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Diagnostic analysis of receivables National Joint-Stock Company Naftogaz of Ukraine

31 July 2015

UK-UA: Reform Assistance Advisory

Important notice

This document has been prepared for National Joint-Stock Company Naftogaz of Ukraine (the “Company” or “Naftogaz”) within the technical assistance provided by the UK Government under the UK-UA: Reform Assistance programme. The objective of this document is to assist Naftogaz with the analysis of its receivables due from the sale of gas as set out in the Memorandum signed by the Ukrainian Government and the International Monetary Fund (the “IMF”) on 27 February 2015.

The work has been carried out in accordance with the Terms of Reference dated 9 June 2015, agreed between Naftogaz and the IMF. Given this work is strongly supported by the IMF and is a key part of their jointly agreed programme with the Government of Ukraine, the IMF can be conceived of as a secondary beneficiary of this document.

Andriy Kobolev Chairman of the Board Naftogaz of Ukraine 6, B.Khmelnitskogo Str., Kyiv, 01001, Ukraine Sergiy Konovets Deputy Chairman of the Board Naftogaz of Ukraine 6, B.Khmelnitskogo Str., Kyiv, 01001, Ukraine Brett Nevin Rayner Economist, European Department International Monetary Fund 700 19TH Street, NW Washington, D.C. 20431

Stephen Oldfield T: +48227467266 M: +48519507266 [email protected]

Donald Bruce T: +48227467759 M: +48519507759 [email protected]

31 July 2015

Dear Sirs

In accordance with your instructions as confirmed in the Terms of Reference dated 9 June 2015 (the “ToR” - Appendix 1), we report on National Joint-Stock Company Naftogaz of Ukraine (the “Company” or “Naftogaz”) and its subsidiary undertakings Public Joint-Stock Company Ukrgazvydobuvannia (“Ukrgazvydobuvannia ”), Public Joint-Stock Company Ukrtransgaz (“Ukrtransgaz ”) and Subsidiary Company Gaz of Ukraine (“Gaz of Ukraine”) (together, the “Group”).

This report has been prepared in connection with the delivery of the Services set out in the ToR.

We draw your attention to important comments regarding the scope and process of our work, set out in Appendix 2.

Yours faithfully

Stephen Oldfield Project Leader

Table of Contents

Section Overview Page

1 Executive Summary 1

2 Background of the Group’s activities and regulations 5

3 Overview of receivables recovery process 11

4 Consolidated receivables of the Group 23

5 Individual receivables analysis 31

Appendices

1 Terms of Reference 41

2 Scope and Process 46

3 Additional Information 48

4 Glossary 56

31 July 2015

Section 1

Executive Summary

1

Diagnostic analysis of receivables • National Joint-Stock Company

Naftogaz of Ukraine

31 July 2015

Summary of key issues (1 of 3)

Observation Comment

Consolidated debt of the Group by customer category and year of origination

As of 31 December 2014, the total debt of the Group from the sale of gas amounted to UAH 38.7 bln, out of which 74% related to Naftogaz. Included in the gross amount of debt is UAH 2.9 bln of fines and penalties, which were accrued by the Group following positive decisions of courts.

Complexity of the market Historically Naftogaz had limited visibility on amounts paid by the end user (e.g. households) and as such was reliant on the intermediaries to pass on funds, once they themselves had been paid.

As such the Group was heavily dependent on the transparency and discretion of intermediaries (such as oblgases and heating companies) and the availability of national budget funds to cover any differences in tariffs and subsidies for the social vulnerable categories of population (e.g., pensioners). The introduction of special accounts (whereby a proportion of payments from end users is transferred directly to Naftogaz) has partially remedied the situation, although they have only recently been introduced for heating companies.

2

Section 1 – Executive Summary


Naftogaz of Ukraine

UAH in millions

before

2010 2010 2011 2012 2013 2014 Total %

Heating companies 719 1,480 1,565 2,912 4,226 9,155 20,057 52%

Oblgases 126 2,111 250 41 1,012 4,436 7,976 21%

Industrial companies 788 1,926 1,977 381 39 1,698 6,809 18%

Other 934 255 26 1,659 600 363 3,837 10%

2,567 5,772 3,818 4,993 5,877 15,652 38,679 100%

as a % from total 7% 15% 10% 13% 15% 40% 100%

Source: Receivables ledgers of Naftogaz and Gas of Ukraine

Year of origination

As of 31 December 2014

31 July 2015


Observation Comment

Highly regulated environment

Under the appropriate legislation Naftogaz is defined as a guaranteed supplier of gas and as such it is required to enter new contracts with customers despite the failure to pay for earlier gas supplies. However, the standard contractual terms of Naftogaz allow them to limit or terminate supply of gas or even terminate the respective contracts, if there is an unsettled overdue debt. Management commented that the clause on limiting or terminating the gas supply is regularly applied by the Company. However, historically Naftogaz did not terminate the contracts and the first cases where Naftogaz has applied this clause are currently being challenged by the customers. The respective court decisions are pending.

Since 2005, legally the Group cannot enforce temporarily debt collection or bankruptcy for certain categories of customers (further details are provided below). In addition, legislation was introduced in 2011 which imposed a write off of some debts for gas supplied prior to 2010 and a restructuring of debts for gas supplied in 2010. As a result, the Group wrote off UAH 10,428 mln of debts and restructured UAH 3,765 mln (payable in instalments over a period of 20 years).

Similar legislation was adopted in May 2015, leading to potential write-off of fines and penalties for the debts of heating companies which were accumulated prior to 2014, provided the principal is paid, and restructuring of debts which originated in 2014 (payable in instalments over a 2 year period).

Legal work-out According to the information provided by the Group’s Legal Departments, the Group is currently managing approximately 5 thousand cases in relation to debts for the sale of gas starting from 2010. The total claims since 2010 amount to UAH 49.5 bln, including UAH 38.8 bln of principal and UAH 10.7 bln of fines and penalties.

Included in the court decisions in favour of Naftogaz are cases totalling UAH 2.5 bln, enforcement of which is currently suspended, mainly under legislative provisions of the Law of Ukraine On Measures Aimed At Ensuring Functioning of Enterprises of Fuel and Energy Sector No.2711-IV dated on 23 June 2005 (with the major impact on the debts due from the heating companies).

In order to decrease the volume of court cases and make the process more efficient, legal actions to collect debts are delayed until contact expiry, while initiation of the claim to be filed is at discretion of the responsible person. In some cases, claims are filed before the expiry of the contract (e.g., when a risk of insolvency has been identified).

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Naftogaz of Ukraine

31 July 2015


Observation Comment

Legal work-out

(continued)

There appears to be limited monitoring of the actual cash payment resulting from the debt collection enforced by the court decision. In addition, the actual enforcement is dependent on the State Enforcement Service and is not controlled by the Group.

Large number of cases is managed in regional courts due to specific legislation norms, which causes additional pressure on timing of claims and resources of the Group.

Information on the business groups and beneficial owners

There is currently no legal requirement for Naftogaz to ask for this information and their internal regulations do not require it, and as such this information is not maintained on file.

Under the new legislation which becomes effective in September 2015, companies are required to disclose information on their beneficial owners and provide such information to the State Registrar.

For the purposes of our analysis, we have reviewed records of the public database (smida.gov.ua) and IFRS financial statements (where publicly available) for the debtors with balances over UAH 50 mln to identify any information related to shareholders. This by itself does not confirm who the beneficial owners are (with the exception of one company). The results of our analysis are presented in Section 5.

Receivables from customers in Crimea and ATO zone

As of 31 December 2014, UAH 10.4 bln was due from customers located in annexed Crimea and ATO zone. In addition, UAH 3.8 bln was due from customers located in close proximity to the ATO zone.

According to management, since February 2015 the Group terminated the gas supply to customers located within the ATO, and no supplies are expected going forward, until the conflict is resolved or respective decision to renew the supply is taken by the Ukrainian Government. Nevertheless this issue requires monitoring from the Company’s management to avoid any debt enlargement.

Next steps We will work with the Group over the coming period to develop new collection targets and recommendations to improve and monitor the Group’s historic debt recovery and ongoing collection performance.

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Naftogaz of Ukraine

31 July 2015

Section 2

Background of the Group’s activities and regulations

5


Naftogaz of Ukraine

31 July 2015

Naftogaz Guaranteed supplier of gas to heating companies and industrial producers

with annual volumes exceeding 3 ml cm;

Guaranteed supplier of gas to the regional gas distribution companies.

Naftogaz operates in a highly regulated market. The Company is engaged in development of the respective regulations

Cabinet of Ministers

Government

• Execution of the state policy in the fuel and energy sectors;

• State management of the natural gas market;

• Approves the annual financial plan of Naftogaz

• Approves annual planned volume of gas consumption in the country

Ministry of Energy and Coal Line Ministry

• Develops and executes the state policy in the oil and gas sector;

• Develops special programmes for diversification of gas supply;

• Reviews and submits for approval by the Cabinet of Ministers the annual planned volume of gas consumption in the country and the financial plan of Naftogaz

Parliament

• Sets key framework legislation on the principles of gas market in Ukraine;

• Ratifies international agreements in the energy sector.

National Commission Regulator

• Issues licenses related to commercial activity on the natural gas market;

• Establishes standard templates of contracts on gas supply;

• Establishes prices for gas and tariffs for transportation, distribution, storage, pumping and supply of the natural gas .

Verkhovna Rada

6


Naftogaz of Ukraine

Section 2 – Background of the Group’s activities and regulations

31 July 2015

Debt collection of the Group is highly impacted by regulations (1 of 3)


Naftogaz of Ukraine


Key legislative acts that historically have had a significant impact on the Group’s debt collection performances are discussed below:

• Law No.2711-IV On Measures Ensuring Functioning of Enterprises of the Fuel and Energy Sector adopted by the Parliament on 23 June 2005, the main objective of which was to protect state-owned assets in the energy sector from misappropriation. This Law introduced a ban on bankruptcy and forced debt collection against participants in the fuel and gas market, including heating companies and regional gas distribution companies.

• Resolution No.705 of the Cabinet of Ministers of Ukraine dated 25 July 2012, which defined Naftogaz and regional gas distribution companies as guaranteed suppliers of gas.

• On 3 October 2012, the Cabinet of Ministers by its Resolution No.939 obliged Naftogaz to supply gas to guaranteed suppliers of gas, i.e. regional gas distribution companies.

