Diagnostic Analysis of Receivables National Joint-Stock Company Naftogaz of Ukraine

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

31 July 2015 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.

Stephen Oldfield Donald Bruce T: +48227467266 T: +48227467759 M: +48519507266 M: +48519507759 [email protected] [email protected]

31 July 2015 Andriy Kobolev Chairman of the Board Dear Sirs Naftogaz of Ukraine In accordance with your instructions as confirmed in the Terms of Reference dated 9 June 2015 (the “ToR” - Appendix 1), we 6, B.Khmelnitskogo Str., report on National Joint-Stock Company Naftogaz of Ukraine (the “Company” or “Naftogaz”) and its subsidiary undertakings Kyiv, 01001, Ukraine Public Joint-Stock Company Ukrgazvydobuvannia (“Ukrgazvydobuvannia ”), Public Joint-Stock Company Ukrtransgaz

(“Ukrtransgaz ”) and Subsidiary Company Gaz of Ukraine (“Gaz of Ukraine”) (together, the “Group”). Sergiy Konovets Deputy Chairman of the Board This report has been prepared in connection with the delivery of the Services set out in the ToR. Naftogaz of Ukraine We draw your attention to important comments regarding the scope and process of our work, set out in Appendix 2. 6, B.Khmelnitskogo Str., Kyiv, 01001, Ukraine

Yours faithfully Brett Nevin Rayner Economist, European Department Stephen Oldfield International Monetary Fund Project Leader 700 19TH Street, NW Washington, D.C. 20431

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 Section 1 Executive Summary

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 1 Section 1 – Executive Summary Summary of key issues (1 of 3)

Observation Comment

Consolidated debt of the As of 31 December 2014 Group by customer category Year of origination and year of origination before UAH in millions 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

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.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 2 Section 1 – Executive Summary Summary of key issues (2 of 3)

Observation Comment

Highly regulated Under the appropriate legislation Naftogaz is defined as a guaranteed supplier of gas and as such it is required to enter environment 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).

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 3 Section 1 – Executive Summary Summary of key issues (3 of 3)

Observation Comment

Legal work-out 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 (continued) 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 There is currently no legal requirement for Naftogaz to ask for this information and their internal regulations do not groups and beneficial require it, and as such this information is not maintained on file. owners 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 As of 31 December 2014, UAH 10.4 bln was due from customers located in annexed Crimea and ATO zone. In addition, in Crimea and ATO zone 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.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 4 Section 2 Background of the Group’s activities and regulations

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 5 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 Cabinet of Rada Ministers Parliament Government • Execution of the state policy in the • Sets key framework legislation on the fuel and energy sectors; principles of gas market in Ukraine; • State management of the natural gas • Ratifies international agreements in market; the energy sector. • Approves the annual financial plan of Naftogaz Naftogaz • Approves annual planned volume of gas consumption in the country Guaranteed supplier of gas to heating companies and industrial producers Ministry of National Commission with annual volumes exceeding 3 ml cm; Energy and Coal Regulator Guaranteed supplier of gas to the Line Ministry • Develops and executes the state • Issues licenses related to commercial regional gas distribution companies. policy in the oil and gas sector; activity on the natural gas market; • Develops special programmes for • Establishes standard templates of diversification of gas supply; contracts on gas supply; • Reviews and submits for approval • Establishes prices for gas and tariffs by the Cabinet of Ministers the for transportation, distribution, annual planned volume of gas storage, pumping and supply of the consumption in the country and the natural gas . financial plan of Naftogaz

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 6 Section 2 – Background of the Group’s activities and regulations Debt collection of the Group is highly Timelines of key legislative changes impacted by regulations (1 of 3) 1998 establishment of the 2005 Key legislative acts that historically have had a significant impact on the Group with Gas of ban on bankruptcy and forced Group’s debt collection performances are discussed below: Ukraine as the main debt collection, inter alia, in trader of gas respect of the heating • Law No.2711-IV On Measures Ensuring Functioning of 2008 companies and regional gas Enterprises of the Fuel and Energy Sector adopted by the distribution companies Parliament on 23 June 2005, the main objective of which was to introduction of special accounts for protect state-owned assets in the energy sector from regional gas distribution companies 2010 misappropriation. This Law introduced a ban on bankruptcy and and traders of gas Law On Principles Of forced debt collection against participants in the fuel and gas 2011 Functioning Of Natural Gas market, including heating companies and regional gas distribution Market companies. transfer of trading operations from Gas of Ukraine to Naftogaz 2012 • Resolution No.705 of the Cabinet of Ministers of Ukraine dated Law On Write-off and 25 July 2012, which defined Naftogaz and regional gas distribution Restructuring of Debts for introduction of new algorithm companies as guaranteed suppliers of gas. Consumed Gas for special accounts guaranteed suppliers of natural • On 3 October 2012, the Cabinet of Ministers by its Resolution 2014 gas are established No.939 obliged Naftogaz to supply gas to guaranteed suppliers of gas, i.e. regional gas distribution companies. introduction of special accounts for heating and March 2015 • Law No. 3319-VI On Debts for Consumed Natural Gas and industrial companies Electrical Energy adopted by the Parliament on 12 May 2011, changes to special accounts algorithm for heating companies 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 April 2015 prior to 2010 were written off and debts accrued during 2010 were Law On Natural Gas Market restructured. May 2015 Law On Stabilization Of Financial Standing Of Naftogaz introduction of special accounts for heating companies which produce Diagnostic analysis of receivables • National Joint-Stock Company electricity using gas Naftogaz of Ukraine 31 July 2015 7 Section 2 – Background of the Group’s activities and regulations Debt collection of the Group is highly Timelines of key legislative changes impacted by regulations (2 of 3) 1998 establishment of the 2005 • On 14 May 2015, the Parliament adopted Law No. 423-VIII On Group with Gas of ban on bankruptcy and forced Stabilization of Financial Standing of Naftogaz. Under this Ukraine as the main debt collection, inter alia, in trader of gas Law debt of the heating companies for the natural gas consumed in respect of the heating companies and regional gas 2014 (excluding fines, late payment interest and inflation 2008 distribution companies compensation), which is outstanding as of 6 June 2015, is subject to introduction of special accounts for restructuring and will be repaid in instalments during a 24-month regional gas distribution companies 2010 period. Such restructuring is possible only if companies repay their and traders of gas debts (excluding fines, late payment interest and inflation Law On Principles Of compensation) for the gas consumed prior to 2014. In this case, 2011 Functioning Of Natural Gas Market fines, late payment interest and inflation compensation will be transfer of trading operations from written off. Gas of Ukraine to Naftogaz Law On Write-off and 2012 • In addition, according to Law No. 423-VIII, Naftogaz and Gas of Restructuring of Debts for introduction of new algorithm Ukraine may sell their debts for the supply of gas via auctions (at a Consumed Gas for special accounts discount). The Law became effective from 6 June 2015 and its guaranteed suppliers of natural application in practice is untested. 2014 gas are established

