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

Transcription

1 UK-UA: Reform Assistance Advisory Diagnostic analysis of receivables National Joint-Stock Company

2 Important notice This document has been prepared for National Joint-Stock Company (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 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.

3 Stephen Oldfield T: M: Donald Bruce T: M: Andriy Kobolev Chairman of the Board 6, B.Khmelnitskogo Str., Kyiv, 01001, Ukraine Sergiy Konovets Deputy Chairman of the Board 6, B.Khmelnitskogo Str., Kyiv, 01001, Ukraine Brett Nevin Rayner Economist, European Department International Monetary Fund TH Street, NW Washington, D.C 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 (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

4 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

5 Section 1 Executive Summary 1

6 Section 1 Executive Summary Summary of key issues (1 of 3) Observation Consolidated debt of the Group by customer category and year of origination Comment As of 31 December 2014 UAH in millions Year of origination before Total % Heating companies 719 1,480 1,565 2,912 4,226 9,155 20,057 52% Oblgases 126 2, ,012 4,436 7,976 21% Industrial companies 788 1,926 1, ,698 6,809 18% Other , ,837 10% 2,567 5,772 3,818 4,993 5,877 15,652 38, % as a % from total 7% 15% 10% 13% 15% 40% 100% Source: Receivables ledgers of Naftogaz and Gas of Ukraine 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

7 Section 1 Executive Summary Summary of key issues (2 of 3) Observation Highly regulated environment Legal work-out Comment 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 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). 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 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). 3

8 Section 1 Executive Summary Summary of key issues (3 of 3) Observation Legal work-out (continued) Information on the business groups and beneficial owners Receivables from customers in Crimea and ATO zone Next steps Comment 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. 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. 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. 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. 4

9 Section 2 Background of the Group s activities and regulations 5

10 Section 2 Background of the Group s activities and regulations Naftogaz operates in a highly regulated market. The Company is engaged in development of the respective regulations Verkhovna Rada 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. 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. 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 6

11 Section 2 Background of the Group s activities and regulations Debt collection of the Group is highly impacted by regulations (1 of 3) 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 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. Timelines of key legislative changes 1998 establishment of the Group with Gas of Ukraine as the main trader of gas 2008 introduction of special accounts for regional gas distribution companies and traders of gas 2011 transfer of trading operations from Gas of Ukraine to Naftogaz Law On Write-off and Restructuring of Debts for Consumed Gas 2014 introduction of special accounts for heating and industrial companies May 2015 Law On Stabilization Of Financial Standing Of Naftogaz introduction of special accounts for heating companies which produce electricity using gas 2005 ban on bankruptcy and forced debt collection, inter alia, in respect of the heating companies and regional gas distribution companies 2010 Law On Principles Of Functioning Of Natural Gas Market 2012 introduction of new algorithm for special accounts guaranteed suppliers of natural gas are established March 2015 changes to special accounts algorithm for heating companies April 2015 Law On Natural Gas Market 7

12 Section 2 Background of the Group s activities and regulations Debt collection of the Group is highly impacted by regulations (2 of 3) 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 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). Timelines of key legislative changes 1998 establishment of the Group with Gas of Ukraine as the main trader of gas 2008 introduction of special accounts for regional gas distribution companies and traders of gas 2011 transfer of trading operations from Gas of Ukraine to Naftogaz Law On Write-off and Restructuring of Debts for Consumed Gas 2014 introduction of special accounts for heating and industrial companies May 2015 Law On Stabilization Of Financial Standing Of Naftogaz introduction of special accounts for heating companies which produce electricity using gas 2005 ban on bankruptcy and forced debt collection, inter alia, in respect of the heating companies and regional gas distribution companies 2010 Law On Principles Of Functioning Of Natural Gas Market 2012 introduction of new algorithm for special accounts guaranteed suppliers of natural gas are established March 2015 changes to special accounts algorithm for heating companies April 2015 Law On Natural Gas Market 8