• Law No. 3319-VI On Debts for Consumed Natural Gas and Electrical Energy adopted by the Parliament on 12 May 2011, which resulted in a partial write-off and restructuring of debts of some customers of Gas of Ukraine (heating companies and regional gas distribution companies). In particular, debts which originated prior to 2010 were written off and debts accrued during 2010 were restructured.

establishment of the Group with Gas of Ukraine as the main trader of gas

1998

introduction of special accounts for regional gas distribution companies and traders of gas

2008

Law On Stabilization Of Financial Standing Of Naftogaz

introduction of special accounts for heating companies which produce electricity using gas

Law On Natural Gas Market

April 2015

May 2015

7

Timelines of key legislative changes

ban on bankruptcy and forced debt collection, inter alia, in

respect of the heating companies and regional gas

distribution companies

2005

Law On Principles Of Functioning Of Natural Gas

Market

2010

transfer of trading operations from Gas of Ukraine to Naftogaz

Law On Write-off and Restructuring of Debts for Consumed Gas

2011

introduction of new algorithm for special accounts

guaranteed suppliers of natural gas are established

2012

introduction of special accounts for heating and industrial companies

2014

changes to special accounts algorithm for heating companies

March 2015

31 July 2015



Naftogaz of Ukraine


• On 14 May 2015, the Parliament adopted Law No. 423-VIII On Stabilization of Financial Standing of Naftogaz. Under this Law debt of the heating companies for the natural gas consumed in 2014 (excluding fines, late payment interest and inflation compensation), which is outstanding as of 6 June 2015, is subject to restructuring and will be repaid in instalments during a 24-month period. Such restructuring is possible only if companies repay their debts (excluding fines, late payment interest and inflation compensation) for the gas consumed prior to 2014. In this case, fines, late payment interest and inflation compensation will be written off.

• In addition, according to Law No. 423-VIII, Naftogaz and Gas of Ukraine may sell their debts for the supply of gas via auctions (at a discount). The Law became effective from 6 June 2015 and its application in practice is untested.

• Special consideration in the regulations is made to the process for payments received by Naftogaz from the customers for gas consumed.

• Resolution No.247 adopted by the Cabinet of Ministers of Ukraine on 26 March 2008 which introduced special bank accounts for oblgases and traders of gas, where funds received from end consumers of gas were further automatically split between Naftogaz and gas transportation companies (Ukrtransgaz and oblgases) according to a complex formula (approved by the Resolution of the National Commission No.1529 dated 25 December 2008).


1998


2008



April 2015

May 2015

8


2005

2010



2011

2012


2014

March 2015






Market




31 July 2015



Naftogaz of Ukraine


• On 2 August 2012, the formula was amended by Resolution No.1000 of the National Commission. According to management, the new formula did not allow Naftogaz to recover old debts, but only service the current portion of receivables.

• Similar accounts were introduced for industrial companies (Resolution No.23 issued by the National Commission on 16 January 2014) and for heating companies (Resolution No.217 issued by the Cabinet of Ministers of Ukraine on 18 June 2014 (effective from 4Q2014). The algorithm established by Resolution No.217 also envisaged repayment of old debts.

Please note that by Resolution No.166 issued by the Cabinet of Ministers of Ukraine on 18 March 2015 changes to the special accounts algorithm were introduced which eliminated the possibility to recover the old debts, negatively effecting the recoverability of Naftogaz’s accounts receivable.

• On 20 May 2015, the Cabinet of Ministers of Ukraine issued Decree No. 670-p introducing a new mechanism of settlements between electricity generating companies and the wholesale suppliers of electricity. This decree introduced the mechanism of special accounts in settlements with Naftogaz for the gas used by the heating/electricity generating companies for the production of electricity.



1998


2008



April 2015

May 2015

9


2005

2010



2011

2012


2014

March 2015






Market




31 July 2015

- gas transportation services (main pipeline)

… and religious organizations

Naftogaz is a guaranteed supplier of natural gas in Ukraine for almost all categories of customers

Regional gas distributors (“0blgases“)

Ukrgazvydobuvannya (all gas produced is

sold to Naftogaz)

Other suppliers (Gazprom, European

suppliers, etc.)

Naftogaz, Gas of Ukraine*

Industrial companies and other customers

Public entities

Heating companies

Uktransgaz (gas transportation )

Gas traders

- Group companies

* - a trading company before December 2011.

- supply of natural gas (without transportation services)

- supply and distribution of natural gas by oblgases to end users

- gas distribution services by oblgases when Naftogaz supplies gas via direct contract (i.e., not through oblgases)

10

- supply of natural gas including transportation services


Diagnostic analysis of receivables • National Joint-

Stock CompanyNaftogaz of Ukraine

- supply of heat

** - other customers only

*** - for heating purposes only

Note: the above chart is presented from the perspective of the Group rather than the market as a whole

***

**

31 July 2015

Section 3

Overview of receivables recovery process

11


Naftogaz of Ukraine

31 July 2015

The Gas sales department oversees all interactions with customers from contract initiation to collection (1 of 2)

12


Naftogaz of Ukraine

Section 3 – Overview of receivables recovery process

Gas sales department

Contractual work and gas sales division

(9 people)

Payments control division

(18 people)

Settlements and analytics division

(8 people)

• Daily analysis of payments received for the gas sold and payments by Naftogaz for transportation and distribution services (including posting respective entries in the automated system Navigator-IN (a system used by the Gas Sales Department to account for and analyse sales related operations and balances)

• Based on court decisions and respective accounting records, reflecting accruals and provisions relating to receivables and payables balances in Navigator-IN

• Daily analysis of received payments and receivable balances

• Daily forecast of cash flows from sales of gas

• Preparation of reports for management

• Development of standard contract templates for gas sale

• Ensure any agreements with customers are concluded in accordance with the established procedures of Naftogaz

• Recording the actual volumes of natural gas consumed by undertaking acceptance procedures with customers

• Informing the Legal Department regarding execution of the enforcement documents by the debtors

• Preparation of gas sales registers and their submission to the Accounting Department to reflect gas sales transactions in the Company’s accounts

Debt management division

(16 people)

• Preparation of materials on overdue debt, respective fines and penalties and their submission to the Legal Department to proceed with court filing

• Off-set arrangements • Regular monitoring of official

information on bankruptcy or liquidation procedures initiated in respect of the Company’s debtors

• Consolidation of information on receivables and payables of the Company

31 July 2015

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• As a guaranteed supplier of natural gas, Naftogaz cannot refuse to conclude new gas supply contracts with its customers even if the latter have unpaid debts for gas supplied under old contracts. At the same time, according to the standard gas supply contracts with its customers, Naftogaz can limit or terminate supply of gas. The Company actively applies this contract clause in accordance with the Decree of the Cabinet of Ministers of Ukraine No1687 dated 8 June 2006 “On Approval of Mechanism of Limiting (Terminating) Supply of Gas (Except for Population)”.

• Moreover the standard contractual terms allow Naftogaz to terminate the contract, if there is an unsettled overdue debt. According to management, they did not apply the contract termination clause until 2015, and as a result two court cases where initiated against Naftogaz (currently in progress). If Naftogaz successfully defends these cases, they will have an effective tool against problematic debtors.

• Before proceeding with the legal work-out, the Debt Management Division of the Gas Sales Department, conducts negotiations with individual debtors, reaching though regional authorities and trying to influence payment discipline of the debtors (through regular calls, official letters, etc.).

The Gas sales department oversees all interactions with customers from contract initiation to collection (2 of 2)

• Usually, Naftogaz files lawsuits against debtors to demand repayment of overdue debts and respective fines and penalties only after expiry of respective gas supply contracts. As such, the lawsuits cover only that portion of the debt which has not been paid after the contract expiry date (i.e., problematic debt). According to management, such approach helps the Group to decrease the number of claims to be filed and the volume of legal work.

• However, in cases where management identifies the risk that the principal debt may not be repaid, then the decision to file a court case is made before the contract expiry.

• There is no general practice of formal debt restructuring in the Group, unless there is a respective court decision or restructuring is initiated by the Parliament (see discussed earlier).


Naftogaz of Ukraine


31 July 2015

Overview of the main contractual terms of Naftogaz for supply of gas

Fines and penalties for overdue debt

Supply and payment terms

Pricing

Naftogaz concludes annual contracts for the supply of gas, using standard templates which are set by Nafogaz internally for each category of customers (i.e., industrial companies, oblgases (separately for supply of gas to households, heating companies, other entities), etc.). Per management, no changes to the standard contractual terms are usually allowed. Please note that the National Commission sets a standard template for the gas supply contract between owners of gas (e.g., Naftogaz) and oblgases which Naftogaz uses to prepare respective contract template with oblgases.

Gas prices are regulated at each stage from exploration to supply to end consumers by the National Commission which sets either fixed prices (for supply of gas to households (through oblgases) as well as to heating companies for production and delivery of heat to households) or maximum level of prices (for other customers).

Contacts stipulate volume of gas to be supplied at a certain price on a monthly basis. Depending on the customer’s category, the payment terms may vary from 30% monthly prepayment with the remaining balance payable in two equal instalments (i.e., 35% each) on the 5th and 15th day of the month of supply with final settlement to be made by the 14th day of the next month (for industrial companies and other customers) to 1oo% payment for the planned volume of gas to be consumed in the month of supply (for oblgases and heating companies) with the final clearance on the 15th (heating companies) or on the 20th (oblgases) of the month following the month of supply.

1. Penalties (late payment interest) are calculated on a daily basis by multiplying the NBU’s double discount rate and the amount of payments in arrears. 2. Fines is a one time fee set at 7% from overdue payment (only for supply of gas to industrial companies) 3. Inflation compensation – 3% + inflation rate (as set by the State Statistics Service) multiplied by the amount of payment in arrears (on a daily basis).

Contract duration

Termination clauses In case of overdue payments, according to the standard gas supply contracts (except for those with oblgases), Naftogaz

has the right to limit/terminate supply of gas until the overdue payment is settled.

14



Naftogaz of Ukraine

31 July 2015

Overview of the legal work-out procedures in Naftogaz and Gas of Ukraine

• Our analysis was focused on Naftogaz and Gas of Ukraine, since these companies are mainly involved in the sale and purchase of gas and, as a result, are engaged in respective litigations.

• The Legal Department of Naftogaz includes about 50 specialists of which 31 are litigation specialists (20 of which participate in drafting and filing court claims, other staff are responsible for enforcement proceedings and bankruptcy cases).

• The Group’s lawyers maintain special registers of the current court cases with indication of debtors, amount of debt, penalties applied for non-payment or late payment of the debt etc.

• If a customer has not paid for the supplied gas according to contractual terms, in most cases Naftogaz will initiate legal proceedings after the respective contract’s term expiration (1-year), when the final outstanding amount of the principal debt is known. Before the litigation process Naftogaz estimates additional penalties (fines, late payment interests etc.) for non-compliance with the contractual terms, which in most cases continue to be accrued during the litigation.

• This approach is applied with the purpose to minimise costs and to avoid initiating a number of cases per one contract. This is also driven by the fact that under effective legislation a court claim regarding debt collection should be submitted at a debtor’s place of registration. Such legislative requirement actually complicates legal work-out with the Group’s debtors, which is managed out of Kyiv.

• In exceptional cases, upon approval of Naftogaz’s management, the legal work-out in respect of the debtors is initiated before the contract’s expiry date.

• Contract management (including conclusion of contracts, control over their execution, penalties accrued for non-compliance with contractual terms) is executed by the Gas Sales Department (discussed earlier). If a counterparty is in breach of the contractual terms, this Department prepares and transfers materials to the Legal Department in order to initiate court proceedings in respect of such a counterparty. The Economic Security Department is responsible for monitoring counterparties solvency in order to timely react in case bankruptcy procedures are initiated in respect of a debtor.