• Special consideration in the regulations is made to the process for introduction of special payments received by Naftogaz from the customers for gas accounts for heating and March 2015 consumed. industrial companies changes to special accounts • Resolution No.247 adopted by the Cabinet of Ministers of algorithm for heating companies Ukraine on 26 March 2008 which introduced special bank accounts for oblgases and traders of gas, where funds received from end April 2015 consumers of gas were further automatically split between Naftogaz and gas transportation companies (Ukrtransgaz and oblgases) May 2015 Law On Natural Gas Market according to a complex formula (approved by the Resolution of the National Commission No.1529 dated 25 December 2008). Law On Stabilization Of Financial Standing Of Naftogaz introduction of special accounts for heating companies which produce Diagnostic analysis of receivables • National Joint-Stock Company electricity using gas Naftogaz of Ukraine 31 July 2015 8 Section 2 – Background of the Group’s activities and regulations Debt collection of the Group is highly Timelines of key legislative changes impacted by regulations (3 of 3) 1998 establishment of the 2005 • On 2 August 2012, the formula was amended by Resolution Group with Gas of ban on bankruptcy and forced No.1000 of the National Commission. According to management, Ukraine as the main debt collection, inter alia, in trader of gas the new formula did not allow Naftogaz to recover old debts, but respect of the heating companies and regional gas only service the current portion of receivables. 2008 distribution companies • Similar accounts were introduced for industrial companies introduction of special accounts for (Resolution No.23 issued by the National Commission on 16 regional gas distribution companies 2010 January 2014) and for heating companies (Resolution No.217 and traders of gas Law On Principles Of issued by the Cabinet of Ministers of Ukraine on 18 June 2014 2011 Functioning Of Natural Gas (effective from 4Q2014). The algorithm established by Resolution Market No.217 also envisaged repayment of old debts. transfer of trading operations from Gas of Ukraine to Naftogaz 2012 Please note that by Resolution No.166 issued by the Cabinet of Law On Write-off and Ministers of Ukraine on 18 March 2015 changes to the special Restructuring of Debts for introduction of new algorithm accounts algorithm were introduced which eliminated the Consumed Gas for special accounts possibility to recover the old debts, negatively effecting the guaranteed suppliers of natural gas are established recoverability of Naftogaz’s accounts receivable. 2014

• On 20 May 2015, the Cabinet of Ministers of Ukraine issued introduction of special Decree No. 670-p introducing a new mechanism of settlements accounts for heating and March 2015 between electricity generating companies and the wholesale industrial companies changes to special accounts suppliers of electricity. This decree introduced the mechanism of algorithm for heating companies special accounts in settlements with Naftogaz for the gas used by the heating/electricity generating companies for the production of April 2015 electricity. May 2015 Law On Natural Gas Market Law On Stabilization Of Financial Standing Of Naftogaz introduction of special accounts for heating companies which produce Diagnostic analysis of receivables • National Joint-Stock Company electricity using gas Naftogaz of Ukraine 31 July 2015 9 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 Other suppliers (all gas produced is (Gazprom, European sold to Naftogaz) suppliers, etc.)

Uktransgaz (gas Naftogaz, Gas traders transportation ) Gas of Ukraine*

** Industrial companies Public entities and other customers ***

Regional gas Heating distributors (“0blgases“) companies

… and religious organizations

- Group companies - supply of natural gas (without - gas transportation services (main pipeline) transportation services) * - a trading company before December 2011. - supply of heat - supply of natural gas including transportation services ** - other customers only - gas distribution services by oblgases when - supply and distribution of natural gas by oblgases to *** - for heating purposes only Naftogaz supplies gas via direct contract (i.e., not end users through oblgases)

Note: the above chart is presented from the perspective of the Group rather than the market as a whole 31 July 2015 Diagnostic analysis of receivables • National Joint- 10 Stock CompanyNaftogaz of Ukraine Section 3 Overview of receivables recovery process

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 11 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 Payments control Settlements and analytics Debt management sales division division division division (9 people) (18 people) (8 people) (16 people)

• Development of standard contract • Daily analysis of received • Daily analysis of payments • Preparation of materials on templates for gas sale payments and receivable received for the gas sold and overdue debt, respective fines • Ensure any agreements with balances payments by Naftogaz for and penalties and their customers are concluded in • Daily forecast of cash flows transportation and distribution submission to the Legal accordance with the established from sales of gas services (including posting Department to proceed with procedures of Naftogaz • Preparation of reports for respective entries in the court filing • Recording the actual volumes of management automated system Navigator-IN • Off-set arrangements natural gas consumed by (a system used by the Gas Sales • Regular monitoring of official undertaking acceptance Department to account for and information on bankruptcy or procedures with customers analyse sales related operations liquidation procedures initiated • Informing the Legal Department and balances) in respect of the Company’s regarding execution of the • Based on court decisions and debtors enforcement documents by the respective accounting records, • Consolidation of information on debtors reflecting accruals and receivables and payables of the • Preparation of gas sales registers provisions relating to Company and their submission to the receivables and payables Accounting Department to reflect balances in Navigator-IN gas sales transactions in the Company’s accounts

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 12 Section 3 – Overview of receivables recovery process The Gas sales department oversees all interactions with customers from contract initiation to collection (2 of 2)

Use the divider control box below to make the slide title appear in your primary TOC and section TOCs. • As a guaranteed supplier of natural gas, Naftogaz cannot refuse to • Usually, Naftogaz files lawsuits against debtors to demand

conclude new gas supply contracts with its customers even if the repayment of overdue debts and respective fines and penalties only Please follow these steps: latter have unpaid debts for gas supplied under old contracts. At the after expiry of respective gas supply contracts. As such, the lawsuits Type ‘Divider’ in the control box same time, according to the standard gas supply contracts with its cover only that portion of the debt which has not been paid after the provided below. customers, Naftogaz can limit or terminate supply of gas. The contract expiry date (i.e., problematic debt). According to Click the Divider command on the Company actively applies this contract clause in accordance with management, such approach helps the Group to decrease the Smart ribbon. the Decree of the Cabinet of Ministers of Ukraine No1687 dated 8 number of claims to be filed and the volume of legal work. Enter the text that you’d like to June 2006 “On Approval of Mechanism of Limiting (Terminating) appear in the TOCs and select a • However, in cases where management identifies the risk that the Supply of Gas (Except for Population)”. divider level. principal debt may not be repaid, then the decision to file a court Click Update. The slide title should • Moreover the standard contractual terms allow Naftogaz to case is made before the contract expiry. now appear on all TOCs. terminate the contract, if there is an unsettled overdue debt. • There is no general practice of formal debt restructuring in the According to management, they did not apply the contract Group, unless there is a respective court decision or restructuring is To remove the slide title from your termination clause until 2015, and as a result two court cases where initiated by the Parliament (see discussed earlier). TOCs, delete the ‘Divider’ text from initiated against Naftogaz (currently in progress). If Naftogaz the divider control box and hit successfully defends these cases, they will have an effective tool Update. 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.).