13 Section 2 Background of the Group s activities and regulations Debt collection of the Group is highly impacted by regulations (3 of 3) 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. Timelines of key legislative changes 1998 establishment of the Group with Gas of Ukraine as the main trader of gas 2008 introduction of special accounts for regional gas distribution companies and traders of gas 2011 transfer of trading operations from Gas of Ukraine to Naftogaz Law On Write-off and Restructuring of Debts for Consumed Gas 2014 introduction of special accounts for heating and industrial companies May 2015 Law On Stabilization Of Financial Standing Of Naftogaz introduction of special accounts for heating companies which produce electricity using gas 2005 ban on bankruptcy and forced debt collection, inter alia, in respect of the heating companies and regional gas distribution companies 2010 Law On Principles Of Functioning Of Natural Gas Market 2012 introduction of new algorithm for special accounts guaranteed suppliers of natural gas are established March 2015 changes to special accounts algorithm for heating companies April 2015 Law On Natural Gas Market 9

14 Section 2 Background of the Group s activities and regulations Naftogaz is a guaranteed supplier of natural gas in Ukraine for almost all categories of customers Ukrgazvydobuvannya (all gas produced is sold to Naftogaz) Other suppliers (Gazprom, European suppliers, etc.) Uktransgaz (gas transportation ) Naftogaz, Gas of Ukraine* Gas traders ** Industrial companies and other customers *** Public entities Regional gas distributors ( 0blgases ) Heating companies and religious organizations - Group companies * - a trading company before December ** - other customers only *** - for heating purposes only - supply of natural gas (without transportation services) - supply of natural gas including transportation services - supply and distribution of natural gas by oblgases to end users - gas transportation services (main pipeline) - supply of heat - gas distribution services by oblgases when Naftogaz supplies gas via direct contract (i.e., not through oblgases) Note: the above chart is presented from the perspective of the Group rather than the market as a whole Diagnostic analysis of receivables National Joint- Stock Company 10

15 Section 3 Overview of receivables recovery process 11

16 Section 3 Overview of receivables recovery process The Gas sales department oversees all interactions with customers from contract initiation to collection (1 of 2) Gas sales department Contractual work and gas sales division (9 people) Payments control division (18 people) Settlements and analytics division (8 people) Debt management division (16 people) 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 Daily analysis of received payments and receivable balances Daily forecast of cash flows from sales of gas Preparation of reports for management 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 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 12

17 Section 3 Overview of receivables recovery process The Gas sales department oversees all interactions with customers from contract initiation to collection (2 of 2) 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.). 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). 13

18 Section 3 Overview of receivables recovery process Overview of the main contractual terms of Naftogaz for supply of gas Contract duration 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. Pricing 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). Supply and payment terms Fines and penalties for overdue debt 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 5 th and 15 th day of the month of supply with final settlement to be made by the 14 th 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 15 th (heating companies) or on the 20 th (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). 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

19 Section 3 Overview of receivables recovery process 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

20 Section 3 Overview of receivables recovery process Naftogaz and Gas of Ukraine undertake any legal work in accordance with the established procedures set out in the internally approved Regulations Key Responsible Departments Gas Sales Department Legal Department Economic Security Department 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 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 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 16

21 Section 3 Overview of receivables recovery process All legal work in the Group related to debt collection is done in-house Maintaining records regarding court cases and enforcement proceedings Preparation and filing of the claims Representation in the court of all instances Enforcement proceedings This work is supported by the Gas Sales Department Includes also appeal claims and cassation claims and bankruptcy cases initiated in respect of the Group s debtors Monitor the status of enforcement, including its initiation by the State Enforcement Service, execution, etc. 17

22 Section 3 Overview of receivables recovery process 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, nonmaterial 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 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. 18

23 Section 3 Overview of receivables recovery process 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 outof-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. Legal cases filed by Naftogaz against debtors and their status UAH in millions Principal debt Total claims Final court Fines and decision Penalties taken * - as a percentage from total claims where final decision have been taken Source: Information of the Legal Department of Naftogaz Pending Total amount Enforcement procedure Restruc tured Paid Claims confirmed by the court Suspended enforcement Written off Bankruptcy proceedings ATO zone and Crimea Total amount % 0f claims confirmed* Industrial companies % Electricity & heating % Oblgases % Other % % 19

24 Section 3 Overview of receivables recovery process 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% Legal cases filed by Gas of Ukraine against debtors and their status UAH in millions Principal debt Total claims Final court Fines and decision Penalties taken Pending * - as a percentage from total claims where final decision have been taken Source: Information of the Legal Department of Gas of Ukraine Total amount Enforcement procedure Written- Off Restructured Paid Claims confirmed by the court Suspended enforcement Bankruptcy proceedings Total amount % 0f claims confirmed* Industrial companies % Electricity & heating % Oblgases % Other % % 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 Our analysis of legal cases of Gas of Ukraine includes legal cases initiated from 2010 till February The total number of legal cases analysed and relating to collection of debts for the sale of gas is 2,273. 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. 20