• Gas of Ukraine ceased its activity related to supply of the natural gas in 2011, however, is actively involved in litigation proceedings with its debtors regarding unpaid balances of principal debts and penalties including late payment interest, fines etc.


15


Naftogaz of Ukraine

31 July 2015

Key Responsible Departments

Gas Sales Department Legal Department Economic Security

Department

• Regular interaction with enterprises, establishments, organisations and citizens with the aim to receive necessary information regarding financial standing and solvency of the debtors

• Checking on the status and accuracy of the court decision execution by the State Enforcement Service

• Identification of possible illegal actions carried out by the debtors aimed at sidestepping the recovery of the debt and notification of the law enforcement authorities if such actions are identified

• Provision of methodical and advisory assistance during pre-court workout procedures

• Legal work-out related to drafting court claims, appeals, cassation of claims or objections to them

• Upon approval of the management, involves representatives of the structural departments to represent the Group’s interests in the court hearings

• Control over process of receiving of the enforcement documents

• Maintaining records regarding court cases and enforcement proceedings

• Collection and preparation of information necessary to file the claim

• Identification of the counterparties for the legal work-out

• Transfer of the case materials to the Legal Department in order to comply with statutory terms for filing documents to the courts etc.

• Informing the Legal Department regarding execution of the enforcement documents by the debtors

• Regular monitoring of the official publications regarding bankruptcy or liquidation proceedings initiated in respect of the Group’s debtors

16


Naftogaz of Ukraine


Naftogaz and Gas of Ukraine undertake any legal work in accordance with the established procedures set out in the internally approved Regulations

31 July 2015

All legal work in the Group related to debt collection is done in-house

Preparation and filing of the claims

Representation in the court of all instances

Enforcement proceedings

Includes also appeal claims and cassation claims and bankruptcy cases initiated in respect of the Group’s debtors

This work is supported by the Gas Sales Department

17


Naftogaz of Ukraine


Monitor the status of enforcement, including its initiation by the State Enforcement Service, execution, etc.

1. 2. 3.

Maintaining records regarding court cases and enforcement proceedings

31 July 2015

Starting from 2012 Naftogaz filed claims for the total amount of UAH 27,184 mln

• Our analysis of the court cases of the Group was mainly focused on Naftogaz and Gas of Ukraine, since these two companies were involved in sale and purchase of gas and were heavily engaged in related litigation. Although Ukrtransgas and Ukrgazvydibuvannia are also involved in litigation, this relates to gas transportation and the collection of intragroup debts and as such falls outside the terms of reference.

• We further split our analysis into two sections: (i) covering Gas of Ukraine from 2010 till February 2015 (see further in the report); and (ii) Naftogaz from 2012 to May 2015 (see below), i.e. starting from the year when they engaged into gas trading activities.

• According to legislation, Naftogaz is a guaranteed supplier of the natural gas to large industrial enterprises with the annual consumption of the natural gas over 3 mln. cm, heating companies and regional gas distribution companies.

• Contracts are concluded by Naftogaz for a period of one year. Hence, for each calendar year Naftogaz concludes a new set of contracts with the same customers (counterparties). As a guaranteed supplier of the natural gas Naftogaz is not permitted to refuse concluding a sale and purchase contract for a new period, even if a customer has debts for the purchase of natural gas under old contracts for prior periods.

• Usually, legal action is initiated after expiry of the sale and purchase contract in order to minimise the quantity of claims filed and resources of Naftogaz involved in the process of court claims.

• Other claims filed by Naftogaz in courts relate to its day-to-day activity (loan agreements, disputes with the state authorities, non-material commercial disputes). However, their number is small compared to disputes regarding sale and purchase of natural gas.

• Our analysis of legal cases of Naftogaz includes legal cases, initiated from 2012 till May 2015. The total number of legal cases is 2,725.

• The total amount of the claims filed during the above mentioned period, including the principal debt, fines, late payment interest and inflation compensation (inflation rate and 3% per annum), is UAH 27,184 mln, including: (i) court cases with the total claims of UAH 18,953 mln, where final court decision was taken (and with respect to which UAH 14,327 mln were confirmed by the court); and (ii) court cases with the total claims of UAH 8,231 mln pending final decision of the court (see details in table on the next page).

• According to the Ukrainian legislation, the court is empowered to revise downward the amount of fines and late payment interest on its own discretion, taking into account the following circumstances: actual execution of the contract by a debtor, financial standing of the parties, their material and non-material interests. Also the amount of principal debt may be decreased by the court or by the parties due to its full or partial payment.

• Therefore, the amount of claims satisfied by the court in favour of Naftogaz may significantly differ from the amount claimed by Naftogaz. Our analysis shows that the average recovery rate for the claims where the final decision of the court was taken is 76% (calculated by dividing the amount of confirmed court claims by the claims amount where final decision was taken). This does not take into account the actual outcome from the enforcement.


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Naftogaz of Ukraine

31 July 2015

Out of UAH 18,953 mln of claims, where the final decision of the court has been taken, Naftogaz is allowed to enforce UAH 14,327 mln

• According to the information provided by the Legal Department, the total claims of UAH 3,577 mln from the confirmed by the court cases were paid by debtors and UAH 5,154 mln are currently in the process of enforcement by the offices of the State Enforcement Service of Ukraine. Currently, enforcement of claims in the amount of UAH 2,491 mln is suspended mainly under legislative provisions of the Law of Ukraine On Measures Aimed At Ensuring Functioning of Enterprises of Fuel and Energy Sector No.2711-IV dated on

23 June 2005, the effect of which is expected to expire on 01 September 2015 (with the major impact on the debts due from the heating companies).

• In addition, UAH 27 mln shall be collected by Naftogaz under out-of-court enforcement procedure based on the notary’s executive inscription (in cases this is envisaged by the contractual terms with customers). This procedure does not involve application to court by Naftogaz and is not included in the total claims filed to court.

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Naftogaz of Ukraine


Source: Information of the Legal Department of Naftogaz

* - as a percentage from total claims where final decision have been taken

Legal cases filed by Naftogaz against debtors and their status

UAH in

millions

Principal

debt

Fines and

Penalties

Final

court

decision

taken Pending

Total

amount

Enforcement

procedure

Restruc

tured Paid

Suspended

enforcement

Written

off

Bankruptcy

proceedings

ATO zone

and Crimea

Total

amount

% 0f claims

confirmed*

Industrial

companies 1 868 550 1 514 904 2 418 538 506 297 3 - - - 1 344 89%

Electricity &

heating 15 081 4 364 13 151 6 294 19 445 4 369 27 2 3 196 2 467 - 62 47 10 413 7 9%

Oblgases 1 466 393 1 213 646 1 859 95 30 60 21 55 - 14 27 5 23%

Other 2 47 6 986 3 07 5 387 3 462 152 23 24 - - - 2 096 2 295 7 5%

20 891 6 293 18 953 8 231 27 184 5 154 831 3 577 2 491 55 62 2 157 14 327 76%

Total claims Claims confirmed by the court

31 July 2015

From 2010 till February 2015, the total claims filed by Gas of Ukraine amounted to UAH 22,315 mln, out of which UAH 17,734 mln have final court decision with the recovery of 76%

• Starting from 1998 till November 2011 Gas of Ukraine was engaged in the purchase and sale of natural gas. In November 2011, the license of Gas of Ukraine for sale and purchase of the natural gas was terminated. Currently, the main activity of Gas of Ukraine is collection of debts which accumulated before November 2011.

• Our analysis of legal cases of Gas of Ukraine includes legal cases initiated from 2010 till February 2015. The total number of legal cases analysed and relating to collection of debts for the sale of gas is 2,273.

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Naftogaz of Ukraine


Source: Information of the Legal Department of Gas of Ukraine

• The total amount of the claims filed during the above mentioned period, including the principal debt, fines, late payment interest and inflation compensation (inflation rate and 3% per annum) is UAH 22,315 mln, including (i) court cases with claims of UAH 17,734 mln where final court decision was taken (and with respect to which UAH 13,395 mln were confirmed by the court); (ii) and court cases with the total claims of UAH 4,581 mln pending final decision of the court.

• Our analysis shows that the average recovery rate for the claims where final decision of the court was taken is 76% (calculated by dividing the amount of confirmed court claims by the claims amount where final decision was taken). This does not take into account the actual outcome from the enforcement.


Legal cases filed by Gas of Ukraine against debtors and their status

UAH in millions

Principal

debt

Fines and

Penalties

Final court

decision

taken Pending

Total

amount

Enforcement

procedure

Written-

Off Restructured Paid

Suspended

enforcement

Bankruptcy

proceedings

Total

amount

% 0f claims

confirmed*

Industrial

companies 5 367 1 932 2 823 4 47 6 7 299 7 42 115 81 1 302 - - 2 240 7 9%

Electricity &

heating 9 401 1 908 11 220 89 11 309 2 7 26 2 511 658 2 455 14 128 8 492 7 6%

Oblgases 3 019 57 8 3 581 16 3 597 10 1 57 3 908 102 - - 2 593 7 2%

Other 94 16 110 - 110 12 13 1 44 - - 7 0 64%

17 881 4 434 17 734 4 581 22 315 3 490 4 212 1 648 3 903 14 128 13 395 76%


31 July 2015

31% of the claimed amount confirmed by courts was written-off under provisions of the Law of Ukraine

• According to the information provided by the Legal Department, the total claims of UAH 3,903 mln from the confirmed by the court cases were paid by debtors and UAH 3,490 mln are currently in the process of enforcement by the offices of the State Enforcement Service of Ukraine.

21


Naftogaz of Ukraine


• Debts of Gas of Ukraine considered by courts in the amount of UAH 4,212 mln were written-off under provisions of the Law of Ukraine “On Certain Issues on Debts for the Consumed Natural Gas and Electricity” No.3319-VI dated 12 May 2011. In 79 court cases with the total claims of UAH 1,648 mln debts are restructured.

Legal cases filed by Gas of Ukraine against debtors and their status

UAH in millions

Principal

debt

Fines and

Penalties

Final court

decision

taken Pending

Total

amount

Enforcement

procedure

Written-

Off Restructured Paid

Suspended

enforcement

Bankruptcy

proceedings

Total

amount

% 0f claims

confirmed*

Industrial

companies 5 367 1 932 2 823 4 47 6 7 299 7 42 115 81 1 302 - - 2 240 7 9%

Electricity &

heating 9 401 1 908 11 220 89 11 309 2 7 26 2 511 658 2 455 14 128 8 492 7 6%

Oblgases 3 019 57 8 3 581 16 3 597 10 1 57 3 908 102 - - 2 593 7 2%

Other 94 16 110 - 110 12 13 1 44 - - 7 0 64%

17 881 4 434 17 734 4 581 22 315 3 490 4 212 1 648 3 903 14 128 13 395 76%




31 July 2015

Positive court decisions with low chances to be executed are estimated at UAH 9,281 mln

Case Description

Debtors located in Crimea and ATO zone

Debts confirmed by the court decisions in the amount of UAH 6,374 mln for Naftogaz and UAH 1,193 mln for Gas of Ukraine are due from companies registered in Crimea, Donetsk and Lugansk regions, which are not controlled by the Ukrainian Government. Currently local offices of the State Enforcement Service of Ukraine responsible for execution of the court decisions on these territories are not operating. Therefore, it is uncertain whether enforcement proceedings in these cases will result in actual recovery of debt.