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 13 Section 3 – Overview of receivables recovery process Overview of the main contractual terms of Naftogaz for supply of gas

Contract 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 duration 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).

Contacts stipulate volume of gas to be supplied at a certain price on a monthly basis. Depending on the customer’s Supply and category, the payment terms may vary from 30% monthly prepayment with the remaining balance payable in two equal payment terms 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 Fines and amount of payments in arrears. penalties for 2. Fines is a one time fee set at 7% from overdue payment (only for supply of gas to industrial companies) overdue debt 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.

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 14 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 • This approach is applied with the purpose to minimise costs and to these companies are mainly involved in the sale and purchase of gas avoid initiating a number of cases per one contract. This is also and, as a result, are engaged in respective litigations. driven by the fact that under effective legislation a court claim regarding debt collection should be submitted at a debtor’s place of • The Legal Department of Naftogaz includes about 50 specialists of registration. Such legislative requirement actually complicates legal which 31 are litigation specialists (20 of which participate in work-out with the Group’s debtors, which is managed out of Kyiv. drafting and filing court claims, other staff are responsible for enforcement proceedings and bankruptcy cases). • In exceptional cases, upon approval of Naftogaz’s management, the legal work-out in respect of the debtors is initiated before the • The Group’s lawyers maintain special registers of the current court contract’s expiry date. cases with indication of debtors, amount of debt, penalties applied for non-payment or late payment of the debt etc. • Contract management (including conclusion of contracts, control over their execution, penalties accrued for non-compliance with • If a customer has not paid for the supplied gas according to contractual terms) is executed by the Gas Sales Department contractual terms, in most cases Naftogaz will initiate legal (discussed earlier). If a counterparty is in breach of the contractual proceedings after the respective contract’s term expiration (1-year), terms, this Department prepares and transfers materials to the when the final outstanding amount of the principal debt is known. Legal Department in order to initiate court proceedings in respect Before the litigation process Naftogaz estimates additional of such a counterparty. The Economic Security Department is penalties (fines, late payment interests etc.) for non-compliance responsible for monitoring counterparties solvency in order to with the contractual terms, which in most cases continue to be timely react in case bankruptcy procedures are initiated in respect accrued during the litigation. 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.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 15 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

Economic Security Gas Sales Department Legal Department Department

• Collection and preparation of • Provision of methodical and advisory • Regular interaction with enterprises, information necessary to file the claim assistance during pre-court workout establishments, organisations and • Identification of the counterparties for procedures citizens with the aim to receive the legal work-out • Legal work-out related to drafting necessary information regarding • Transfer of the case materials to the court claims, appeals, cassation of financial standing and solvency of the Legal Department in order to comply claims or objections to them debtors with statutory terms for filing • Upon approval of the management, • Checking on the status and accuracy of documents to the courts etc. involves representatives of the the court decision execution by the • Informing the Legal Department structural departments to represent State Enforcement Service regarding execution of the the Group’s interests in the court • Identification of possible illegal actions enforcement documents by the debtors hearings carried out by the debtors aimed at • Regular monitoring of the official • Control over process of receiving of the sidestepping the recovery of the debt publications regarding bankruptcy or enforcement documents and notification of the law liquidation proceedings initiated in • Maintaining records regarding court enforcement authorities if such actions respect of the Group’s debtors cases and enforcement proceedings are identified

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 16 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

1. 2. 3. Preparation and Representation in the Enforcement filing of the claims court of all instances proceedings

This work is Includes also appeal claims Monitor the status of enforcement, supported by the Gas and cassation claims and including its initiation by the State Sales Department bankruptcy cases initiated in Enforcement Service, execution, respect of the Group’s debtors etc.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 17 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 • Other claims filed by Naftogaz in courts relate to its day-to-day Naftogaz and Gas of Ukraine, since these two companies were activity (loan agreements, disputes with the state authorities, non- involved in sale and purchase of gas and were heavily engaged in material commercial disputes). However, their number is small related litigation. Although Ukrtransgas and Ukrgazvydibuvannia compared to disputes regarding sale and purchase of natural gas. are also involved in litigation, this relates to gas transportation and • Our analysis of legal cases of Naftogaz includes legal cases, initiated the collection of intragroup debts and as such falls outside the terms from 2012 till May 2015. The total number of legal cases is 2,725. of reference. • The total amount of the claims filed during the above mentioned • We further split our analysis into two sections: (i) covering Gas of period, including the principal debt, fines, late payment interest Ukraine from 2010 till February 2015 (see further in the report); and inflation compensation (inflation rate and 3% per annum), is and (ii) Naftogaz from 2012 to May 2015 (see below), i.e. starting UAH 27,184 mln, including: (i) court cases with the total claims of from the year when they engaged into gas trading activities. UAH 18,953 mln, where final court decision was taken (and with • According to legislation, Naftogaz is a guaranteed supplier of the respect to which UAH 14,327 mln were confirmed by the court); natural gas to large industrial enterprises with the annual and (ii) court cases with the total claims of UAH 8,231 mln pending consumption of the natural gas over 3 mln. cm, heating companies final decision of the court (see details in table on the next page). and regional gas distribution companies. • According to the Ukrainian legislation, the court is empowered to • Contracts are concluded by Naftogaz for a period of one year. revise downward the amount of fines and late payment interest on Hence, for each calendar year Naftogaz concludes a new set of its own discretion, taking into account the following circumstances: contracts with the same customers (counterparties). As a actual execution of the contract by a debtor, financial standing of guaranteed supplier of the natural gas Naftogaz is not permitted to the parties, their material and non-material interests. Also the refuse concluding a sale and purchase contract for a new period, amount of principal debt may be decreased by the court or by the even if a customer has debts for the purchase of natural gas under parties due to its full or partial payment. old contracts for prior periods. • Therefore, the amount of claims satisfied by the court in favour of • Usually, legal action is initiated after expiry of the sale and purchase Naftogaz may significantly differ from the amount claimed by contract in order to minimise the quantity of claims filed and Naftogaz. Our analysis shows that the average recovery rate for the resources of Naftogaz involved in the process of court claims. 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 Diagnostic analysis of receivables • National Joint-Stock Company into account the actual outcome from the enforcement. Naftogaz of Ukraine 31 July 2015 18

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, 23 June 2005, the effect of which is expected to expire on 01 the total claims of UAH 3,577 mln from the confirmed by the court September 2015 (with the major impact on the debts due from the cases were paid by debtors and UAH 5,154 mln are currently in the heating companies). process of enforcement by the offices of the State Enforcement • In addition, UAH 27 mln shall be collected by Naftogaz under out- Service of Ukraine. Currently, enforcement of claims in the amount of-court enforcement procedure based on the notary’s executive of UAH 2,491 mln is suspended mainly under legislative provisions inscription (in cases this is envisaged by the contractual terms with of the Law of Ukraine On Measures Aimed At Ensuring Functioning customers). This procedure does not involve application to court of Enterprises of Fuel and Energy Sector No.2711-IV dated on by Naftogaz and is not included in the total claims filed to court.