25 Section 3 Overview of receivables recovery process 31% of the claimed amount confirmed by courts was written-off under provisions of the Law of Ukraine Legal cases filed by Gas of Ukraine against debtors and their status UAH in millions Principal debt Total claims Final court Fines and decision Penalties taken Pending Total amount Enforcement procedure Written- Off Restructured Paid Suspended enforcement Bankruptcy proceedings Total amount % 0f claims confirmed* Industrial companies % Electricity & heating % Oblgases % Other % % * - as a percentage from total claims where final decision have been taken Source: Information of the Legal Department of Gas of Ukraine Claims confirmed by the court 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. 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 In 79 court cases with the total claims of UAH 1,648 mln debts are restructured. 21

26 Section 3 Overview of receivables recovery process Positive court decisions with low chances to be executed are estimated at UAH 9,281 mln Case Debtors located in Crimea and ATO zone Description 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. Source: Information of the Legal Department of Gas of Ukraine and Naftogaz 22

27 Section 4 Consolidated receivables of the Group 23

28 Section 4 Consolidated receivables of the Group Naftogaz and Gas of Ukraine account for almost all debt of the Group for the sale of gas The Group companies' receivables in respect of gas sale operations as of 31 December 2014 UAH in million Heating companies Source: Receivables ledgers of Naftogaz and Gas of Ukraine Industrial companies Oblgases Other Total Naftogaz Trade receivables 15,882 2,548 5,535 2,924 26,889 Fines and penalties ,769 16,819 2,626 5,643 3,570 28,658 Gas of Ukraine Trade receivables 2,559 3,871 2, ,889 Fines and penalties ,128 3,237 4,181 2, ,017 Ukrgazvydobuvannya Trade receivables Ukrtransgaz Trade receivables ,056 6,807 7,976 3,840 38,679 % from total 52% 18% 21% 10% 100% 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 8 th 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. 24

29 Section 4 Consolidated receivables of the Group Recoverability of the Group s debt is impacted, primarily, by the amount recovered from heating companies (1 of 2) Recoverability of current debt*, % Heating companies Oblgases Industrial companies Other clients 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 Recoverability of old debt*, % Heating companies Oblgases Industrial companies Other clients Total 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 Source: Accounting records of Naftogaz and Gas of Ukraine 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 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 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

30 Section 4 Consolidated receivables of the Group Recoverability of the Group s debt is impacted, primarily, by the amount recovered from heating companies (2 of 2) Recoverability of current debt*, % Heating companies Oblgases Industrial companies Other clients 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 - 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. Recoverability of old debt*, % Q13 2Q13 3Q13 4Q13 - 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. Total 1Q14 Heating companies Oblgases Industrial companies 2Q14 3Q14 Other clients Total 4Q14 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 4 th 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). 26

31 Section 4 Consolidated receivables of the Group As of 31 December 2014, heating companies and oblgases accounted for 72% of the Group s total debt Debt as of 31 December 2014, UAH in millions *Heating companies Oblgases Industrial companies 7% Other 2, % 5,772 2,111 1,926 1, % 3,818 1,565 1, % 4,993 2, , Prior to * - includes heating companies which also produce electricity 5, 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). 15% 4,226 1, % 100% 15,652 9,155 4,436 1, ,679 20,057 7,976 6,809 3,837 Total 60% 47% 67% 53% of the total debt was originated prior to 2014 out of the debt which originated prior to 2014 is due from heating companies of debt of industrial companies is due from companies of the chemical sector of the total debt of other customers is due from one counterparty (UAH 2,046 mln) - LLC Gazukraina-Commerce. 27