Debtors in bankruptcy procedure UAH 1,714 mln (Naftogaz - UAH 975 mln, Gas of Ukraine – UAH 739 mln) is subject of collection from the companies which are currently in the bankruptcy procedure. Chances of collecting such debts are low, since it is unclear whether debtors will be able to pay their debts in full.

22


Naftogaz of Ukraine


Source: Information of the Legal Department of Gas of Ukraine and Naftogaz

31 July 2015

Section 4

Consolidated receivables of the Group

23


Naftogaz of Ukraine

31 July 2015






provided below.


Smart ribbon.



divider level.






Update.

24

Section 4 – Consolidated receivables of the Group






provided below.


Smart ribbon.



divider level.






Update.

• As of 31 December 2014, the gross receivables of the Group for the sale of gas, excluding intra-group balances, amounted to UAH 38,679 mln (including UAH 2,897 mln of fines and penalties).

• Receivables are recorded in the Group’s accounting records based on gas sales registers provided to the Acounting Department by the Gas Sales Department before the 15th day of the month following the month of supply.

• According to the standard contractual terms, acceptance acts confirming volumes of gas supplied and its price should be signed by Naftogaz and its customers by the 8th of the month following the month of supply. Once acceptance acts are signed, they are transferred to the Accounting Department. If there are differences between the sales registers and the signed acceptance acts in terms of volume or price of gas supplied, respective adjustments are made in the Company’s accounts.

• As discussed earlier in the report, the gas supply contracts stipulate fines and penalties for the late payments. According to management, such fines and penalties are recorded in the Group’s books only if there is a respective decision of an appeal court. Until such ruling is obtained, no respective accrual is made in the Group’s accounting records.

Naftogaz and Gas of Ukraine account for almost all debt of the Group for the sale of gas


UAH in million

Heating

companies

Industrial

companies Oblgases Other Total

Naftogaz

Trade receivables 15,882 2,548 5,535 2,924 26,889

Fines and penalties 937 78 108 647 1,769

16,819 2,626 5,643 3,570 28,658

Gas of Ukraine

Trade receivables 2,559 3,871 2,267 192 8,889

Fines and penalties 678 309 66 74 1,128

3,237 4,181 2,333 266 10,017

Ukrgazvydobuvannya

Trade receivables - - - 3 3

- - - 3 3

Ukrtransgaz

Trade receivables - - - 1 1

- - - 1 1

20,056 6,807 7,976 3,840 38,679

% from total 52% 18% 21% 10% 100%

The Group companies' receivables in respect of gas sale

operations as of 31 December 2014


Naftogaz of Ukraine

31 July 2015

Recoverability of the Group’s debt is impacted, primarily, by the amount recovered from heating companies (1 of 2)

0

20

40

60

80

100

2010 2011 2012 2013 2014

Total

Other clients

Industrial companies

Oblgases

Heating companies

Recoverability of current debt*, %

• - recovery rates were calculated by dividing the amount of payments received during the year and relating to debts which originated in prior periods by the amount of such debts outstanding at the beginning of the year

0

20

40

60

80

2010 2011 2012 2013 2014

Recoverability of old debt*, %


Other clients

Oblgases

Heating companies

Total

• - recovery rates were calculated by dividing the amount of payments received during the year for the gas supplied by the amount of revenue (including VAT) accrued in the respective period

• The debt recovery rate for the heating companies is the lowest when compared to other categories of the Group’s customers. There is a significant dependency of debt recovery rates in respect of the heating companies’ debt on the amount of transfers from the state budget. Heating companies receive compensation from the state budget for the difference between the price of gas purchased for the purposes of heat production and supply to households and the price of gas included in the respective heating tariffs to households.

According to the information provided by Naftogaz, in 2012 heating companies received UAH 9.8 bln of such compensation, which was eventually used to settle the debt for the gas consumed, while in 2013 no such compensation was paid to heating companies. In 2014, the compensation from the budget amounted to UAH 10.8 bln.

• As mentioned earlier in the report, in 2014 – 2015 some initiatives were introduces to improve the payment discipline of the heating companies (eg, introduction of special accounts, adoption of Law No.423 allowing Naftogaz to limit supply of gas to heating companies in case of overdue payments).

• While in 2011 – 2013 recoverability of the current debt of oblgases was rather stable (appx. 84%), in 2014 it dropped to 71%. The major factor that has negative impact on the recoverability in 2014 was increase of prices for gas, including gas purchased by oblgases for production purposes, i.e. industrial and technical losses (“ITL”). At the same time, the price of gas for ITL included in the gas distribution tariff and charged to customers in 2014 was lower compared to the actual price, resulting in oblgases’ inability to pay for respective gas in full. Naftogaz intends to recover full amount of debt for gas for ITL but it may prove to be challenging.

25

Source: Accounting records of Naftogaz and Gas of Ukraine


Naftogaz of Ukraine


31 July 2015

Recoverability of the Group’s debt is impacted, primarily, by the amount recovered from heating companies (2 of 2)

0

20

40

60

80

100

2Q13 1Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

Total

Other clients


Oblgases

Heating companies

Recoverability of current debt*, %

• - recovery rates were calculated by dividing the amount of payments received during the year and relating to debts which originated in prior periods by the amount of such debts outstanding at the beginning of the year. Calculation was done on a cumulative basis.

Recoverability of old debt*, %

0

10

20

30

40

50

4Q14 3Q14 2Q14 1Q13 1Q14 3Q13 4Q13 2Q13


Total

Heating companies Other clients

Oblgases

• - recovery rates were calculated by dividing the amount of payments received during the year for the gas supplied by the amount of revenue (including VAT) accrued in the respective period. Calculation was done on a cumulative basis.

26

• Quarterly recovery rates were calculated on a cumulative basis as gas sales contracts are for a period of one year and payments made by customers during the year are not linked to the month of supply in the Group’s accounting system.

• Fluctuations of quarterly recovery rates for the current debt of oblgases and heating companies reflect the seasonality of gas consumption during the year (i.e., which is increasing in cold months with respective payments being delayed and made in the following periods). In the first quarter of the year, the current debt recovery rate is the lowest, while it improves in the following quarters.

• For industrial companies and other clients the consumption is less dependant on the season.

• Improvement of recoverability of the current and old debt of heating companies in the 4th quarter of 2014 reflects receipt by Naftogaz of the heat tariffs compensation from the state budget which related to the supply of gas in the current and previous years (UAH 10.8 bln).


Naftogaz of Ukraine


31 July 2015

53%

As of 31 December 2014, heating companies and oblgases accounted for 72% of the Group’s total debt

of the total debt was originated prior to 2014

67%

60%

out of the debt which originated prior to 2014 is due from heating companies

47%

of debt of industrial companies is due from companies of the chemical sector

• Payment discipline of heating companies is one of major concerns of the Group’s management. In 2014, settlements through special accounts were introduced for these companies and, according to management, it has a positive impact on the recoverability of their debt.

• Annexation of Crimea, ATO, increase of maximum level of gas prices in 2014 for industrial companies from UAH 3,113 per thousand cm to UAH 5,900 per thousand cm (which is also applicable to gas purchased by oblgases for ITL as well as gas consumed by heating companies to produce heat for commercial and public entities) were the major factors negatively impacting the debt repayment of the Group in 2014 (see analysis further in the report).

of the total debt of other customers is due from one counterparty (UAH 2,046 mln) - LLC Gazukraina-Commerce.

27

Debt as of 31 December 2014, UAH in millions

2013

5,877

600 39 1,012

4,226

2012

4,993

1,659 381 41 2,912

2,567

934 788

126 719

2011

3,818

26 1,977

250 1,565

2010

5,772

255 1,926 2,111

1,480

Prior to 2010

9,155

Total

38,679

3,837

6,809

7,976

20,057

2014

15,652

363 1,698

4,436 Other

Oblgases


*Heating companies

7%

15%

10%

13%

15%

40% 100%

* - includes heating companies which also produce electricity


Naftogaz of Ukraine


31 July 2015

As of 31 December 2014, 49% of the Group’s debt was originated under gas supply contracts for households and public organisations

28

• All contracts concluded by Naftogaz with its counterparties are split by the end consumer category as gas prices and heat tariffs vary depending on the consumer category (i.e., the price of gas sold for households is lower than the price for the industrial companies). Note that there is no separate category of households entitled to subsidies (individuals identified as socially vulnerable) as prices at which gas is supplied to oblgases and heating companies are the same for all households. The subsidies are paid from the State budget to oblgases and heating companies.

• Given that payments for consumed gas are made by customers of oblgases through special accounts with further automatic distribution between the provider of gas (i.e., Naftogaz) and providers of transportation and distribution services (Ukrtransgas and oblgases), debt structure of oblgases accurately reflects the “ultimate” debtors of the Group.

*- primarily for production of electricity

*** - primarily, traders, Chornomornaftogas, condominiums, public organizations, etc.

Source: Receibables ledgers of Naftogaz and Gas of Ukraine

26% 0%

11%

24%

2%

11%

25%


Heating companies

Other

Public and municipal organizations

Households

Religious organizations

Oblgases

UAH in millions

Gas of

Ukraine Naftogaz Total %

Heating companies

Public organizations 1,451 6,948 8,399 22%

Households 982 5,573 6,555 17%

Industrial companies* 254 2,472 2,726 7%

Municipal organizations - 1,105 1,105 3%

Heating companies** - 708 708 2%

Religious organisations - 1 1 0%

Other 541 12 553 1%

3,228 16,819 20,047 52%

Oblgases

Industrial technical losses (ITL) 1,049 3,322 4,371 11%

Households 671 1,812 2,483 6%

Industrial companies 449 261 710 2%

Public organizations 52 133 185 0%

Households - heating 1 55 56 0%

Public organizations - heating - 45 45 0%

Religious organisations 9 15 24 0%

Other 101 - 101 0%

2,332 5,643 7,975 21%

Industrial companies -

Industrial companies 4,142 2,546 6,688 17%



Municipal organizations - heating - 15 15 0%

4,177 2,626 6,803 18%

Other

Other*** 237 3,256 3,493 9%

Households - gas 14 188 202 1%


Public organizations - heating 4 61 65 0%

Public organizations - gas 3 - 3 0%

279 3,570 3,849 10%

10,016 28,658 38,674 100%

Receivables of Gas of Ukraine and Naftogaz by the end consumer,

as of 31 December 2014


Naftogaz of Ukraine


31 July 2015

As of 31 December 2014, 73% of the Group’s debt was originated under gas supply contracts with oblgases and heating companies

29

• The debt structure of heating companies may not properly reflect the “ultimate” debtors, as the mechanism of special accounts for heating companies started to function only in November 2014 (following the adoption of the respective legislation in June 2014) and till that time payments for purchased gas had been made by the heating companies at their discretion and did not reflect the actual payment discipline of the ultimate customers.