Legal cases filed by Naftogaz against debtors and their status Total claims Claims confirmed by the court Final court UAH in Principal Fines and decision Total Enforcement Restruc Suspended Written Bankruptcy ATO zone Total % 0f claims millions debt Penalties taken Pending amount procedure tured Paid enforcement off proceedings and Crimea amount 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% * - as a percentage from total claims where final decision have been taken Source: Information of the Legal Department of Naftogaz

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 19 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 Total claims Claims confirmed by the court Final court Principal Fines and decision Total Enforcement Written- Suspended Bankruptcy Total % 0f claims UAH in millions debt Penalties taken Pending amount procedure Off Restructured Paid enforcement proceedings amount 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 - - 70 64% 17 881 4 434 17 734 4 581 22 315 3 490 4 212 1 648 3 903 14 128 13 395 76%

* - as a percentage from total claims where final decision have been taken Source: Information of the Legal Department of Gas of Ukraine

• Starting from 1998 till November 2011 Gas of Ukraine was engaged • The total amount of the claims filed during the above mentioned in the purchase and sale of natural gas. In November 2011, the period, including the principal debt, fines, late payment interest and license of Gas of Ukraine for sale and purchase of the natural gas inflation compensation (inflation rate and 3% per annum) is UAH was terminated. Currently, the main activity of Gas of Ukraine is 22,315 mln, including (i) court cases with claims of UAH 17,734 mln collection of debts which accumulated before November 2011. where final court decision was taken (and with respect to which • Our analysis of legal cases of Gas of Ukraine includes legal cases UAH 13,395 mln were confirmed by the court); (ii) and court cases initiated from 2010 till February 2015. The total number of legal with the total claims of UAH 4,581 mln pending final decision of the cases analysed and relating to collection of debts for the sale of gas court. is 2,273. • 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.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 20 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

* - as a percentage from total claims where final decision have been taken Source: Information of the Legal Department of Gas of Ukraine

• According to the information provided by the Legal Department, • Debts of Gas of Ukraine considered by courts in the amount of UAH the total claims of UAH 3,903 mln from the confirmed by the court 4,212 mln were written-off under provisions of the Law of Ukraine cases were paid by debtors and UAH 3,490 mln are currently in the “On Certain Issues on Debts for the Consumed Natural Gas and process of enforcement by the offices of the State Enforcement Electricity” No.3319-VI dated 12 May 2011. In 79 court cases with Service of Ukraine. the total claims of UAH 1,648 mln debts are restructured.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 21 Section 3 – Overview of receivables recovery process Positive court decisions with low chances to be executed are estimated at UAH 9,281 mln

Case Description

Debtors located in Crimea and ATO Debts confirmed by the court decisions in the amount of UAH 6,374 mln for Naftogaz and UAH 1,193 mln for zone 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

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 22 Section 4 Consolidated receivables of the Group

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 23 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

Use the divider control box below to make the slide title appear in your The Group companies' receivables in respect of gas sale • As of 31 December 2014, the gross receivables of the Group for the primary TOC and section TOCs. sale of gas, excluding intra-group balances, amounted to UAH operations as of 31 December 2014 38,679 mln (including UAH 2,897 mln of fines and penalties). Please follow these steps: Heating Industrial Type ‘Divider’ in the control box UAH in million companies companies Oblgases Other Total • Receivables are recorded in the Group’s accounting records based on gas sales registers provided to the Acounting Department by the provided below. Naftogaz Click the Divider command on the Trade receivables 15,882 2,548 5,535 2,924 26,889 Gas Sales Department before the 15th day of the month following Smart ribbon. Fines and penalties 937 78 108 647 1,769 the month of supply. Enter the text that you’d like to 16,819 2,626 5,643 3,570 28,658 • According to the standard contractual terms, acceptance acts appear in the TOCs and select a Gas of Ukraine confirming volumes of gas supplied and its price should be signed divider level. Trade receivables 2,559 3,871 2,267 192 8,889 by Naftogaz and its customers by the 8th of the month following the Click Update. The slide title should Fines and penalties 678 309 66 74 1,128 month of supply. Once acceptance acts are signed, they are now appear on all TOCs. 3,237 4,181 2,333 266 10,017 transferred to the Accounting Department. If there are differences Ukrgazvydobuvannya between the sales registers and the signed acceptance acts in terms To remove the slide title from your Trade receivables - - - 3 3 of volume or price of gas supplied, respective adjustments are made TOCs, delete the ‘Divider’ text from - - - 3 3 in the Company’s accounts. the divider control box and hit Ukrtransgaz • As discussed earlier in the report, the gas supply contracts stipulate Update. Trade receivables - - - 1 1 - - - 1 1 fines and penalties for the late payments. According to 20,056 6,807 7,976 3,840 38,679 management, such fines and penalties are recorded in the Group’s % from total 52% 18% 21% 10% 100% 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 Source: Receivables ledgers of Naftogaz and Gas of Ukraine accounting records.