32 Section 4 Consolidated receivables of the Group As of 31 December 2014, 49% of the Group s debt was originated under gas supply contracts for households and public organisations Receivables of Gas of Ukraine and Naftogaz by the end consumer, as of 31 December 2014 Gas of UAH in millions 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** % Religious organisations % Other % 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 % Public organizations % Households - heating % Public organizations - heating % Religious organisations % Other % 2,332 5,643 7,975 21% Industrial companies - Industrial companies 4,142 2,546 6,688 17% Households - heating % Public organizations - heating % Municipal organizations - heating % 4,177 2,626 6,803 18% Other Other*** 237 3,256 3,493 9% Households - gas % Households - heating % Public organizations - heating % Public organizations - gas 3-3 0% 279 3,570 3,849 10% 10,016 28,658 38, % *- primarily for production of electricity *** - primarily, traders, Chornomornaftogas, condominiums, public organizations, etc. Source: Receibables ledgers of Naftogaz and Gas of Ukraine 25% 24% 2% 0% 11% 26% 11% Industrial companies Oblgases Other Households Public and municipal organizations Heating companies Religious organizations 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. 28

33 Section 4 Consolidated receivables of the Group As of 31 December 2014, 73% of the Group s debt was originated under gas supply contracts with oblgases and heating companies Receivables of Gas of Ukraine and Naftogaz by the end consumer, as of 31 December 2014 Gas of UAH in millions 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** % Religious organisations % Other % 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 % Public organizations % Households - heating % Public organizations - heating % Religious organisations % Other % 2,332 5,643 7,975 21% Industrial companies - Industrial companies 4,142 2,546 6,688 17% Households - heating % Public organizations - heating % Municipal organizations - heating % 4,177 2,626 6,803 18% Other Other*** 237 3,256 3,493 9% Households - gas % Households - heating % Public organizations - heating % Public organizations - gas 3-3 0% 279 3,570 3,849 10% 10,016 28,658 38, % *- primarily for production of electricity *** - primarily, traders, Chornomornaftogas, condominiums, public organizations, etc. Source: Receibables ledgers of Naftogaz and Gas of Ukraine 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.. ** - 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 29

34 Dnipropetrovsnk regio 4,849 Kharkiv region 2,939 Kyiv 2,415 Kyiv region 1,184 Lviv region 1,157 Odessa region 1,640 Rivne region 1,674 Zaporizzhya region 1,165 Vinnytya region 551 Volyn region 379 Zhytomyr region Ternopil region Lugansk region ATO zone Crimea Foreign countries 579 Zakarpattya region 371 Ivano-Frankivsk region 570 Kirovograd region 350 Mykolaiv region 281 Poltava region 744 Cumy region Kherson region 342 Khmelnytsk region 354 Cherkasy region 1,027 Chernivtzi region 253 Chernigiv region 538 Donetzk region 1,759 2,039 3,986 6,376 Section 4 Consolidated receivables of the Group 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 Debt as of 31 December 2014 by region, UAH in millions 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. Heating companies* Oblgases Industrial companies Other 461 Source: Naftogaz information 30

35 Section 5 Individual receivables analysis 31

36 Section 5 Individual receivables analysis As of 31 December 2014, 91% of the Group s debt was due from 119 debtors Concentration analysis of the Group's debt Debtors owing less than UAH 50 m Debt Number of debtors Debtors owing between UAH 50 m and UAH 500 m Number of Debt debtors Debtors owing between UAH 500 m and UAH 1000 m Number of Debt debtors Debtors owing more than UAH 1000 m Debt Number of debtors Debt Total Number of debtors Heating companies* 2, , , , , Oblgases , , , Industrial companies , , , , Other 356 1,553 1, , ,837 1,561 3,462 2,298 16, , , ,679 2,417 % from total 9% 95% 42% 4% 23% 1% 25% 0% * - includes heating companies which also produce electricity Source: Receivables ledgers of Naftogaz and Gas of Ukraine 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.). 32

37 Section 5 Individual receivables analysis The Group s receivables by ownership category of the debtor Consolidated debt owed to the Group by group of customers and year of origination, as of 31 December 2014 Year of origination UAH in millions Total before 2010 Privately owned companies Oblgases 7,848 4, , Heating companies* 4,049 2, Other 2, , Industrial companies 5,936 1, ,951 1, Chemical 3, ,725 1, Metallurgical 1, Other industries ,936 1, ,951 1, ,824 8,206 2,362 2,079 2,348 4,163 1,666 SOEs Oblgases Heating companies* 4,026 1,362 1, Other Industrial companies Chemical Metallurgical Other industries ,787 2,257 1,092 1, 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. Municipally owned companies Heating companies* 11,982 5,145 2,414 1, , Other Industrial companies * - includes heating companies which also produce electricity Source: Receivables ledgers of Naftogaz and Gas of Ukraine 12,020 5,173 2,418 1, , Households Public entities ,679 15,652 5,877 4,993 3,818 5,772 2,567 33

