Gazprom's 2001 IAS Profit Dive Deceives

On paper, Gazprom's net profit in 2001 plunged 97 percent to just $372 million calculated to international accounting standards, according to the gas giant's financials, which were released piecemeal Thursday and Friday.

But a closer look at the 44-page audit shows a much healthier bottom line. It also shows just how far the gas giant has come since its Soviet-era management was deposed last year -- and the shortcomings that could prove painful for the new guard in the near future.

The good news is that profits, adjusted to provide an accurate reflection of Gazprom's business, almost doubled. The company scaled back its dealings with Itera, a Florida-registered gas trader that benefited from schemes drawn up to funnel assets out of Gazprom. Asset write-offs, previously perceived as a symptom of bad management, plunged.

The bad news is that management was unable to reduce debts in a time of high profits. Production costs are up by 51 percent. And its petrochemical subsidiary Sibur, which Gazprom regained control of earlier this year in a much-publicized battle, is hemorrhaging money.

And buried in a footnote on page 40 of the financial report prepared by PricewaterhouseCoopers: According to tax authorities, Gazprom owes about 19 billion rubles ($604 million) in excise taxes, not including interest or penalties.

Although the release of the financials was delayed by several months, their accessibility is a sign that Gazprom has made strides in corporate governance. It was only last year that the company began opening its books to public scrutiny.

At first glance, the good news doesn't look that good. The net profit figure plunged from $10 billion in 2000 to $372 million, mostly due to income taxes that were treated as an expense on paper. But operating profits, which are derived by subtracting costs from revenues, actually increased by 38 percent to $6 billion. Gazprom was able to push down gas purchase expenses by 28 percent by curtailing orders from Itera by 84 percent in 2001.

However, Gazprom's relationship with the Tax Police, notorious for their politically motivated audits and raids, is another story.

The tax authorities completed an audit on Gazprom's payment of excise taxes from January 1999 to June 2001, and the company was subsequently asked to pay up.

"Gazprom management intends to dispute the total amount of the tax authorities' claim in court as it does not comply with the tax legislation," reads the report.

Neither Gazprom nor the Tax Police could be reached for comment.

Gazprom's market capitalization fell by $1.1 billion March 13 after Moscow Tax Police chief General Viktor Vasilyev said the company was being audited. At the time, Vasilyev accused Gazprom of selling gas below market rates and decreasing its revenues on paper.

Market analysts shrugged off the charges, as did managers, who did not consider the allegations serious enough to be included in the financials. The company, 38.7 percent of which belongs to the state, has problems more pressing than the Tax Police, analysts said.

"Unfortunately, 2001 will likely prove to be the pinnacle of Gazprom's financial performance over the next several years as lower gas export prices and higher operating expenses in 2002-03 will result in lower revenues and profits," Aton said in a research note.

The side effects of CEO Alexei Miller's campaign to bring back assets lost in the 1990s have made themselves felt in the case of Sibur, the losses of which dragged down Gazprom's overall performance.

In 2001, Sibur lost 20.6 billion rubles on sales of about 50 billion rubles, and its debts exceeded its assets by 17.5 billion rubles. The subsidiary also paid 6.5 billion rubles for stakes in other companies that were supposed to be on Sibur's balance sheet anyway.

Debt is another chain around Gazprom's neck. Net debt increased by $263 million to $12.1 billion. Despite Miller's strategy to extend the tenure of the company's loans, long-term borrowings decreased by 15 percent to 206 billion rubles.

A revved-up Central Bank earlier this year began enforcing limits on how much banks could lend to one customer, forcing Gazprom to seek new lines of credit. New forms of financing, including a possible $750 million Eurobond this fall, are to be discussed during Tuesday's board meeting.