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 24 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*, % • The debt recovery rate for the heating companies is the lowest when compared to other categories of the Group’s customers. There is a 100 significant dependency of debt recovery rates in respect of the 80 heating companies’ debt on the amount of transfers from the state budget. Heating companies receive compensation from the state 60 budget for the difference between the price of gas purchased for the purposes of heat production and supply to households and the price 40 Heating companies Other clients of gas included in the respective heating tariffs to households. 20 Oblgases Total Industrial companies According to the information provided by Naftogaz, in 2012 heating 0 companies received UAH 9.8 bln of such compensation, which was 2010 2011 2012 2013 2014 eventually used to settle the debt for the gas consumed, while in 2013 no such compensation was paid to heating companies. In • - recovery rates were calculated by dividing the amount of payments received during the year 2014, the compensation from the budget amounted to UAH 10.8 for the gas supplied by the amount of revenue (including VAT) accrued in the respective period bln. Recoverability of old debt*, % • As mentioned earlier in the report, in 2014 – 2015 some initiatives Heating companies were introduces to improve the payment discipline of the heating Oblgases companies (eg, introduction of special accounts, adoption of Law 80 Industrial companies No.423 allowing Naftogaz to limit supply of gas to heating 60 Other clients companies in case of overdue payments). Total • While in 2011 – 2013 recoverability of the current debt of oblgases 40 was rather stable (appx. 84%), in 2014 it dropped to 71%. The major factor that has negative impact on the recoverability in 2014 was 20 increase of prices for gas, including gas purchased by oblgases for 0 production purposes, i.e. industrial and technical losses (“ITL”). At the same time, the price of gas for ITL included in the gas 2010 2011 2012 2013 2014 distribution tariff and charged to customers in 2014 was lower • - 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 compared to the actual price, resulting in oblgases’ inability to pay beginning of the year for respective gas in full. Naftogaz intends to recover full amount of Source: Accounting records of Naftogaz and Gas of Ukraine debt for gas for ITL but it may prove to be challenging. Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 25 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*, % • Quarterly recovery rates were calculated on a 100 cumulative basis as gas sales contracts are for a 80 period of one year and payments made by customers during the year are not linked to the 60 month of supply in the Group’s accounting 40 system. 20 Heating companies Industrial companies Total • Fluctuations of quarterly recovery rates for the Oblgases Other clients current debt of oblgases and heating companies 0 reflect the seasonality of gas consumption 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 during the year (i.e., which is increasing in cold months with respective payments being delayed • - recovery rates were calculated by dividing the amount of payments received during the year for and made in the following periods). In the first the gas supplied by the amount of revenue (including VAT) accrued in the respective period. Calculation was done on a cumulative basis. quarter of the year, the current debt recovery rate is the lowest, while it improves in the Recoverability of old debt*, % Heating companies Other clients following quarters. Oblgases Total • For industrial companies and other clients the 50 Industrial companies consumption is less dependant on the season. 40 • Improvement of recoverability of the current 30 and old debt of heating companies in the 4th quarter of 2014 reflects receipt by Naftogaz of 20 the heat tariffs compensation from the state 10 budget which related to the supply of gas in the current and previous years (UAH 10.8 bln). 0

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 • - 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. Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 26 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 40% 100% of the total debt was 15,652 38,679 *Heating companies 60% originated prior to Oblgases 9,155 2014 Industrial companies 15% 4,436 20,057 Other 5,877 1,698 13% 363 4,226 10% 4,993 1,012 39 600 2,912 41 7,976 out of the debt which 15% 3,818 1,659 381 1,565 originated prior to 2014 is 250 5,772 1,977 47% 7% 26 due from heating 1,480 6,809 2,111 companies 2,567 1,926 719 255 788 3,837 934 126

Prior to 2010 2011 2012 2013 2014 Total 2010 of debt of industrial * - includes heating companies which also produce electricity companies is due from • Payment discipline of heating companies is one of major concerns of 67% companies of the the Group’s management. In 2014, settlements through special accounts chemical sector 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 of the total debt of other prices in 2014 for industrial companies from UAH 3,113 per customers is due from thousand cm to UAH 5,900 per thousand cm (which is also applicable to one counterparty (UAH gas purchased by oblgases for ITL as well as gas consumed by heating 53% companies to produce heat for commercial and public entities) were the 2,046 mln) - LLC major factors negatively impacting the debt repayment of the Group in Gazukraina-Commerce. 2014 (see analysis further in the report).

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 27 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, 2% Industrial companies as of 31 December 2014 0% Gas of Oblgases 26% UAH in millions Ukraine Naftogaz Total % 25% Other Heating companies Public organizations 1,451 6,948 8,399 22% Households Households 982 5,573 6,555 17% Public and municipal organizations Industrial companies* 254 2,472 2,726 7% Municipal organizations - 1,105 1,105 3% Heating companies Heating companies** - 708 708 2% Religious organizations Religious organisations - 1 1 0% Other 541 12 553 1% 11% 3,228 16,819 20,047 52% Oblgases 24% Industrial technical losses (ITL) 1,049 3,322 4,371 11% 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% • All contracts concluded by Naftogaz with its counterparties are split by the Religious organisations 9 15 24 0% end consumer category as gas prices and heat tariffs vary depending on the Other 101 - 101 0% consumer category (i.e., the price of gas sold for households is lower than the 2,332 5,643 7,975 21% Industrial companies - price for the industrial companies). Note that there is no separate category of Industrial companies 4,142 2,546 6,688 17% households entitled to subsidies (individuals identified as socially vulnerable) Households - heating 35 43 78 0% Public organizations - heating - 22 22 0% as prices at which gas is supplied to oblgases and heating companies are the Municipal organizations - heating - 15 15 0% same for all households. The subsidies are paid from the State budget to 4,177 2,626 6,803 18% oblgases and heating companies. Other Other*** 237 3,256 3,493 9% • Given that payments for consumed gas are made by customers of oblgases Households - gas 14 188 202 1% Households - heating 21 65 86 0% through special accounts with further automatic distribution between the Public organizations - heating 4 61 65 0% provider of gas (i.e., Naftogaz) and providers of transportation and Public organizations - gas 3 - 3 0% 279 3,570 3,849 10% distribution services (Ukrtransgas and oblgases), debt structure of oblgases 10,016 28,658 38,674 100% 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

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 28 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, • The debt structure of heating companies may not properly reflect the “ultimate” as of 31 December 2014 debtors, as the mechanism of special accounts for heating companies started to Gas of function only in November 2014 (following the adoption of the respective UAH in millions Ukraine Naftogaz Total % Heating companies legislation in June 2014) and till that time payments for purchased gas had Public organizations 1,451 6,948 8,399 22% been made by the heating companies at their discretion and did not reflect the Households 982 5,573 6,555 17% Industrial companies* 254 2,472 2,726 7% actual payment discipline of the ultimate customers. Municipal organizations - 1,105 1,105 3% Heating companies** - 708 708 2% • Please note that till May 2015, payments for the gas supplied by Naftogaz to Religious organisations - 1 1 0% oblgases for ITL (price of which is included into the distribution tariff of Other 541 12 553 1% oblgases) were outside the special accounts mechanism and were made at 3,228 16,819 20,047 52% Oblgases discretion of oblgases. In May 2015, changes in the respective regulations were Industrial technical losses (ITL) 1,049 3,322 4,371 11% made introducing the algorithm for such payments, but only when there was Households 671 1,812 2,483 6% Industrial companies 449 261 710 2% an overdue debt under gas supply contracts for the network operation Public organizations 52 133 185 0% purposes. Households - heating 1 55 56 0% Public organizations - heating - 45 45 0% • In such cases, a part of the distribution tariff of oblgases which relates to cost of Religious organisations 9 15 24 0% gas purchased for ITL is automatically distributed from special accounts of Other 101 - 101 0% 2,332 5,643 7,975 21% oblgases to special accounts of Naftogaz, once payments for gas and connected Industrial companies - services (i.e. transportation and distribution) are made by the end consumers. Industrial companies 4,142 2,546 6,688 17% Households - heating 35 43 78 0% If the overdue debt is settled, respective payments are made at oblgases Public organizations - heating - 22 22 0% discretion. 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% Households - heating 21 65 86 0% ** - Includes UAH 675 m of debt due from Kharkivski Teplovi Merezhi which originated from debt Public organizations - heating 4 61 65 0% assignment agreement concluded between Nafrogaz and Kharkivska TETs-5. According to this agreement, Public organizations - gas 3 - 3 0% debt of Kharkivska TETs-5 due from Kharkivski Teplovi Merezhi was reassigned to Naftogaz as a 279 3,570 3,849 10% settlement for debt of the former originated under gas supply contracts 10,016 28,658 38,674 100% *- primarily for production of electricity *** - primarily, traders, Chornomornaftogas, condominiums, public organizations, etc. Source: Receibables ledgers of Naftogaz and Gas of Ukraine

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 29 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 Heating companies* 6,376 2014 repayment of the respective debt for gas supplied deteriorated Oblgases

significantly resulting in accumulation of overdue balances.