• Please note that till May 2015, payments for the gas supplied by Naftogaz to oblgases for ITL (price of which is included into the distribution tariff of oblgases) were outside the special accounts mechanism and were made at discretion of oblgases. In May 2015, changes in the respective regulations were made introducing the algorithm for such payments, but only when there was an overdue debt under gas supply contracts for the network operation purposes.

• In such cases, a part of the distribution tariff of oblgases which relates to cost of gas purchased for ITL is automatically distributed from special accounts of oblgases to special accounts of Naftogaz, once payments for gas and connected services (i.e. transportation and distribution) are made by the end consumers. If the overdue debt is settled, respective payments are made at oblgases discretion.

.

*- primarily for production of electricity

*** - primarily, traders, Chornomornaftogas, condominiums, public organizations, etc.

Source: Receibables ledgers of Naftogaz and Gas of Ukraine

** - Includes UAH 675 m of debt due from Kharkivski Teplovi Merezhi which originated from debt

assignment agreement concluded between Nafrogaz and Kharkivska TETs-5. According to this agreement,

debt of Kharkivska TETs-5 due from Kharkivski Teplovi Merezhi was reassigned to Naftogaz as a

settlement for debt of the former originated under gas supply contracts


Naftogaz of Ukraine

UAH in millions

Gas of

Ukraine Naftogaz Total %

Heating companies

Public organizations 1,451 6,948 8,399 22%

Households 982 5,573 6,555 17%

Industrial companies* 254 2,472 2,726 7%

Municipal organizations - 1,105 1,105 3%

Heating companies** - 708 708 2%

Religious organisations - 1 1 0%

Other 541 12 553 1%

3,228 16,819 20,047 52%

Oblgases

Industrial technical losses (ITL) 1,049 3,322 4,371 11%

Households 671 1,812 2,483 6%

Industrial companies 449 261 710 2%

Public organizations 52 133 185 0%



Religious organisations 9 15 24 0%

Other 101 - 101 0%

2,332 5,643 7,975 21%

Industrial companies -

Industrial companies 4,142 2,546 6,688 17%



Municipal organizations - heating - 15 15 0%

4,177 2,626 6,803 18%

Other

Other*** 237 3,256 3,493 9%

Households - gas 14 188 202 1%


Public organizations - heating 4 61 65 0%

Public organizations - gas 3 - 3 0%

279 3,570 3,849 10%

10,016 28,658 38,674 100%

Receivables of Gas of Ukraine and Naftogaz by the end consumer,



31 July 2015

As of 31 December 2014, 26% of the Group’s debt was due from customers located in the ATO zone (or in a close proximity) or in annexed Crimea

In 2014, Naftogaz continued to supply gas to its counterparties located on territories, which were not under control of the Ukrainian Government (primarily, to heating companies and oblgases). During the second half of 2014 repayment of the respective debt for gas supplied deteriorated significantly resulting in accumulation of overdue balances.

30

Source: Naftogaz information

Vo

lyn

’ reg

ion

3

79

Vin

ny

tya

reg

ion

5

51

Za

po

rizz

hy

a r

egio

n

1,16

5

Riv

ne

reg

ion

1,

67

4

Od

essa

reg

ion

1,

64

0

Lv

iv r

egio

n

1,15

7

Ky

iv r

egio

n

1,18

4

Ky

iv

2,4

15

Kh

ark

iv r

egio

n

2,9

39

Dn

ipro

pet

rov

snk

reg

io

4,8

49

6,3

76

Lu

ga

nsk

reg

ion

Fo

reig

n c

ou

ntr

ies

Cri

mea

461

3,9

86

AT

O z

on

e

2,0

39

Do

net

zk r

egio

n

1,7

59

Ch

ern

igiv

reg

ion

5

38

Ch

ern

ivtz

i re

gio

n

25

3

Ch

erk

asy

reg

ion

1,

02

7

Kh

mel

ny

tsk

reg

ion

3

54

Kh

erso

n r

egio

n

34

2

Ter

no

pil

reg

ion

57

9

Cu

my

reg

ion

3

93

Po

lta

va

reg

ion

7

44

My

ko

laiv

reg

ion

2

81

30

3

35

0

Iva

no

-Fra

nk

ivsk

reg

ion

5

70

Za

ka

rpa

tty

a re

gio

n

37

1

Zh

yto

my

r re

gio

n

Kir

ov

og

rad

reg

ion

Other

Oblgases


Heating companies*

Debt as of 31 December 2014 by region, UAH in millions


Naftogaz of Ukraine


31 July 2015

Section 5

Individual receivables analysis

31


Naftogaz of Ukraine

31 July 2015

As of 31 December 2014, 91% of the Group’s debt was due from 119 debtors

Section 5 – Individual receivables analysis

32

Concentration analysis of the Group's debt

DebtNumber of

debtorsDebt

Number of

debtorsDebt

Number of

debtorsDebt

Number of

debtorsDebt

Number of

debtors

Heating companies* 2,377 453 7,262 47 4,997 8 5,421 4 20,057 512

Oblgases 234 15 6,443 31 1,299 2 - - 7,976 48

Industrial companies 495 277 1,269 13 2,691 4 2,354 2 6,809 296

Other 356 1,553 1,434 7 - - 2,047 1 3,837 1,561

3,462 2,298 16,408 98 8,987 14 9,822 7 38,679 2,417

% from total 9% 95% 42% 4% 23% 1% 25% 0%

Debtors owing less

than UAH 50 m

Debtors owing

between UAH 50 m

and UAH 500 m

Debtors owing

between UAH 500 m

and UAH 1000 m

Debtors owing more

than UAH 1000 mTotal



• The largest category of debtors includes balances between UAH 50 mln – UAH 500 mln, which in total represent 42% of the Group’s debt for the sale of gas, covering 98 debtors.

• 48% of the total debt is due from 21 debtors with individual exposure over UAH 500 mln.

• Such clients include trading companies (e.g., LLC Gazukraina-Commerce – UAH 2,047 mln.), large chemical producers (such as Rivbeazot PJSC, Concern Stirol PJSC, Severodonetzke objednannya Azot CJSC and Cherkassy Azot PJSC) with total debt of UAH 3,881 mln), as well as heating companies (Kharkivski teplovi merezhi CE – UAH 1,569 mln., Kyivenergo PKSC - 1,331 mln., etc.).


Naftogaz of Ukraine

31 July 2015

The Group’s receivables by ownership category of the debtor

33



• As at 31 December 2014, 54% of the total debt of the Group was due from privately owned companies with oblgases and industrial companies being the main categories of customers.

• 60% of the debt owned by the Group from heating companies were attributed to legal entities in municipal ownership.

• 67% of the debt due from the industrial companies were concentrated within the chemical sector, with the majority of legal entities being privately owned.

UAH in millions Total 2014 2013 2012 2011 2010

before

2010

Privately owned companies

Oblgases 7,848 4,342 984 41 247 2,108 126

Heating companies* 4,049 2,648 755 238 140 191 77

Other 2,991 156 584 1,421 10 5 815

Industrial companies 5,936 1,060 39 379 1,951 1,859 648

Chemical 3,931 84 9 2 1,725 1,813 298

Metallurgical 1,107 895 - - - - 212

Other industries 898 81 30 377 226 46 138

5,936 1,060 39 379 1,951 1,859 648

20,824 8,206 2,362 2,079 2,348 4,163 1,666

SOEs

Oblgases 128 94 28 - 3 3 -

Heating companies* 4,026 1,362 1,057 805 498 242 62

Other 763 164 7 236 2 246 108

Industrial companies 870 637 - 1 25 67 140

Chemical 658 568 - - 23 62 5

Metallurgical 2 2 - - - - -

Other industries 210 67 - 1 2 5 135

870 637 - 1 25 67 140

5,787 2,257 1,092 1,042 528 558 310

Municipally owned companies

Heating companies* 11,982 5,145 2,414 1,869 927 1,047 580

Other 35 27 4 2 - - 2

Industrial companies 3 1 - 1 1 - -

12,020 5,173 2,418 1,872 928 1,047 582

Households 20 6 - - 12 1 1

Public entities 28 10 5 - 2 3 8

38,679 15,652 5,877 4,993 3,818 5,772 2,567

Consolidated debt owed to the Group by group of customers and year of origination,


Year of origination


Naftogaz of Ukraine


31 July 2015

As of 31 December 2014, the top 20 debtors accounted for 47% of the Group’s total debt (1 of 7)

34

The Group's debtors with debt more than UAH 50 m, UAH in million

Name of the debtor OwnerCategory

Before

2010 2010 2011 2012 2013 2014 Total

Gazukraina-Commerce LLC No information Other - - - 1,420 579 47 2,046

Kharkivski Teplovi Merezhi MC No information Heating companies 40 227 159 109 113 921 1,569

Rivneazot PJSCOstchem Enterprises Limited (Cyprus) -

96.4898% Industrial companies 297 978 20 - - 47 1,341

Kyivenergo PJSC Mr. Rinat Akhmetov Heating companies 0 - - - 36 1,295 1,331

Donetskmiskteplomerezha MC No information Heating companies 0 24 21 407 333 502 1,287

Kryvorizhskaya Teplocentral SE No information Heating companies 0 114 236 381 288 215 1,235

Concern Stirol Gorlivka PJSCOstchem Investments Limited (Cyprus) -

90.5271% Industrial companies - 75 935 - - - 1,009

Severodonetsk union Azot JSC Ostchem Ventures Limited (Cyprus) - 100% Industrial companies - 556 344 - - - 900

Donetskteplocomunenergo MC No information Heating companies 0 92 38 233 163 299 825

Krymteplocomunenergo RE No information Heating companies 5 25 24 147 294 277 773

Lvivhaz PJSC

Naftogaz - 25%,

Roloks PJSC - 10.6%,

Hastek PJSC - 13.1%

Ternopromservis - 10.6%

Meteron Limited PJSC - 22.95% Oblgases - 318 - - 26 313 657

Luhanskgas PJSC

Naftogaz - 25%

Gastek PJSC - 26%

Holder Stock PJSC - 23.9% Oblgases - 307 - - 87 247 641

Cherkasy AZOT PJSC

PLG UA LIMITED, Cyprus - 75.57%

OMBRYDZH Ltd. - 20.1%

Uralkali PJSC - 11.3403% Industrial companies - 204 427 - - - 631

Teplocomunenergo Luhansk MC No information Heating companies 102 25 83 150 158 109 627

Miski Teplovi Merezhi Koncern No information Heating companies - 40 69 100 164 219 592

