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Fitch: Ukraine's Naftogaz split unlikely to solve problem. [IntelliNews - Weekly Reports]
[June 10, 2014]

Fitch: Ukraine's Naftogaz split unlikely to solve problem. [IntelliNews - Weekly Reports]


(IntelliNews - Weekly Reports Via Acquire Media NewsEdge) Fitch says the implications of the Ukrainian government's recent decision to split Naftogaz of Ukraine (CCC) into two entities - gas transportation and gas storage - is already captured in the company's IDR. Naftogaz continues to be badly affected by weak operations and cash generation, the ongoing gas price dispute with Gazprom, and the secession of its E&P subsidiaries in the Crimea peninsula.



Splitting up Naftogaz has been discussed for some time, and despite the recent government decision, Fitch expects that the restructuring process is likely to be prolonged. The agency does not have sufficient details at this point about the structure and allocation of debt between the newly created entities to fully assess the impact on Naftogaz.

The decision to separate the stable revenues of gas transit from those of gas production and storage reduces diversification and is likely to result in two operationally weaker entities, Fitch notes. Although Ukraine remains an important gas transit country, accounting for about half of Russian gas flows into Europe, its gas transportation network is believed to be outdated and in need of upgrades. While Naftogaz has not published its IFRS accounts since 2011, Fitch believes that most of its borrowings relate to the E&P segment, rather than the transit operations.


Naftogaz's ratings continue to be aligned with those of Ukraine (CCC), its only shareholder. Fitch expects Ukraine to provide Naftogaz with cash for repayment of its USD1.5bn Eurobond maturing in September 2014, or repay the bond from the sovereign assets.

Last week, the government has decided to reform Naftogaz of Ukraine, Minister of Energy and Coal Industry Yurii Prodan has said. According to him, two companies fully belonging to the state will be created. These will be - the company responsible for independent operation of gas pipelines and the company responsible for underground gas storage facilities.

He said that the reformation of Naftogaz of Ukraine requires a number of draft laws in order to meet the requirements of the third European energy package. The first company will be responsible for the pumping of gas via main pipelines, and the second - for the servicing of Ukrainian underground gas storage facilities.

In the end of May, the government has decided to expand the statutory fund of the Naftogaz of Ukraine by UAH 22.3bn (USD 1.9bn). The statutory fund will increased via the additional issue of shares with current face value and retention of 100% of shares in state's ownership.

The government estimates deficit of the Naftogaz of Ukraine at UAH 62bn (USD 5.4bn) in 2014, reads a memorandum signed with the International Monetary Fund (IMF). In 2014, the main objective will be to offset the negative impact of the exchange rate adjustment on Naftogaz balances and contain its deficit to 3.3% of GDP. The government plans to reduce Naftogaz's deficit to 1.9% of GDP in 2015 and aim to eliminate it by 2018, said the document. At the same time, this year Naftogaz's financing gap is large at UAH 62bn, of which the government has already provided UAH 11bn (via placement of domestic government loan bonds).

Filling the remaining gap of UAH 51bn will require further support from the government. For this purpose, the government's supplementary budget will include UAH 22bn in 'recapitalization' bonds. To fill the remaining gap, Naftogaz will need to develop a plan, based on cost rationalization, improved revenue collection, and taking into account the full effect of these measures, further financial backing from the budget, for repayment of its large arrears to Gazprom in a timely manner, said the document.

In addition, the government made a decision and schedule for tariff increases through 2017, where the schedule includes the following: in 2015, the Naftogaz will raise end-user gas and heating tariffs by 40% on average, effective May 1; and thereafter we will raise these tariffs by 20% on average in each of 2016 and 2017, effective May 1, until losses of Naftogaz are eliminated by 2018 (prior action), the document reads.

(c) 2014 Emerging Markets Direct Media Holdings LLC Provided by SyndiGate Media Inc. (Syndigate.info).

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