4,849 Industrial companies

Other

3,986

2,939

2,415

2,039

1,759

1,674

1,640

1,184

1,157 1,165

1,027

744

579 570

551 538 393

379 461

371 350 354

342

303

281

253

Kyiv

Crimea

ATO zone ATO

Lviv region Lviv

Kyiv region Kyiv

Rivne region Rivne

Cumy region Cumy

Volyn’ region Volyn’

Odessa region Odessa

Poltava region Poltava

Kharkiv region Kharkiv

Donetzk region Donetzk

Kherson region Kherson

Lugansk region Lugansk

Ternopil region Ternopil

Vinnytya region Vinnytya

Mykolaiv region Mykolaiv

Cherkasy region Cherkasy

Chernigivregion

Zhytomyr region Zhytomyr

Frankivsk region Frankivsk

Chernivtzi region Chernivtzi

Foreign countries Foreign

Kirovograd region Kirovograd

Zakarpattya region Zakarpattya

Khmelnytsk region Khmelnytsk

Zaporizzhya region Zaporizzhya

Dnipropetrovsnk regio Dnipropetrovsnk Ivano

Source: Naftogaz information

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 30 Section 5 Individual receivables analysis

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 31 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 Debtors owing Debtors owing less Debtors owing more between UAH 50 m between UAH 500 m than UAH 50 m than UAH 1000 m and UAH 500 m and UAH 1000 m Total Number of Number of Number of Number of Number of Debt Debt Debt Debt Debt debtors debtors debtors debtors 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% * - 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.).

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 32 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 at 31 December 2014, 54% of the total debt of the as of 31 December 2014 Group was due from privately owned companies with Year of origination oblgases and industrial companies being the main before categories of customers. UAH in millions Total 2014 2013 2012 2011 2010 2010 Privately owned companies • 60% of the debt owned by the Group from heating Oblgases 7,848 4,342 984 41 247 2,108 126 companies were attributed to legal entities in Heating companies* 4,049 2,648 755 238 140 191 77 municipal ownership. Other 2,991 156 584 1,421 10 5 815 Industrial companies 5,936 1,060 39 379 1,951 1,859 648 • 67% of the debt due from the industrial companies Chemical 3,931 84 9 2 1,725 1,813 298 Metallurgical 1,107 895 - - - - 212 were concentrated within the chemical sector, with the Other industries 898 81 30 377 226 46 138 majority of legal entities being privately owned. 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 * - includes heating companies which also produce electricity Source: Receivables ledgers of Naftogaz and Gas of Ukraine

Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 33 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 Year of origination Before Category Name of the debtor Owner 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 Ostchem Enterprises Limited (Cyprus) - Rivneazot PJSC 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 Ostchem Investments Limited (Cyprus) - Concern Stirol Gorlivka PJSC 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 Naftogaz - 25%, Roloks PJSC - 10.6%, Lvivhaz PJSC Hastek PJSC - 13.1% Ternopromservis - 10.6% Meteron Limited PJSC - 22.95% Oblgases - 318 - - 26 313 657 Naftogaz - 25% Luhanskgas PJSC Gastek PJSC - 26% Holder Stock PJSC - 23.9% Oblgases - 307 - - 87 247 641 PLG UA LIMITED, Cyprus - 75.57% Cherkasy AZOT PJSC 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 FG Plant Holdings Limited, (Cyprus) - Lisichanskiy glass factory Proletary PJSC 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

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 34 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) Year of origination Before Category Name of the debtor Owner 2010 2010 2011 2012 2013 2014 Total

Krymteploelektrotsentral PJSC Asermill Ventures LTD, (Cyprus) - 62.7717% Heating companies - 55 - 18 198 207 479 Naftogaz - 25% LLC TRANSIT-Invest - 15% Kyivoblgas PJSC LLC Omega-Capital - 20.4% LLC MASHDIBUR - 13.6% Oblgases - 75 0 0 49 354 478 Naftogaz - 25%, Dnepropetrovskgas PJSC PJSC Haztek - 50.8% Oblgases - 142 - - 34 285 461 Itera LLC Rosneft Other 457 - - - - - 457 Limited liability companyt UKRISTHAZ - Kharkiv Teploelektrotsentral-5 JSC 99.8563% Heating companies - - 4 - 161 288 454 Makiivteplomerezha MC No information Heating companies 14 57 41 26 120 166 423 Lasfano Ukraine LLC - 17.65%, Kharkivhaz PJSC 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 Naftogaz - 38% Donetskoblhaz PJSC GrandGas - 24.9% GasCity - 24.9% Oblgases - - - - 61 295 356 Sevteploenergo MC No information Heating companies - 18 63 85 100 72 337 Roloks PJSC - 15% Haztek PJSC - 21% Zakarpathaz PJSC 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 Naftogaz - 25% Ivano-Frankivskgas PJSC PJSC Haztek - 35% PJSC Rolyuks - 15.2% Oblgases 15 118 - - 29 156 317 Naftogaz - 25% Rolyuks PJSC - 19% Vinnitsagaz PJSC Hastek PPJSC- 34.7% Ahropromkomplekt PJSC - 19.1% Oblgases - 78 - - 16 220 314