38 Section 5 Individual receivables analysis As of 31 December 2014, the top 20 debtors accounted for 47% of the Group s total debt (1 of 7) The Group's debtors with debt more than UAH 50 m, UAH in million Name of the debtor Owner Category Year of origination Before Total Gazukraina-Commerce LLC No information Other , ,046 Kharkivski Teplovi Merezhi MC No information Heating companies ,569 Rivneazot PJSC Ostchem Enterprises Limited (Cyprus) % Industrial companies ,341 Kyivenergo PJSC Mr. Rinat Akhmetov Heating companies ,295 1,331 Donetskmiskteplomerezha MC No information Heating companies ,287 Kryvorizhskaya Teplocentral SE No information Heating companies ,235 Concern Stirol Gorlivka PJSC Ostchem Investments Limited (Cyprus) % Industrial companies ,009 Severodonetsk union Azot JSC Ostchem Ventures Limited (Cyprus) - 100% Industrial companies Donetskteplocomunenergo MC No information Heating companies Krymteplocomunenergo RE No information Heating companies Lvivhaz PJSC Naftogaz - 25%, Roloks PJSC %, Hastek PJSC % Ternopromservis % Meteron Limited PJSC % Oblgases Luhanskgas PJSC Naftogaz - 25% Gastek PJSC - 26% Holder Stock PJSC % Oblgases Cherkasy AZOT PJSC PLG UA LIMITED, Cyprus % OMBRYDZH Ltd % Uralkali PJSC % Industrial companies Teplocomunenergo Luhansk MC No information Heating companies Miski Teplovi Merezhi Koncern No information Heating companies Lisichanskiy glass factory Proletary PJSC FG Plant Holdings Limited, (Cyprus) % Industrial companies Dnipropetrovsk Mis'ki teplovi merezhi MC No information Heating companies Odessa Port Plant PJSC State-owned Industrial companies Kryvorizhteplomerezha MC No information Heating companies Odessa Teploelektrotsentral PJSC State-owned Heating companies

39 Section 5 Individual receivables analysis As of 31 December 2014, the top 20 debtors accounted for 47% of the Group s total debt (2 of 7) The Group's debtors with debt more than UAH 50 m, UAH in million (continued) Category Name of the debtor Owner Year of origination Before Total Krymteploelektrotsentral PJSC Asermill Ventures LTD, (Cyprus) % Heating companies Kyivoblgas PJSC Naftogaz - 25% LLC TRANSIT-Invest - 15% LLC Omega-Capital % LLC MASHDIBUR % Oblgases Dnepropetrovskgas PJSC Naftogaz - 25%, PJSC Haztek % Oblgases Itera LLC Rosneft Other Kharkiv Teploelektrotsentral-5 JSC Limited liability companyt UKRISTHAZ % Heating companies Makiivteplomerezha MC No information Heating companies Kharkivhaz PJSC Lasfano Ukraine LLC %, Sodeman Limited % Oblgases Dniprodzerzhyns'k Teploelektrotsentral PJSC No information Heating companies Donetskoblhaz PJSC Naftogaz - 38% GrandGas % GasCity % Oblgases Sevteploenergo MC No information Heating companies Zakarpathaz PJSC Roloks PJSC - 15% Haztek PJSC - 21% Ahropromkomplekt PJSC - 15% PJSC Ternoprominvest - 15% Oblgases Horlivskteplomerezha PJSC No information Heating companies Ivano-Frankivskgas PJSC Naftogaz - 25% PJSC Haztek - 35% PJSC Rolyuks % Oblgases Vinnitsagaz PJSC Naftogaz - 25% Rolyuks PJSC - 19% Hastek PPJSC- 34.7% Ahropromkomplekt PJSC % Oblgases