Lisichanskiy glass factory Proletary PJSCFG Plant Holdings Limited, (Cyprus) -

66.6685% Industrial companies - - 200 375 11 5 592

Dnipropetrovsk Mis'ki teplovi merezhi MC No information Heating companies - 7 73 20 140 329 569

Odessa Port Plant PJSC State-owned Industrial companies - - - - - 568 568

Kryvorizhteplomerezha MC No information Heating companies 0 55 38 7 89 361 550

Odessa Teploelektrotsentral PJSC State-owned Heating companies - 38 77 111 192 125 544

Year of origination


Naftogaz of Ukraine


31 July 2015


35

The Group's debtors with debt more than UAH 50 m, UAH in million (continued)


Before

2010 2010 2011 2012 2013 2014 Total

Krymteploelektrotsentral PJSC Asermill Ventures LTD, (Cyprus) - 62.7717%Heating companies - 55 - 18 198 207 479

Kyivoblgas PJSC

Naftogaz - 25%

LLC TRANSIT-Invest - 15%

LLC Omega-Capital - 20.4%

LLC MASHDIBUR - 13.6% Oblgases - 75 0 0 49 354 478

Dnepropetrovskgas PJSCNaftogaz - 25%,

PJSC Haztek - 50.8% Oblgases - 142 - - 34 285 461

Itera LLC Rosneft Other 457 - - - - - 457

Kharkiv Teploelektrotsentral-5 JSCLimited liability companyt UKRISTHAZ -

99.8563% Heating companies - - 4 - 161 288 454

Makiivteplomerezha MC No information Heating companies 14 57 41 26 120 166 423

Kharkivhaz PJSCLasfano Ukraine LLC - 17.65%,

Sodeman Limited -17.19% Oblgases 2 92 3 - 35 263 396

Dniprodzerzhyns'k Teploelektrotsentral PJSC No information Heating companies 0 - 33 71 113 161 378

Donetskoblhaz PJSC

Naftogaz - 38%

GrandGas - 24.9%

GasCity - 24.9% Oblgases - - - - 61 295 356

Sevteploenergo MC No information Heating companies - 18 63 85 100 72 337

Zakarpathaz PJSC

Roloks PJSC - 15%

Haztek PJSC - 21%

Ahropromkomplekt PJSC - 15% PJSC

Ternoprominvest - 15% Oblgases - 158 - 7 46 117 329

Horlivskteplomerezha PJSC No information Heating companies 10 15 5 47 97 150 325

Ivano-Frankivskgas PJSC

Naftogaz - 25%

PJSC Haztek - 35%

PJSC Rolyuks - 15.2% Oblgases 15 118 - - 29 156 317

Vinnitsagaz PJSC

Naftogaz - 25%

Rolyuks PJSC - 19%

Hastek PPJSC- 34.7%

Ahropromkomplekt PJSC - 19.1% Oblgases - 78 - - 16 220 314

Year of origination


Naftogaz of Ukraine


31 July 2015


36



Before

2010 2010 2011 2012 2013 2014 Total

Poltavaoblenergo PJSC

FC Meridian LLC - 12.6%

Ltd. IR Business-Invest - 12,75%

Larva Investments limited - 25%

UA Energy Distribution Holding Limited -

23.29%

Bikontia Enterprises Limited - 23.9% Heating companies - - 1 37 92 166 296

Chernomorneftegaz PJSC State-owned Other - - - 231 - 49 280

Zaporizhgas PJSC

Naftogaz - 25%

Hastek PJSC - 49.9%,

Centragas Holding Limited - 14.5% Oblgases - 79 - 7 21 172 280

Chernihivgas PJSC

Naftogaz - 25%

Lasfano Ukraine LLC - 13.28%

Roloks PJSC - 19.65%

Hastek PJSC - 13.08%

Ahropromkomlekt PJSC - 10% Oblgases 5 93 - - 49 131 279

Odesagas PJSC

Zemare Limited - 20.36%

Semenco Limited - 20.3%

Vorean holdings & Investments Limited -

20.74%

Raysure Limeted - 20.31% Oblgases 0 - 59 - 71 145 275

Zuevskaya experimental Teploelektrotsentral SE No information Heating companies 0 15 59 19 97 85 274

Dniprogaz PJSC

Sagacity Limited - 16%

Humgate Holdings Limited - 21%

Tanter Holdings Limited - 16%

Eriswell Trading Limited - 16% Oblgases - 42 104 - 51 73 271

Volynhaz PJSC

Roloks PJSC - 14.3%

Hastek PJSC - 38.6%

Ahropromkomplekt PJSC - 14.3%

Ternoprominvest PJSC - 14.3% Oblgases 2 108 - - 18 120 248

Poltavagaz PJSC No information Oblgases - 31 - 2 63 144 240

State Reserve Agency of Ukraine State-owned Other - 238 - - - - 238

Teplopostachannya of Odessa MC No information Heating companies - 0 0 25 19 187 231

Lvivteploenerho MC No information Heating companies 0 45 4 38 40 102 229

Year of origination


Naftogaz of Ukraine


31 July 2015


37



Before

2010 2010 2011 2012 2013 2014 Total

Severodonetsk teploelektrotsentral SE No information Heating companies - 11 20 14 - 180 225

Teploenergo Dnipropetrovsk City Council MC No information Heating companies 2 1 7 11 131 64 216

Zhytomyrteplokomunenerho MC No information Heating companies - 55 3 32 48 74 212

Khmelnitskgaz PJSCNaftogaz - 25%,

Hastek PJSC - 50.89% Oblgases 21 44 - - 13 130 208

Zhytomyrhaz PJSCHastek PJSC - 50%

Khmelnitskgaz PJSC - 24% Oblgases - 71 - - 13 123 207

Sumyhaz PJSC

Naftogaz - 25%

Hastek PJSC - 25.78%

Stoke Holder PJSC - 20.85%

Oksilend Ltd. - 24.17% Oblgases 2 55 - - 25 104 186

Chernivtsihaz PJSC

Roloks PJSC - 14.69%

Hastek PJSC - 34.3%

Ternopromservis PJSC - 14.69% Oblgases 0 48 0 - 31 101 181

Luhanskteplokomunenerho No information Heating companies 162 5 4 8 - 1 179

CP HMR coals Vuhlyk MC No information Heating companies 3 11 15 25 58 66 179

Orion Kyiv No information Other 178 - - - - - 178

Kherson Teploelektrotsentral JSC State-owned Heating companies 10 11 12 34 22 86 176

Oblteplocomunenergo PJSC No information Heating companies 9 27 8 48 24 56 171

Alchevsk Metallurgical Plant PJSC No information Industrial companies - - - - - 166 166

Kharkivmiskgaz PJSC

Sodeman Limited - 18.1%

Humgate Holdings Limited -19.17%

Tanter Holdings Limited - 18.88%

Eriswell Trading Limited - 20.06% Oblgases 35 28 0 0 10 86 159

Rivnegaz PJSC

Naftogaz - 25%

Hazek - 31.6%

Ahropromkomplekt - 16%

MATHERON LIMITED - 24.8% Oblgases 14 38 - - 13 87 151

Vinnytsyamiskteploenerho MC No information Heating companies 0 3 15 - 47 82 147

Mykolayivgas PJSCNaftogaz - 25%

Haztek PJSC - 50.22% Oblgases - 50 2 - 9 83 144

Energomashspetsstal PJSC EMSS Holdings Limited (Cyprus) - 92.6771 Industrial companies - - 8 - - 129 137

Lysychanskteplomerezha MC No information Heating companies 21 22 25 26 18 24 136

Management of infrastructure of territory HO MC No information Heating companies 4 6 7 39 41 33 130

Year of origination


Naftogaz of Ukraine


31 July 2015


38



Before

2010 2010 2011 2012 2013 2014 Total

Dneprovskiy Metallurgical Plant im.F.Ye.

Dzerzhinsky PJSCNo information

Industrial companies - - - - - 123 123

ISD No information Industrial companies 121 - - - - 0 121

Ivano-Frankivskteplokomunenergo SME No information Heating companies 0 29 7 38 14 31 119

Rivneteploenergo LLC No information Heating companies - 10 11 - 3 94 119

Donetskmiskhaz PJSC

Sodeman Limited - 21%

Humgate Holdings Limited - 19%

Tanter Holdings Limited - 14%

Eriswell Trading Limited - 22% Oblgases 1 8 - - 6 104 118

Nikopolteploenergo MC No information Heating companies 0 8 12 23 30 46 118

Ternopilmiskhaz PJSC No information Oblgases 9 8 20 11 19 45 112

Ternopilhaz PJSCNaftogaz - 25%

Ltd. PROMTEKHRESURS - 42.75% Oblgases 6 4 26 1 20 56 112

Hlib of Ukraine SE State-owned Industrial companies 110 - - - - - 110

Kryvorizhhaz PJSC

PJSC Dniprogaz - 10.7%

Sodeman Limited - 13.8%

Humgate Holdings Limited - 21.08%

Tanter Holdings Limited - 15.02%

Eriswell Trading Limited - 17.77%

Sagacity Limited - 12.51% Oblgases - 8 - - 8 88 103

Bilotserkivteplomerezha MC No information Heating companies - 22 1 10 16 53 102

Power system MC No information Heating companies 0 1 0 1 43 53 98

Ukravtohaz SE No information Other - - - - - 98 98

Mariupol met. Plant Ilyich PJSC Mr. Rinat Akhmetov and Mr. Vadim NovinskyyIndustrial companies - - - - - 97 97

Teplotrans MC No information Heating companies - - 3 5 41 46 96

Edyni Energy Systems of Ukraine No information Other 94 - - - - - 94

Kirovohradteplo LLC No information Heating companies 0 5 17 22 21 29 93

Energetyka ta palyvo Ukrainy SE No information Other 90 - - - - - 90

Makiyivka metallurgist. integrated works Mr. Rinat Akhmetov and Mr. Vadim NovinskyyIndustrial companies 89 - - - - - 89

Kirovogradgas JSC State-owned Oblgases - 1 3 - 21 63 89

Heat supply system MC No information Heating companies 0 - 5 - 12 71 88

Year of origination


Naftogaz of Ukraine


31 July 2015


39



Before

2010 2010 2011 2012 2013 2014 Total

Kyivgas PJSC

PJSC Kyyivenerhoholdinh - 60%

DEPARTMENT OF KYIV municipal property

executive body of Kyiv City Council (Kyiv City

State Administration) - 28.4553% Oblgases - 20 1 - 36 30 88

Alchevskteplokomunenerho MC No information Heating companies 13 2 1 1 36 33 87

SGS Plus LLC No information Heating companies 4 9 17 6 26 25 87

Cherkasygaz PJSC

Lasfano Ukraine LLC - 20.35%,

Interregional trade company Ltd - 15.81%

Perrit Select investments Limited - 22.56% Oblgases - - - - 25 61 86

Sumykhimprom PJSC State-owned Industrial companies 0 62 23 - - - 85

Pavlohradteploenerho MC No information Heating companies 0 7 15 15 12 31 80

Chervonohradteplokomunenerho MC No information Heating companies - 6 4 26 26 19 80

