Naftogaz of Ukraine, one of Europe’s largest vertically integrated oil and gas companies, has published today its first detailed annual report in English. The accompanying audited consolidated statements for 2014 were released on 29 September 2015. The report is available at this link.
Why this report is published so late
The annual report of Naftogaz is published with a several months delay compared to the international best practices for major companies. However, with this document the management initiated a much more detailed disclosure of the group’s core activities than ever before. The financial statements are based on new valuations of the group’s property, plant and equipment performed by EY and of the group’s oil and gas reserves prepared by Ryder Scott Company. These valuations were last made in 2009.
Some data have never been disclosed before and were compiled specifically for this report. In particular, PWC has conducted a detailed analysis of the group’s account receivables.
This year the report comprises not only audited consolidated financial statements but also details about the group’s structure, its strategy and results in the past 1,5 years.
Starting conditions for the new management team
The period covered in the annual report has been truly transformational for Naftogaz. The decade-long policy of gas-related populism and the resulting gas pricing distortions in Ukraine have led Naftogaz to the perpetual dependence of on the state budget support, the accumulation of multi-billion-dollar obligations and the abundance of corrupt intermediaries in gas trading. In addition, Ukraine was almost entirely dependent on Russian gas imports and had to buy gas at inflated prices.
The inability of the previous governments and Naftogaz managers to resolve these issues, as well as the Russian military aggression against Ukraine, resulted in a record loss of UAH 88.4 billion (USD 5.6 billion at the prevailing exchange rate) in 2014.
During the reporting period, on the backdrop of a drastic devaluation the Ukrainian hryvnia, Naftogaz had to deal with its sizeable maturing obligations (mostly foreign-exchange denominated), cover gas bills unpaid by the previous management and secure financing to accumulate gas in the underground gas storages in sufficient volumes for the country to safely pass the 2014-2015 winter season.
Taking into account the unilateral 80% increase of the Russian gas price by Gazprom in April 2014, Naftogaz had to cover a deficit of over UAH 142.0 billion (USD 9.0 billion).
Due to the activities of the new management team, in particular, its successful efforts in reducing the cost of gas imports for Ukraine, this deficit was reduced by nearly 25% — to UAH 108.6 billion (USD 6.9 billion). Approximately UAH 96.6 billion (USD 6.2 billion) was covered by the state, and the rest by refinancing or restructuring of the group’s loans.
Despite the challenging starting conditions, thanks to the support of the Ukrainian government and the international partners of Ukraine, the new management succeeded not only to cover its financial obligations and supply sufficient volumes of gas to the consumers.
Steps were made to resolve the most pressing and systemic issues related to the group’s operations. The annual report describes, in particular, the successful launch of the new route of gas imports via Slovakia, the revision of relations with Gazprom aimed at bringing them to regular market terms, as well as the elimination of the old corrupt practices and the unprecedented improvement in the transparency of Naftogaz. The new merit-based HR policy of Naftogaz is explained as well.
Most importantly, a comprehensive gas market reform has been started. This reform will result in the implementation of standard EU business practices and regulations in Ukraine. The ultimate goals of these changes include an unobstructed competition between gas suppliers, the introduction of efficient anti-corruption mechanisms, as well as the establishment of an investor-friendly operating environment enabling to attract FDI in gas production and energy saving in Ukraine.
The initiated gas reform will also replace the wasteful policy of “cheap” gas for every household with the market-based gas pricing and targeted subsidies for low-income households.
“It would certainly be an exaggeration to say that the process of change is going smoothly and there are no unexpected, sometimes very discouraging, failures. However, it is also impossible to deny that today there are more reform-oriented people in the government and public sector enterprises than ever before. We are laying the foundation for sustainable growth in the coming years that will make Ukraine strong and truly independent,” said Andriy Kobolyev, Naftogaz CEO, in his address opening the annual report.
Contents of the annual report
The actual results of Naftogaz in 2014 are only a small portion of what is discussed in the report. The document explains in detail the development strategy the management has chosen for Naftogaz, as well as the company’s changing role in the overall context of the gas market reform in Ukraine.
The document also contains concise descriptions of the group’s key markets (upstream, transmission and supply of gas and oil) and explains Naftogaz place and role in each of these markets.
In this report, the management also presents an analysis of the corporate governance system of Naftogaz, addresses the issue of gas pricing for households in detail, discusses the recent changes in Naftogaz human resources policy, the group’s new transparency and disclosure policy, its social initiatives, its responsibilities to consumers in Ukraine and abroad, as well as its strong commitment to follow the highest standards of industrial and environmental safety.
The last section of the report includes consolidated financial statements of Naftogaz for 2014. They were audited by Deloitte and are accompanied by a detailed management discussion and analysis. The financial statements are also published as a separate document on the group’s website.
To request a printed copy of the annual report, please send a message to [email protected].