40 Section 5 Individual receivables analysis As of 31 December 2014, the top 20 debtors accounted for 47% of the Group s total debt (3 of 7) The Group's debtors with debt more than UAH 50 m, UAH in million (continued) Name of the debtor Owner Category Year of origination Before Total FC Meridian LLC % Ltd. IR Business-Invest - 12,75% Poltavaoblenergo PJSC Larva Investments limited - 25% UA Energy Distribution Holding Limited % Bikontia Enterprises Limited % Heating companies Chernomorneftegaz PJSC State-owned Other Zaporizhgas PJSC Naftogaz - 25% Hastek PJSC %, Centragas Holding Limited % Oblgases Chernihivgas PJSC Naftogaz - 25% Lasfano Ukraine LLC % Roloks PJSC % Hastek PJSC % Ahropromkomlekt PJSC - 10% Oblgases Odesagas PJSC Zemare Limited % Semenco Limited % Vorean holdings & Investments Limited % Raysure Limeted % Oblgases Zuevskaya experimental Teploelektrotsentral SE No information Heating companies Dniprogaz PJSC Sagacity Limited - 16% Humgate Holdings Limited - 21% Tanter Holdings Limited - 16% Eriswell Trading Limited - 16% Oblgases Volynhaz PJSC Roloks PJSC % Hastek PJSC % Ahropromkomplekt PJSC % Ternoprominvest PJSC % Oblgases Poltavagaz PJSC No information Oblgases State Reserve Agency of Ukraine State-owned Other Teplopostachannya of Odessa MC No information Heating companies Lvivteploenerho MC No information Heating companies

41 Section 5 Individual receivables analysis As of 31 December 2014, the top 20 debtors accounted for 47% of the Group s total debt (4 of 7) The Group's debtors with debt more than UAH 50 m, UAH in million (continued) Name of the debtor Owner Category Year of origination Before Total Severodonetsk teploelektrotsentral SE No information Heating companies Teploenergo Dnipropetrovsk City Council MC No information Heating companies Zhytomyrteplokomunenerho MC No information Heating companies Khmelnitskgaz PJSC Naftogaz - 25%, Hastek PJSC % Oblgases Zhytomyrhaz PJSC Hastek PJSC - 50% Khmelnitskgaz PJSC - 24% Oblgases Naftogaz - 25% Sumyhaz PJSC Hastek PJSC % Stoke Holder PJSC % Oksilend Ltd % Oblgases Roloks PJSC % Chernivtsihaz PJSC Hastek PJSC % Ternopromservis PJSC % Oblgases Luhanskteplokomunenerho No information Heating companies CP HMR coals Vuhlyk MC No information Heating companies Orion Kyiv No information Other Kherson Teploelektrotsentral JSC State-owned Heating companies Oblteplocomunenergo PJSC No information Heating companies Alchevsk Metallurgical Plant PJSC No information Industrial companies Kharkivmiskgaz PJSC Sodeman Limited % Humgate Holdings Limited % Tanter Holdings Limited % Eriswell Trading Limited % Oblgases Rivnegaz PJSC Naftogaz - 25% Hazek % Ahropromkomplekt - 16% MATHERON LIMITED % Oblgases Vinnytsyamiskteploenerho MC No information Heating companies Mykolayivgas PJSC Naftogaz - 25% Haztek PJSC % Oblgases Energomashspetsstal PJSC EMSS Holdings Limited (Cyprus) Industrial companies Lysychanskteplomerezha MC No information Heating companies Management of infrastructure of territory HO MC No information Heating companies

42 Section 5 Individual receivables analysis As of 31 December 2014, the top 20 debtors accounted for 47% of the Group s total debt (5 of 7) The Group's debtors with debt more than UAH 50 m, UAH in million (continued) Name of the debtor Owner Category Year of origination Before Total Dneprovskiy Metallurgical Plant im.f.ye. No information Dzerzhinsky PJSC Industrial companies ISD No information Industrial companies Ivano-Frankivskteplokomunenergo SME No information Heating companies Rivneteploenergo LLC No information Heating companies Donetskmiskhaz PJSC Sodeman Limited - 21% Humgate Holdings Limited - 19% Tanter Holdings Limited - 14% Eriswell Trading Limited - 22% Oblgases Nikopolteploenergo MC No information Heating companies Ternopilmiskhaz PJSC No information Oblgases Ternopilhaz PJSC Naftogaz - 25% Ltd. PROMTEKHRESURS % Oblgases Hlib of Ukraine SE State-owned Industrial companies Kryvorizhhaz PJSC PJSC Dniprogaz % Sodeman Limited % Humgate Holdings Limited % Tanter Holdings Limited % Eriswell Trading Limited % Sagacity Limited % Oblgases Bilotserkivteplomerezha MC No information Heating companies Power system MC No information Heating companies Ukravtohaz SE No information Other Mariupol met. Plant Ilyich PJSC Mr. Rinat Akhmetov and Mr. Vadim Novinskyy Industrial companies Teplotrans MC No information Heating companies Edyni Energy Systems of Ukraine No information Other Kirovohradteplo LLC No information Heating companies Energetyka ta palyvo Ukrainy SE No information Other Makiyivka metallurgist. integrated works Mr. Rinat Akhmetov and Mr. Vadim Novinskyy Industrial companies Kirovogradgas JSC State-owned Oblgases Heat supply system MC No information Heating companies