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 35 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) Year of origination Before Category Name of the debtor Owner 2010 2010 2011 2012 2013 2014 Total FC Meridian LLC - 12.6% Ltd. IR Business-Invest - 12,75% Larva Investments limited - 25% Poltavaoblenergo PJSC 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 Naftogaz - 25% Zaporizhgas PJSC Hastek PJSC - 49.9%, Centragas Holding Limited - 14.5% Oblgases - 79 - 7 21 172 280 Naftogaz - 25% Lasfano Ukraine LLC - 13.28% Chernihivgas PJSC Roloks PJSC - 19.65% Hastek PJSC - 13.08% Ahropromkomlekt PJSC - 10% Oblgases 5 93 - - 49 131 279 Zemare Limited - 20.36% Semenco Limited - 20.3% Odesagas PJSC 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 Sagacity Limited - 16% Humgate Holdings Limited - 21% Dniprogaz PJSC Tanter Holdings Limited - 16% Eriswell Trading Limited - 16% Oblgases - 42 104 - 51 73 271 Roloks PJSC - 14.3% Hastek PJSC - 38.6% Volynhaz PJSC 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 31 July 2015 Diagnostic analysis of receivables • National Joint-Stock Company 36 Naftogaz of Ukraine 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) Year of origination Before Category Name of the debtor Owner 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 Naftogaz - 25%, Khmelnitskgaz PJSC Hastek PJSC - 50.89% Oblgases 21 44 - - 13 130 208 Hastek PJSC - 50% Zhytomyrhaz PJSC Khmelnitskgaz PJSC - 24% Oblgases - 71 - - 13 123 207 Naftogaz - 25% Hastek PJSC - 25.78% Sumyhaz PJSC Stoke Holder PJSC - 20.85% Oksilend Ltd. - 24.17% Oblgases 2 55 - - 25 104 186 Roloks PJSC - 14.69% Chernivtsihaz PJSC 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 Sodeman Limited - 18.1% Humgate Holdings Limited -19.17% Kharkivmiskgaz PJSC Tanter Holdings Limited - 18.88% Eriswell Trading Limited - 20.06% Oblgases 35 28 0 0 10 86 159 Naftogaz - 25% Hazek - 31.6% Rivnegaz PJSC Ahropromkomplekt - 16% MATHERON LIMITED - 24.8% Oblgases 14 38 - - 13 87 151 Vinnytsyamiskteploenerho MC No information Heating companies 0 3 15 - 47 82 147 Naftogaz - 25% Mykolayivgas PJSC 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 Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 37 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) Year of origination Before Category Name of the debtor Owner 2010 2010 2011 2012 2013 2014 Total Dneprovskiy Metallurgical Plant im.F.Ye. No information Dzerzhinsky PJSC 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 Sodeman Limited - 21% Humgate Holdings Limited - 19% Donetskmiskhaz PJSC 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 Naftogaz - 25% Ternopilhaz PJSC Ltd. PROMTEKHRESURS - 42.75% Oblgases 6 4 26 1 20 56 112 Hlib of Ukraine SE State-owned Industrial companies 110 - - - - - 110 PJSC Dniprogaz - 10.7% Sodeman Limited - 13.8% Humgate Holdings Limited - 21.08% Kryvorizhhaz PJSC 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 Novinskyy Industrial 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 Novinskyy Industrial 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 Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 38 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) Year of origination Before Category Name of the debtor Owner 2010 2010 2011 2012 2013 2014 Total PJSC Kyyivenerhoholdinh - 60% DEPARTMENT OF KYIV municipal property Kyivgas PJSC 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 Lasfano Ukraine LLC - 20.35%, Cherkasygaz PJSC 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-PC LLC - 21.83% Kyiv Sekyuritiz Group LLC - 24.5% Zaporizhstal JSC Hals-Invest Ltd.- 17.06% Global steel investments limited - 12.35% Midland Capital Management LLC -11.22% Industrial companies - - - - - 80 80 PJSC Neycherel end likvified Petrolem CEO - Khersongas PJSC 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 Naftogaz - 25% Melitopolhaz JSC 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 Diagnostic analysis of receivables • National Joint-Stock Company 31 July 2015 Naftogaz of Ukraine 39 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) Year of origination Before Category Name of the debtor Owner 2010 2010 2011 2012 2013 2014 Total Mykolaiv Teploelektrotsentral PJSC State-owned Heating companies - - 2 - 2 57 61 Naftogaz - 25% Haztek PJSC - 24% Krymhaz PJSC 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 Novinskyy Industrial 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 Ltd. Mahraz - 76,9% Mariupolgaz PJSC 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 No information company 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

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

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 40 Appendix 1 Terms of Reference

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 41 Appendix 1 – Terms of Reference Terms of Reference (1 of 4)

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 42 Appendix 1 – Terms of Reference Terms of Reference (2 of 4)

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 43 Appendix 1 – Terms of Reference Terms of Reference (3 0f 4)

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 44 Appendix 1 – Terms of Reference Terms of Reference (4 0f 4)

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 45 Appendix 2 Scope and Process

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 46 Appendix 2 – Scope and Process 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.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 47 Appendix 3 Additional Information

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 48 Appendix 3 – Additional Information The Group’s receivables by customer category and year of origination

Debt owed to Gas of Ukraine by customer category and year of origination, as of 31 December 2014

Year of origination before UAH in millions 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%

Debt owed to Naftogaz by customer category and year of origination, as of 31 December 2014

Year of origination before UAH in millions 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%

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 49 Appendix 3 – Additional Information The introduction of special accounts was an important step in improving payments from the Group’s major customers (i.e., heating companies and oblgases)

Industrial companies and other • Special accounts were introduced for all End customers entities categories of the Group’s customers in 2008 (except for heating companies, for Special distribution accounts which they were introduced only in Special distribution accounts opened by Heating Special distribution accounts opened by oblgases for each 2014). companies for each group of opened by Naftogaz group of customers* customers** • Payments from customers for gas (to Naftogaz or oblgases) or heat (to heating Current accounts of companies) are made to special account Current accounts of Current accounts of oblgases (gas supply and oblgases (gas distribution oblgases (gas distribution where they are automatically distributed distribution fee (including fee (including ITL)) fee (including ITL)) ITL)) between providers of gas, heat and transportation services (i.e., Naftogaz, Current account of Current account of Current account of Ukrtransgas (gas Ukrtransgas (gas Ukrtransgas (gas heating companies, Ukrtransgas and transportation fee) transportation fee) transportation fee) oblgases).

Current accounts of Heating • The major advantage of special accounts, companies (premises is that oblgases and heating companies heating and water heating fee) are not allowed to withdraw funds from such accounts and payments to Naftogaz Naftogaz special account do not depend on their discretion, but on the level of payment made by end Naftogaz current account (gas) customers.

