State, Naftogaz and Ukrnafta reconcile their debts

The Ukrainian government, natural gas giant Naftogaz (NAFTO)
and crude oil producer Ukrnafta (UNAF UK) all made mutual money transfers to
settle their mutual debts, Naftogaz reported on its website Dec. 22. As a
result of the operation, the government paid Naftogaz to compensate losses
inflicted by its public service obligations (PSO) on the natural gas market in
2015-2019, Naftogaz liquidated its debt to Ukrnafta for 2.06 bcm of natural gas
expropriated from the company in 2006, while Ukrnafta liquidated its tax debt
to the government.

 

Namely, the Energy Ministry transferred UAH 32.2 bln
to Naftogaz as compensation for PSO losses. Naftogaz recognized this payment as
profit and paid UAH 6.4 bln in profit tax to the government. Also, Naftogaz
paid Ukrnafta a total of UAH 36.1 bln (of which UAH 12.6 bln was compensation
for expropriated gas, and UAH 23.5 bln was prepayment for natural gas to be
produced/supplied later by Ukrnafta). In its turn, Ukrnafta repaid to the
government UAH 28.9 bln of tax debt accumulated in 2015-2016 and penalties for
delayed taxes. On top of that, Ukrnafta paid to the government UAH 3.3 bln in
profit tax and UAH 3.9 bln in VAT from Naftogaz’s prepayment.

 

In this way, the operation was cash-neutral for
Ukrnafta and cash-positive for the state (which gained UAH 10.3 bln from
additional taxes). Naftogaz turned out to be the donor in these operations,
losing a net of UAH 10.3 bln in cash.

 

“We have added more than UAH 10 billion to the state
budget. It is an excellent example of how effective and coordinated efforts
between the government, Naftogaz, and the management of Ukrnafta can work in
the interests of the state,” said Peter Van Driel, CFO of Naftogaz.

 

Recall, this way of mutual debt settlement had been
discussed since 2018, and an Ukrnafta shareholder meeting (led by the government
and Naftogaz, which control a 50% stake in the company) even approved the deal in March 2019.
However, the transaction only became possible after Ukraine’s parliament approved
needed amendments to the state budget in November 2020.

 

Alexander Paraschiy: Among its
numerous positives, this deal will be very helpful for the state budget, which
is suffering from a high need to finance the large outlays of December.

 

No doubt, the deal is extremely positive for Ukrnafta,
which was on the verge of liquidation due to unaffordable tax debt. Now its
solvency has been completely restored. However, this does not guarantee that
Ukrnafta won’t have liquidity problems in the future, as the deal does not
improve its cash balance, though it forces the sale of yet-to-be-mined natural
gas (about 2 bcm). All this means the company’s liquidity will remain
constrained for many years, and this could become another headache for Naftogaz
and the government.

 

Meanwhile, the deal is painful for Naftogaz which, in
addition to income tax already paid, will likely have to pay more, e.g. in the
form of dividends from its 2020 profit. Recall, the company’s 9M20 net loss of
UAH 17.0 bln had implied it might not have a positive bottom line in full-year
2020 and could avoid dividend payments next year. The latest transaction
generated UAH 25.8 bln in net profit for Naftogaz alone (and probably some more
on a consolidated basis, if the accounts of Ukrnafta are included).

 

At the same time, we admit that Naftogaz can afford
this, as its end-September cash balance was UAH 45.8 bln. Also, the future
sales of the prepaid natural gas might play to fill its liquidity needs.