2008 Budget Draft to Provide USD 1.6 bln Compensation of Naftogaz’s Losses

The Cabinet of Ministers of Ukraine charged the Ministry of Finance with building into the 2008 budget USD 1.6 bln in compensation for Naftogaz’s losses from below-cost gas sales (to municipal heating companies). The government also charged the Finance Ministry with making a provision in the Budget to allow Naftogaz to use its 2007 dividends from Ukrnafta (UNAF: SELL) and Ukrgaz-Energo for its own operating needs, and to attract loans from foreign financial institutions for other purposes than working capital financing. The Cabinet recommendations are dated April 9, also when it approved Naftogaz’s financial plan for 2008, with revenues of “around USD 14.8 bln.” Vladimir Nesterenko: The size of the compensation looks large – twice higher than our estimate of USD 0.8 mln, and the reasons so far are unclear. Most probably, the compensation is being considered to cover Naftogaz’s losses on gas sales to municipal heating companies (MHEs) last year. Another explanation may be that Naftogaz is going to subsidize not only MHEs, as it did in 2007, but other categories of consumers. There is also a possibility that the government foresees an increase in the price of incoming gas already this year. Meanwhile, Naftogaz’s approved 2008 revenue plan of USD 14.8 mln also looks quite inflated: it is twice its all-time high of USD 7.2 bln in 2005, and around ~ USD 5 bln (~50%) higher our most optimistic estimate of the company’s consolidated sales.