Gas supply company level Heating company level Naftogaz level Distribution of fees for ITL of gas (if there is an overdue ** Population, Public organizations, other customers debt) * Population, Public organizations, Industrial companies and other entities, religious organizations, Heating companies and other customers

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 50 Appendix 3 – Additional Information Debtors with the largest claims from the Group (1 of 2)

Debtors of Naftogaz with the total claims over UAH 500 mln Total claims Claims confirmed by court Final ATO court zone Principal Fines and decision Total Enforcement Restruct Suspended and Total % 0f claims UAH in millions debt Penalties taken Pending amount procedure ured Paid enforcement Crimea amount confirmed* Electricity and 1 Kyivenergo, PJSC 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% Electricity and 3 Kharkivski teplovi meregi, MC heating 7 80 335 97 1 144 1 115 11 - 77 627 - 7 15 7 4% Electricity and 4 Kryvorizka teplocentral, SC heating 812 233 1 045 - 1 045 516 - 128 322 - 966 92% Electricity and 5 Kharkivska TEC-5, PJSC heating 7 39 269 1 008 - 1 008 64 - 195 557 - 816 81% Electricity and 6 Mariupolteplomerega, MCC heating 7 67 227 544 450 994 17 0 168 45 - - 383 7 0% Donetskteplocomunenergo Electricity and 7 Oblasne, MC heating 57 6 17 0 549 197 7 46 253 2 11 1 - 267 49% Electricity and 8 Krymteplokomunenergo, LC heating 595 114 37 8 331 7 09 235 - - - 9 244 65% 9 Cherkasygaz, OJSC Oblgases 650 12 41 621 662 36 - 4 - - 40 98% Electricity and 10 Poltavaoblenergo, PJSC heating 329 293 90 532 622 68 - - - - 68 7 6% Electricity and 11 Donetskmiskteplomerega, MCC heating 501 95 441 155 596 - - - 65 - 65 15% Lysyschnskyy sklozavod Industrial 12 “Proletariy”, PJSC companies 481 92 57 3 - 57 3 29 486 - - - 515 90% Industrial 13 Interpipe NZD, OJSC companies 432 132 - 564 564 ------n/a Electricity and 14 Krymteploelectrocentral, LLC 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% * - as a percentage from total claims where final decision have been taken

Source: Information of the Legal Department of Naftogaz

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 51 Appendix 3 – Additional Information Debtors with the largest claims from the Group (2 of 2)

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

Total claims Claims confirmed by court Final court Principal Fines and decision Total Enforcement Restruct Written- Total % 0f claims # UAH in millions debt Penalties taken Pending amount procedure ured Off Paid amount confirmed* Electricity and 1 Kyivenergo, PJSC 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 Electricity and 5 Kharkivski teplovi merezhi, MC heating 954 197 1 151 - 1 151 658 43 291 - 992 86% 6 Cherkasy Azot, OJSC Industrial 539 240 631 148 779 631 - - - 631 100% 7 Interpipe Nizhnedneprovskyy Rolling Plant, PJSC Industrial 57 1 67 57 1 67 638 - - - 57 1 57 1 100% Electricity and 8 Kryvorizka Teplocentral, SE heating 493 113 606 - 606 320 - 258 - 57 8 95% Electricity and 9 Donetskmiskteplomerezha, MCC heating 399 80 47 6 3 47 9 95 79 17 2 149 495 104% 8 443 2 517 6 505 4 455 10 960 1 723 122 721 2 193 4 759 73%

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

Source: Information of the Legal Department of Gas of Ukraine

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 52 Appendix 3 – Additional Information Regional allocation of Naftogaz claims against debtors

Total claims Claims confirmed by court Final court AT O zone Principal Fines and decision T otal Enforcement Written- Restructu Suspended Bankruptcy and T otal % 0f claims UAH in millions debt penalties taken Pending am ount procedure Off red Paid enforcement proceedings Crim ea am ount confirm ed* Kyiv 16 20 34 2 36 5 - - 1 - - - 6 18% Kyiv 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% Zaporizzhya region 419 161 118 462 580 61 3 - 4 5 - - 73 62% Vinnytsya region 244 75 17 8 141 319 89 1 - 17 - - - 107 60% Volyn' region 117 38 151 4 155 3 - - 380 10 - - 393 260% Zhytomyr region 208 78 27 9 7 286 196 4 - 5 24 - - 229 82% Zakarpattya 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% Mykolaiv 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 76 52 128 12 - 3 9 - - - 24 32% Ternopil region 76 21 90 7 97 19 - - 1 1 - - 21 23% Kharkiv region 1 990 7 56 2 502 244 2 7 46 149 6 74 360 1 183 - - 1 7 7 2 7 1% Kherson region 251 59 27 1 39 310 128 - - 90 29 - - 247 91% Khmelnytsk region 228 80 192 116 308 92 - 2 54 - - - 148 77% 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% * - as a percentage from total claims where final decision have been taken

Source: Information of the Legal Department of Naftogaz

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 53 Appendix 3 – Additional Information Regional allocation of Gas of Ukraine claims against debtors

Total claims Claims confirmed by the court Final court Principal Fines and decision T otal Enforcement Written- Restruct Suspended Bankruptcy T otal % 0f claims UAH in millions debt Penalties taken Pending am ount procedure Off ured Paid enforcement proceedings am ount confirm ed* Kyiv 2 496 407 2 901 2 2 903 72 39 49 1 083 - - 1 243 43% Kyiv 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 77 53 480 - - 664 96% Zaporizzhya region 1 27 9 613 421 1 47 1 1 892 71 191 76 47 - - 385 91% Vinnytsya region 247 54 301 - 301 3 108 3 148 - 7 269 89% Volyn' region 167 30 197 - 197 39 90 - 24 - 25 17 8 90% Zhytomyr region 231 62 288 5 293 107 115 2 20 - 1 245 85% Zakarpattya 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% Mykolaiv 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 2 183 778 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% Khmelnytsk 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 78 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%

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

Source: Information of the Legal Department of Gas of Ukraine

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 54 Appendix 3 – Additional Information Recently adopted legislation regulating general principles of the natural gas market in Ukraine

Law No. 1645-VII On Reform of the Unified Gas Law No. 329-VIII On the Natural Gas Market adopted by the Transportation System adopted by the Parliament on 14 Parliament on 9 April 2015 August 2014 • This Law was developed in order to fulfil the Law of Ukraine “On • This Law envisages, inter alia, creation of the Operator of the united Ratification Of The Protocol Regarding Accession Of Ukraine To gas transportation system (UGTS), a company founded by the state Incorporation Of Energy Union” No.2787-VI dated 15 December or by a company owned by the state/the company with at least 51% 2010 and implementation of the EU Association Agreement. It of the corporate rights owned by the state. Such Operator should be establishes economically substantiated approaches to the determined by the executive body responsible for the oil and gas organisation of the natural gas market. Key pillars are as follows: sector. Co-founder of the UGTS Operator can be a legal entity, 1) Separation of the Operator’s functions from functions of gas which is owned or controlled by the resident of the European producers and suppliers; Union, the USA, or from the countries included to the European Energy Union under certain conditions set by the mentioned Law. 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.

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 55 Appendix 4 Glossary

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 56 Appendix 4 – Glossary 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

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 57 Appendix 4 – Glossary 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

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 58 Appendix 4 – Glossary 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

Diagnostic analysis of receivables • National Joint-Stock Company Naftogaz of Ukraine 31 July 2015 59