43 Section 5 Individual receivables analysis As of 31 December 2014, the top 20 debtors accounted for 47% of the Group s total debt (6 of 7) The Group's debtors with debt more than UAH 50 m, UAH in million (continued) Name of the debtor Owner Category Year of origination Before Total PJSC Kyyivenerhoholdinh - 60% Kyivgas PJSC DEPARTMENT OF KYIV municipal property executive body of Kyiv City Council (Kyiv City State Administration) % Oblgases Alchevskteplokomunenerho MC No information Heating companies SGS Plus LLC No information Heating companies Cherkasygaz PJSC Lasfano Ukraine LLC %, Interregional trade company Ltd % Perrit Select investments Limited % Oblgases Sumykhimprom PJSC State-owned Industrial companies Pavlohradteploenerho MC No information Heating companies Chervonohradteplokomunenerho MC No information Heating companies Zaporizhstal JSC Zaporizhstal-PC LLC % Kyiv Sekyuritiz Group LLC % Hals-Invest Ltd % Global steel investments limited % Midland Capital Management LLC % Industrial companies Khersongas PJSC PJSC Neycherel end likvified Petrolem CEO % Oblgases Donetsk-Energy LLC No information Heating companies Interpipe Niko Tube LLC No information Industrial companies Interpipe Nizhnedneprovskiy Rolling Plant PJSC Saleks Investments Limited - 60% Industrial companies Poltavateploenerho No information Heating companies Umanteplokomunenerho Uman MC No information Heating companies Ukrspirt SE State-owned Industrial companies Melitopolhaz JSC Naftogaz - 25% Limited Liability Company investment company FINLEKS-INVEST % Oblgases UZHKH MC No information Heating companies Mykolayivoblteploenerho RMC No information Heating companies Lutskteplo SE No information Heating companies Melitopol's'ki Thermal Network LLC No information Heating companies

44 Section 5 Individual receivables analysis As of 31 December 2014, the top 20 debtors accounted for 47% of the Group s total debt (7 of 7) The Group's debtors with debt more than UAH 50 m, UAH in million (continued) Name of the debtor Owner Category Year of origination Before Total Mykolaiv Teploelektrotsentral PJSC State-owned Heating companies Krymhaz PJSC Naftogaz - 25% Haztek PJSC - 24% National Joint Stock Company Chornomornaftogas PJSC %, Lasfano Ukraine LLC - 15% Oblgases Chernivtsiteplokomunenerho MC No information Heating companies PJSC Azovstal Mr. Rinat Akhmetov and Mr. Vadim Novinskyy Industrial companies Smela Energoinvest LLC No information Heating companies Ternopilmiskteplokomunenerho MC No information Heating companies Mariupolgaz PJSC Ltd. Mahraz - 76,9% UITC LIMITED - 11,24% Oblgases Heat networks meters. Volnogirsk MC No information Heating companies Eastern European teploenerhoheneruyucha No information company Heating companies Stanislav thermal power Co., LLC No information Heating companies Teplocomunenergo Antratsitovsky MC No information Heating companies Source: smida.gov.ua, IFRS financial statements for 2014 (where publicly available) 40

45 Appendix 1 Terms of Reference 41

46 Appendix 1 Terms of Reference Terms of Reference (1 of 4) 42

47 Appendix 1 Terms of Reference Terms of Reference (2 of 4) 43

48 Appendix 1 Terms of Reference Terms of Reference (3 0f 4) 44

49 Appendix 1 Terms of Reference Terms of Reference (4 0f 4) 45