the presentation of its performance results. On this account, the Q4 2015 statements included losses from natural gas sales to households and district heating companies sourced from the underground gas storage (UGS) facilities, actually incurred by Naftogaz in Q1 2016 (value of gas in UGS was adjusted to net realisable value). The losses amounted to UAH 3.6 billion.
∙ for the needs of population and district heating companies during the heating season 2015/16, the natural gas volume of 14.0 bcm was used, with the imported gas volume totalling to 3.4 bcm. As required by the forecasted balance of gas receipt and distribution in Ukraine for 2015, approved by the CMU order No. 410-р dd. 15 April 2015, the major part of the expensive imported gas (2.2 bcm) was used during Q4 2015, therefore, losses incurred through its sale were mostly reflected in 2015
Hence, despite the gross income received from natural gas sales in the first half of 2016, for the heating season 2015/16 the company incurred gross loss from selling gas to population and district heating companies, in the amount of UAH 0.5 billion (loss for the heating season 2014/15 was UAH 27.9 billion)
In 2016, the Naftogaz Group will pay taxes to the budget by UAH 25 billion more than the amount the budget will allocate for gas subsidies to population
Economically unjustified prices for households and heating providers, as well as the lack of appropriate financing from the state budget to cover losses from selling gas to these consumer categories, have caused Naftogaz’s accumulation of debts accrued in connection with the need to finance purchase of Russian gas in 2009 – 2013 (outstanding debt for gas to Gazprom, advance payments received for transit from Gazprom, the Gazprombank’s loan, and Eurobonds). In early 2014, the amount of outstanding debts was nearly USD 8 billion.
The need to pay debts and cover losses incurred from gas sales to households and district heating companies, led to the need of substantial financing of Naftogaz by the state budget in 2014 – 2015.
Reforming of the gas market and gradual adjustment of gas sale prices allowed Naftogaz to ensure generation of net profits in H1 2016 and transform from the budget-funded company to the largest national taxpayer.
In 2016, for the first time since 2006, the company has not been directly supported by the government to compensate for price differences, in the form of recapitalization at the expense of the received domestic government bonds.