Zaporizhstal JSC

Zaporizhstal-PC LLC - 21.83%

Kyiv Sekyuritiz Group LLC - 24.5%

Hals-Invest Ltd.- 17.06%

Global steel investments limited - 12.35%

Midland Capital Management LLC -11.22% Industrial companies - - - - - 80 80

Khersongas PJSCPJSC Neycherel end likvified Petrolem CEO -

60.9% Oblgases - - - - 18 56 74

Donetsk-Energy LLC No information Heating companies - - - 4 22 45 71

Interpipe Niko Tube LLC No information Industrial companies - - - - - 70 70

Interpipe Nizhnedneprovskiy Rolling Plant PJSC Saleks Investments Limited - 60%Industrial companies - - - - - 69 69

Poltavateploenerho No information Heating companies - 2 1 - - 63 67

Umanteplokomunenerho Uman MC No information Heating companies - 5 1 9 12 38 66

Ukrspirt SE State-owned Industrial companies - - - - - 66 66

Melitopolhaz JSC

Naftogaz - 25%

Limited Liability Company investment

company FINLEKS-INVEST - 40.8% Oblgases 13 20 0 - 10 22 64

UZHKH MC No information Heating companies 4 5 1 25 12 17 64

Mykolayivoblteploenerho RMC No information Heating companies - 11 - 2 1 47 62

Lutskteplo SE No information Heating companies - - 3 21 - 38 61

Melitopol's'ki Thermal Network LLC No information Heating companies - 10 3 10 17 21 61

Year of origination


Naftogaz of Ukraine


31 July 2015


40



Before

2010 2010 2011 2012 2013 2014 Total

Mykolaiv Teploelektrotsentral PJSC State-owned Heating companies - - 2 - 2 57 61

Krymhaz PJSC

Naftogaz - 25%

Haztek PJSC - 24%

National Joint Stock Company

Chornomornaftogas PJSC - 15.5%,

Lasfano Ukraine LLC - 15% Oblgases - 37 - 2 15 6 60

Chernivtsiteplokomunenerho MC No information Heating companies - 3 - 12 3 41 59

PJSC Azovstal Mr. Rinat Akhmetov and Mr. Vadim NovinskyyIndustrial companies - - - - - 57 57

Smela Energoinvest LLC No information Heating companies - 1 8 9 18 20 57

Ternopilmiskteplokomunenerho MC No information Heating companies - - 1 - - 55 56

Mariupolgaz PJSCLtd. Mahraz - 76,9%

UITC LIMITED - 11,24% Oblgases 1 - - - 8 46 55

Heat networks meters. Volnogirsk MC No information Heating companies - 3 11 15 25 - 53

Eastern European teploenerhoheneruyucha

companyNo information

Heating companies 17 16 20 - - - 53

Stanislav thermal power Co., LLC No information Heating companies - - - 11 17 25 53

Teplocomunenergo Antratsitovsky MC No information Heating companies 3 1 5 5 24 14 51

Year of origination

Source: smida.gov.ua, IFRS financial statements for 2014 (where publicly available)


Naftogaz of Ukraine


31 July 2015

Appendix 1 Terms of Reference

41


Naftogaz of Ukraine

31 July 2015

Terms of Reference (1 of 4)

Appendix 1 – Terms of Reference

42


Naftogaz of Ukraine

31 July 2015

Terms of Reference (2 of 4)


43


Naftogaz of Ukraine

31 July 2015

Terms of Reference (3 0f 4)


44


Naftogaz of Ukraine

31 July 2015

Terms of Reference (4 0f 4)


45


Naftogaz of Ukraine

31 July 2015

Appendix 2 Scope and Process

46


Naftogaz of Ukraine

31 July 2015

Scope and process

Scope Process

Scope of our work This report covers analysis of external receivables due from the sale of gas and recorded on the books of Naftogaz, Ukrgazvydobuvannia, Ukrtransgaz and Gaz of Ukraine (the Group). It does not cover any intra-group receivables which originated from transactions between the companies of the Group.

Exclusions from scope As instructed, we have not carried out any analysis of other receivables recorded on the books of the Group and which did not relate to the sale of gas. In addition, the following receivables were excluded from our analysis:

• Receivables of Ukrtransgaz due for the transportation services in relation to the gas sold by Naftogaz to the regional gas distribution companies for further supply to households and budget organisations, as such services and related receivables are subject to individual contracts between Ukrtransgaz and its customers and are separate from Naftogaz’s contracts for the sale of gas;

• Receivables of Gaz of Ukraine for the sale of condensed gas, as this type of gas is classified as oil product which is subject to seprate regulations.

Review process Our work was performed over the period starting from 12 June 2015. We visited the headquarters of the Group as well as offices of Ukrgazvydobuvannia, Ukrtransgaz and Gaz of Ukraine. We had access to the Deputy Chairman of the Board Mr. Sergiy Konovets and various other members of senior management.

Access to information Our work has comprised a review and analysis of the financial and other information provided to us by the Group and discussions with management. We have assumed that this information and management’s explanations and representations are complete, accurate and reliable. We note that we were not provided with the information on the business groups and beneficial owners of the Group’s debtors, as such information was not available in the books and records of the Group.

Basis of our work We have not carried out anything in the nature of an audit nor, except where otherwise stated, have we subjected the financial or other information contained in this report to checking or verification procedures. Accordingly, we assume no responsibility and make no representations with respect to the accuracy or completeness of the information in this report, except where otherwise stated.

47

Appendix 2 – Scope and Process


Naftogaz of Ukraine

31 July 2015

Appendix 3

Additional Information

48


Naftogaz of Ukraine

31 July 2015

The Group’s receivables by customer category and year of origination

49

UAH in millions

before

2010 2010 2011 2012 2013 2014 Total %

Heating companies 708 1,480 974 75 - - 3,237 32%

Oblgases 126 1,991 215 1 - - 2,333 23%

Industrial companies 338 1,926 1,916 - - - 4,180 42%

Other 245 5 16 - - - 266 3%

1,417 5,402 3,121 76 - - 10,016 100%

as a % from total 14% 54% 31% 1% 0% 0% 100%

Year of origination

Debt owed to Gas of Ukraine by customer category and year of origination,


UAH in millions

before

2010 2010 2011 2012 2013 2014 Total %

Heating companies 11 - 591 2,837 4,226 9,155 16,820 59%

Oblgases - 120 35 40 1,012 4,436 5,643 20%

Industrial companies 450 - 61 381 39 1,698 2,629 9%

Other 684 250 10 1,659 600 363 3,566 12%

1,145 370 697 4,917 5,877 15,652 28,658 100%

4% 1% 2% 17% 21% 55% 100%

Year of origination

Debt owed to Naftogaz by customer category and year of origination, as of

31 December 2014


Naftogaz of Ukraine

Appendix 3 – Additional Information

31 July 2015

The introduction of special accounts was an important step in improving payments from the Group’s major customers (i.e., heating companies and oblgases)

• Special accounts were introduced for all categories of the Group’s customers in 2008 (except for heating companies, for which they were introduced only in 2014).

• Payments from customers for gas (to Naftogaz or oblgases) or heat (to heating companies) are made to special account where they are automatically distributed between providers of gas, heat and transportation services (i.e., Naftogaz, heating companies, Ukrtransgas and oblgases).

• The major advantage of special accounts, is that oblgases and heating companies are not allowed to withdraw funds from such accounts and payments to Naftogaz do not depend on their discretion, but on the level of payment made by end customers.

50

Special distribution accounts opened by oblgases for each

group of customers*

Special distribution accounts opened by Heating

companies for each group of customers**

Special distribution accounts opened by Naftogaz

End customers

Current account of Ukrtransgas (gas transportation fee)

Current accounts of oblgases (gas distribution

fee (including ITL))


Current accounts of oblgases (gas supply and distribution fee (including

ITL))

Naftogaz current account (gas)

Current accounts of Heating companies (premises

heating and water heating fee)


Current accounts of oblgases (gas distribution

fee (including ITL))

Gas supply company level Heating company level Naftogaz level

* Population, Public organizations, Industrial companies and other entities, religious organizations, Heating companies and other

customers

** Population, Public organizations, other customers

Naftogaz special account

Industrial companies and other entities

Distribution of fees for ITL of gas (if there is an overdue debt)


Naftogaz of Ukraine


31 July 2015

Debtors with the largest claims from the Group (1 of 2)

51


Naftogaz of Ukraine



Debtors of Naftogaz with the total claims over UAH 500 mln

UAH in millions

Principal

debt

Fines and

Penalties

Final

court

decision

taken Pending

Total

amount

Enforcement

procedure

Restruct

ured Paid

Suspended

enforcement

ATO

zone

and

Crimea

Total

amount

% 0f claims

confirmed*

1 Ky ivenergo, PJSC

Electricity and

heating 2 491 496 1 367 1 620 2 987 332 7 96 160 - 595 44%

2 Gas Ukraine Commerce, LLC Other 1 896 7 17 2 494 119 2 613 - - - - 2 081 2 081 83%

3 Kharkivski teplov i meregi, MC

Electricity and

heating 7 80 335 97 1 144 1 115 11 - 7 7 627 - 7 15 7 4%

4 Kry vorizka teplocentral, SC

Electricity and

heating 812 233 1 045 - 1 045 516 - 128 322 - 966 92%

5 Kharkivska TEC-5, PJSC

Electricity and

heating 7 39 269 1 008 - 1 008 64 - 195 557 - 816 81%

6 Mariupolteplomerega, MCC

Electricity and

heating 7 67 227 544 450 994 17 0 168 45 - - 383 7 0%

7

Donetskteplocomunenergo

Oblasne, MC

Electricity and

heating 57 6 17 0 549 197 7 46 253 2 11 1 - 267 49%

8 Kry mteplokomunenergo, LC

Electricity and

heating 595 114 37 8 331 7 09 235 - - - 9 244 65%

9 Cherkasy gaz, OJSC Oblgases 650 12 41 621 662 36 - 4 - - 40 98%

10 Poltavaoblenergo, PJSC

Electricity and

heating 329 293 90 532 622 68 - - - - 68 7 6%

11 Donetskmiskteplomerega, MCC

Electricity and

heating 501 95 441 155 596 - - - 65 - 65 15%

12

Ly sy schnsky y sklozavod

“Proletariy ”, PJSC

Industrial

companies 481 92 57 3 - 57 3 29 486 - - - 515 90%

13 Interpipe NZD, OJSC

Industrial

companies 432 132 - 564 564 - - - - - - n/a

14 Kry mteploelectrocentral, LLC

Electricity and

heating 426 103 29 500 529 - - 28 - - 28 97 %

11 47 5 3 288 9 530 5 233 14 7 63 1 7 14 663 584 1 7 32 2 090 6 7 83 7 1%

Total claims Claims confirmed by court


31 July 2015

Debtors with the largest claims from the Group (2 of 2)

52


Naftogaz of Ukraine




Debtors of Gas of Ukraine with the total claims over UAH 400 mln

# UAH in millions

Principal

debt

Fines and

Penalties

Final

court

decision

taken Pending

Total

amount

Enforcement

procedure

Restruct

ured

Written-

Off Paid

Total

amount

% 0f claims

confirmed*

1 Ky ivenergo, PJSC

Electricity and

heating 2 244 351 2 595 - 2 595 - - - 1 027 1 027 40%

2 Rivneazot, PJSC Industrial 1 417 326 47 5 1 268 1 7 43 19 - - 446 465 98%

3 Concern Stirol, PJSC Industrial 1 009 660 - 1 669 1 669 - - - - - n/a

4 Severodonetsk union Azot, CJSC Industrial 817 483 - 1 300 1 300 - - - - - n/a

5 Kharkivski teplov i merezhi, MC

Electricity and

heating 954 197 1 151 - 1 151 658 43 291 - 992 86%

6 Cherkasy Azot, OJSC Industrial 539 240 631 148 7 7 9 631 - - - 631 100%

7 Interpipe Nizhnedneprovsky y

Rolling Plant, PJSC Industrial 57 1 67 57 1 67 638 - - - 57 1 57 1 100%

8 Kry vorizka Teplocentral, SE

Electricity and

heating 493 113 606 - 606 320 - 258 - 57 8 95%

9 Donetskmiskteplomerezha, MCC

Electricity and

heating 399 80 47 6 3 47 9 95 7 9 17 2 149 495 104%

8 443 2 517 6 505 4 455 10 960 1 723 122 721 2 193 4 759 73%

Total claims Claims confirmed by court

31 July 2015

Regional allocation of Naftogaz claims against debtors

53


Naftogaz of Ukraine



UAH in m illions

Principal

debt

Fines and

penalties

Final

court

decision

taken Pending

T otal

am ount

Enforcem ent

procedure

Written-

Off

Restructu

red Paid

Suspended

enforcem ent

Bankruptcy

proceedings

AT O zone

and

Crim ea

T otal

am ount

% 0f claim s

confirm ed*

Ky iv 16 20 34 2 36 5 - - 1 - - - 6 18%

Ky iv region 3 019 7 98 1 950 1 867 3 817 621 2 30 159 210 - - 1 022 52%

Lviv region 396 169 456 109 565 289 - 31 54 36 - - 410 90%

Odessa region 510 215 489 236 7 25 191 - - 34 39 - - 264 54%

Rivne region 492 188 67 5 5 680 525 - - 36 7 - - 568 84%

Zaporizzhy a region 419 161 118 462 580 61 3 - 4 5 - - 7 3 62%

Vinny tsy a region 244 7 5 17 8 141 319 89 1 - 17 - - - 107 60%

Voly n' region 117 38 151 4 155 3 - - 380 10 - - 393 260%

Zhy tomy r region 208 7 8 27 9 7 286 196 4 - 5 24 - - 229 82%

Zakarpatty a region - 10 10 - 10 - - - - 1 - - 1 10%

Ivano-Frankivsk region 109 68 167 10 17 7 38 - 17 3 69 - - 127 7 6%

Kirovograd region 250 67 255 62 317 68 - - 63 59 - - 190 7 5%

My kolaiv region 106 50 113 43 156 8 - - 21 - - - 29 26%

Poltava region 47 6 357 250 583 833 100 - - 22 38 - - 160 64%

Sumy region 83 45 7 6 52 128 12 - 3 9 - - - 24 32%

Ternopil region 7 6 21 90 7 97 19 - - 1 1 - - 21 23%

Kharkiv region 1 990 7 56 2 502 244 2 7 46 149 6 7 4 360 1 183 - - 1 7 7 2 7 1%

Kherson region 251 59 27 1 39 310 128 - - 90 29 - - 247 91%

Khmelny tsk region 228 80 192 116 308 92 - 2 54 - - - 148 7 7 %

Cherkasy region 883 64 323 624 947 17 0 - - 69 - - - 239 7 4%

Chernivtzi region 142 38 17 9 1 180 27 - - 38 - - - 65 36%

Chernigiv region 381 90 354 117 47 1 6 - 18 115 67 56 - 262 7 4%

Donetzk region 2 852 7 29 2 284 1 297 3 581 630 - 17 0 598 95 6 4 1 503 66%

Lugansk region 1 060 212 1 216 56 1 27 2 37 1 39 485 10 58 - 1 964 7 9%

Dnipropetrovsk region 2 917 7 85 2 7 13 989 3 7 02 97 6 - 1 1 149 560 - - 2 686 99%

Crimea 3 666 1 120 3 628 1 158 4 7 86 380 - - 285 - - 2 152 2 817 7 8%

20 891 6 293 18 953 8 231 27 184 5 154 55 831 3 57 7 2 491 62 2 157 14 327 7 6%

T otal claim s Claim s confirm ed by court


31 July 2015

Regional allocation of Gas of Ukraine claims against debtors

54


Naftogaz of Ukraine




UAH in m illions

Principal

debt

Fines and

Penalties

Final

court

decision

taken Pending

T otal

am ount

Enforcem ent

procedure

Written-

Off

Restruct

ured Paid

Suspended

enforcem ent

Bankruptcy

proceedings

T otal

am ount

% 0f claim s

confirm ed*

Ky iv 2 496 407 2 901 2 2 903 7 2 39 49 1 083 - - 1 243 43%

Ky iv region 17 9 50 229 - 229 104 33 16 50 - - 203 89%

Lviv region 395 81 47 4 2 47 6 40 27 0 116 8 - - 434 92%

Odessa region 825 95 920 - 920 1 112 100 151 - 36 400 43%

Rivne region 1 594 364 690 1 268 1 958 54 7 7 53 480 - - 664 96%

Zaporizzhy a region 1 27 9 613 421 1 47 1 1 892 7 1 191 7 6 47 - - 385 91%

Vinny tsy a region 247 54 301 - 301 3 108 3 148 - 7 269 89%

Voly n' region 167 30 197 - 197 39 90 - 24 - 25 17 8 90%

Zhy tomy r region 231 62 288 5 293 107 115 2 20 - 1 245 85%

Zakarpatty a region 204 29 233 - 233 - 160 32 - 14 17 223 96%

Ivano-Frankivsk region 27 1 51 322 - 322 25 17 3 95 2 - - 295 92%

Kirovograd region 99 30 129 - 129 33 35 - 42 - - 110 85%

My kolaiv region 137 23 160 - 160 1 107 10 - - - 118 7 4%

Poltava region 205 47 233 19 252 27 112 1 49 - - 189 81%

Sumy region 138 34 168 4 17 2 1 81 15 19 - - 116 69%

Ternopil region 153 31 184 - 184 1 54 61 37 - - 153 83%

Kharkiv region 2 183 7 7 8 2 245 7 16 2 961 7 05 7 83 89 222 - - 1 7 99 80%

Kherson region 83 19 102 - 102 21 14 - 8 - - 43 42%

Khmelny tsk region 223 55 27 7 1 27 8 64 - 66 64 - - 194 7 0%

Cherkasy region 689 285 826 148 97 4 649 57 - 82 - - 7 88 95%

Chernivtzi region 24 5 29 - 29 1 8 8 9 - - 26 90%

Chernigiv region 207 41 248 - 248 45 138 36 10 - - 229 92%

Donetzk region 1 817 421 2 014 224 2 238 512 310 418 340 - 27 1 607 80%

Lugansk region 1 384 27 7 1 033 628 1 661 27 7 326 221 19 - 15 858 83%

Dnipropetrovsk region 2 07 3 444 2 439 7 8 2 517 400 7 55 120 966 - - 2 241 92%

Crimea 57 8 108 67 1 15 686 237 64 61 23 - - 385 57 %

17 881 4 434 17 7 34 4 581 22 315 3 490 4 212 1 648 3 903 14 128 13 395 7 6%

T otal claim s Claim s confirm ed by the court

31 July 2015

Recently adopted legislation regulating general principles of the natural gas market in Ukraine

Law No. 1645-VII On Reform of the Unified Gas Transportation System adopted by the Parliament on 14 August 2014

• This Law envisages, inter alia, creation of the Operator of the united gas transportation system (UGTS), a company founded by the state or by a company owned by the state/the company with at least 51% of the corporate rights owned by the state. Such Operator should be determined by the executive body responsible for the oil and gas sector. Co-founder of the UGTS Operator can be a legal entity, which is owned or controlled by the resident of the European Union, the USA, or from the countries included to the European Energy Union under certain conditions set by the mentioned Law.

Law No. 329-VIII On the Natural Gas Market adopted by the Parliament on 9 April 2015

• This Law was developed in order to fulfil the Law of Ukraine “On Ratification Of The Protocol Regarding Accession Of Ukraine To Incorporation Of Energy Union” No.2787-VI dated 15 December 2010 and implementation of the EU Association Agreement. It establishes economically substantiated approaches to the organisation of the natural gas market. Key pillars are as follows:

1) Separation of the Operator’s functions from functions of gas producers and suppliers;

2) Clear division of functions of the state and the National Commission;

3) Free pricing for wholesale and retail natural gas market, except for cases when the Cabinet of Ministers uses its right to impose special obligations on the market participant;

4) Free choice of natural gas supplier, etc.

55


Naftogaz of Ukraine


31 July 2015

Appendix 4 Glossary

56


Naftogaz of Ukraine

31 July 2015

Glossary of terms and abbreviations

Term Definition

ATO zone Parts of Donetsk and Lugansk regions which are not controlled by the Ukrainian Government

CJSC Closed Joint-Stock Company

cm Cubic meter

Company or Naftogaz National Joint-Stock Company Naftogaz of Ukraine

EU European Union

Gas of Ukraine Subsidiary Company Gaz of Ukraine

Group, the Naftogaz and its subsidiary undertakings Ukrgazvydobuvannia, Ukrtransgaz and Gas of Ukraine

IMF International Monetary Fund

LC Lease Company

LLC Limited Liability Company

LLP Limited Liability Partnership

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Appendix 4 – Glossary


Naftogaz of Ukraine

31 July 2015

Glossary of terms and abbreviations (cont’d)

Term Definition

m, mln Million

MC Municipal Company

MCC Municipal Commercial Company

MLC Municipal Lease Company

National Commission National Commission for State Energy and Public Utilities Regulation of Ukraine

Oblgases Regional gas distributors

OJSC Open Joint-Stock Company

PJSC Public Joint-Stock Company

SE State-Owned Enterprise

Q Quarter

ToR Terms of Reference

UAH Ukrainian hryvnya

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Naftogaz of Ukraine

31 July 2015

Glossary of terms and abbreviations (cont’d)

Term Definition

UGTS Operator Operator of the united gas transportation system

UK United Kingdom

Ukrgazvydobuvannia Public Joint-Stock Company Ukrgazvydobuvannia

Ukrtransgaz Public Joint-Stock Company Ukrtransgaz

VAT Value Added Tax

Gas distribution Transportation of gas through distribution pipelines

ITL Industrial technical losses

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Naftogaz of Ukraine

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